Trust Test: Are Stablecoins Really Stable?

Stablecoins are designed to maintain a steady value throughout a transaction. However, the collapse of Terra has cast doubt on the future of all stablecoins. After depegging its value, it crashed to a record low of around $0.20 from $1.

USDC is Overtaking USDT

According to data by Coinmarketcap, stablecoins have traded between $0.95 and $1 during the week. Despite the industry’s negativity, BUSD and USDC have still managed to hold the $1 mark.

There has been a shift in the thinking of some of the most prominent crypto investors, such as whales. The USD coin has become the preferred stablecoin on the Ethereum blockchain, according to Coinmetrics.

The biggest cryptocurrency holders are the whales, deep-pocketed individuals who can move large sums of money in the market. These individuals closely monitor the movements in the market and anticipate significant price changes.

According to data from blockchain analysis firm, CoinMetrics, the number of wallets that have more than $1 million in USDC is greater than the number of wallets that have USDT in their wallets.

A Shift in Preference

According to Edward Moya, a senior market analyst at Oanda, the USD is the preferred stablecoin among investors too. He noted that due to the current market conditions, people have shifted preference to hold USDC.

The second-largest stablecoin by market share, the USDC, has been gaining popularity due to the collapse of the US Treasury stablecoin.

Data analysis firm CoinMetrics also analyzed the blockchain data of over 140 Ethereum addresses since May 9, when the UST lost its peg to the US dollar. The addresses increased their balances by at least $1 million.

Twenty-three stablecoins had added at least $10 million worth of USDC to their market cap. Many of these addresses are operated by various companies, such as exchanges and decentralized finance protocols.

The report noted that the USDC has a significant advantage over the USDT regarding the free float supply on the Ethereum blockchain. On Tuesday, the number of Ethereum tokens held by various groups reached an all-time high.

According to Kyle Waters, an analyst at CoinMetrics, the increase in the number of USD being redeemed and issued by large holders could be related to their desire to take advantage of the arbitrage opportunity presented by the free float supply of the Ethereum blockchain. However, it could also be that they are hedging their positions due to the monthly full-reserve backing provided by the US Dollar.

Is Stability a Myth?

Since Terra collapsed, DAI, a stablecoin managed by the MakerDAO community, has maintained its cap and carried out liquidations in an orderly manner. According to Luca Prosperi, a leader in the lending department at the company, the liquidations have been a great test of the system.

According to Prosperi, the stablecoin’s conservative nature and over-collateralization make it stable. The current collateral ratio of the DAI is 175.59%, which means that each DAI is backed by around $1.7558 worth of collateral. On-chain data shows that the USDC stablecoin accounts for over 40% of the total collateral used to mint the DAI.

Due to the liquidation process, the company’s market cap has decreased from around $6.4 billion to around $6.4 billion. At one end is USDC, “a plain vanilla coin that is very safe, is not very innovative but is a great bridge,” Prosperi said. He said the other extreme is UST, and DAI is somewhere in the middle.

Meanwhile, following the collapse of Terra, the US regulators have started to implement stricter regulations on the operations of stablecoins. According to Janet Yellen, the treasury secretary, the government plans on introducing legislation by the end of the year that would impose more stringent rules on the industry.

Tether Stablecoin USDT Now on Polygon 

Despite the concerns about the stablecoin market, Tether is still focused on expanding its operations in the crypto space. The company has launched its flagship product, USDT, on the Ethereum scaling solution, Polygon, to maintain its position as the top stablecoin. With the launch of Polygon, USDT has now been available on 11 blockchains. These include Ethereum, Solana, Tron, Bitcoin Cash, Liquid Network, and Avalanche.