Stablecoins and Banking Crisis: winners and losers
The recent banking crisis sparked bank runs across the United States, leading to a liquidity crisis and the depegging of USDC to $0.88. In response, the Federal Reserve agreed to backstop every bank and protect depositors from any losses. Although the fear, uncertainty, and doubt (FUD) are now behind us, stablecoins were stress-tested to the max. In this article, we’ll analyze how various stablecoins performed during this critical period.
Timeline of Events
March 8th:
- Silicon Valley Bank (SVB) attempted to raise equity but failed.
- SVB sold bonds at a $1.8B loss.
March 9th:
- Bank run began, rendering SVB effectively insolvent. The Federal Deposit Insurance Corporation (FDIC) took over.
- Circle, the largest SVB depositor, had ~$3.3B in USDC backing at risk.
March 10th:
- USDC rapidly began to depeg due to uncertainty around its redeemability.
- A massive influx of users swapped USDC and DAI for USDT on Curve.
March 11th:
- Curve’s 3pool was almost completely drained of USDT, falling to 2.4% of 3pool makeup. USDC was priced as low as $0.88.
Winners and Losers
During the recent banking crisis, various stablecoins emerged as winners and losers. On one hand, Liquity Protocol and its stablecoin, LUSD, showcased their censorship-resistant capabilities. LUSD managed to rebound to its peg faster than any other stablecoin, apart from USDT. In fact, since March 10th, there has been a 13% increase in Troves created and a 13.1% increase in new LUSD minted.
Tether’s USDT also proved its resilience in the face of adversity. As market participants swapped out of USDC, USDT’s market cap grew by an impressive ~$7 billion.
On the other hand, Circle and its stablecoin, USDC, experienced a loss of trust among market participants. Even though no collateral was ultimately lost, the total USDC market cap dropped by ~$9 billion following the collapse of SVB, with no signs of the downtrend stopping anytime soon.
Lastly, MakerDAO and its stablecoin, DAI, had a somewhat mixed performance. While DAI’s price moved similarly to USDC, it actually increased its supply by ~500 million. This increase was facilitated by Maker’s Peg Stability Mechanism, which enabled users to mint DAI against USDC deposits at a 1:1 rate. During the depeg, users poured over $1.5 billion in USDC into the PSM and minted DAI. MakerDAO has even recently decided to use some of the newly acquired USDC to purchase an additional $750 million in US Treasuries.
Conclusion
In the current stablecoin landscape, the cost of scalability is the loss of decentralization. The recent USDC depeg serves as further evidence that the most resilient stablecoins are those that fully embrace decentralization. As we move forward, it is crucial for the crypto community to prioritize sound decentralized mechanisms in order to create sound decentralized money.
