I often say that, to me, the most interesting digital assets are stablecoins. Specifically, the centralized and asset-backed variety. I’m drawn to these stores of value because the fixed prices highlight their standing as programmable money. The thesis around stablecoins isn’t about speculation and price going up. Theirs is a narrative about financial innovation and increased user adoption. Even so, occasionally stablecoin price volatility does come into play, and because they form the bedrock of digital finance, such instances are a big deal. Many market participants had existential thoughts when USDC depegged at the onset of the 2023 U.S. banking crisis. Since then, the asset has seen its market share trend reverse in favour of USDT.
Major Centralized USD-pegged Stablecoin Market Share
After ceding activity to USDC and BUSD since DeFi Summer, USDT has recently seen its market capitalization increase dramatically based on improved transparency regarding its reserves and due to Tether’s modest reliance on the U.S. banking system. An important catalyst for the shift was also the SEC’s February delivery of a Wells notice to Paxos, who was the administrator of BUSD.
USDT Market Cap (in billions, USD)
Last week, the crypto world experienced another fearful episode when the market turned against USDT seemingly out of nowhere. It’s natural that traders are a bit skittish after all the dramas of the past 18 months, especially when it comes to a leading asset like Tether. It didn’t last long, but the world’s largest stablecoin decoupled from its peg to the tune of nearly 50 basis points.
USDT/USD Price June 14, 2023 – June 15, 2023
There are some helpful resources that reveal market sentiment in the digital economy. Perhaps most important for stablecoins is Curve Finance’s 3Pool, which includes USDC, USDT and DAI. Curve is an automated market maker (AMM) that was designed specifically to provide minimal slippage and low fee swaps between assets of similar price. The 3Pool is one of the most popular venues in DeFi with roughly $350M in Total Value Locked (TVL) and average weekly trading volume of nearly $1B in 2023.
3Pool Liquidity Providers (LPs) deposit any of the three stablecoins into the smart contract and earn trading fees from the swaps that happen within the pool. They can also earn CRV tokens and possibly other rewards through liquidity mining. The protocol was designed to incentivize balanced amounts of each token through rewards, but sometimes animal spirits take over and the marketplace becomes lopsided. As holders of a certain asset look to exchange it for other stablecoins on Curve then the name being sold will dominate liquidity/composition in the pool.
USDT Weight in Curve’s 3Pool
It’s fascinating to see USDT’s relative standing shift over time. Last year, when UST (an algorithmic stablecoin) melted down, the market appeared to believe that Tether had exposure to the Terra/Luna ecosystem and USDT was dumped relentlessly into the 3Pool, reaching over 80% of total assets. A similar story played out when FTX imploded. Conversely, Tether became a safe haven when a portion of USDC’s reserves were believed to be at risk due to the insolvency of Silicon Valley Bank. Last week, alarm bells went off as Tether’s share of the 3Pool bloated to 60% seemingly out of nowhere. Other exchanges (centralized and decentralized) also recorded significant volumes of USDT selling.
Market observers can get similar sentiment clues through other on-chain lenses. For example, Uniswap’s USDC/USDT pool is an alternative (though less popular) indication of supply/demand imbalances. Alternatively, the utilization rates in major stablecoin lending contracts can provide an indication of demand for borrowing an asset with the intention to sell it short. This activity is also captured in Aquanow’s DeFi Funding Rate (ADFR), which saw a significant increase around the time that the 3Pool became overloaded with USDT. However, the activity in the credit markets paled in comparison to the level of fear when USDC depegged in March, which is notable given how quickly USDT reconverged to $1 this time around.
Aquanow’s DeFi Funding Rate
So why did traders dump USDT into the 3Pool last week? We can’t say for sure, but it appears to be related to the release of documents provided as part of a lawsuit involving the New York Attorney General’s Office. Tether had to file quarterly reserve reports for the two years following the settlement of the case and CoinDesk had requested access to the records under the Freedom of Information Law. For some time, Tether had appealed the release “to prevent public dissemination of confidential customer data and sensitive proprietary information” but recently withdrew its opposition “to prove its commitment to transparency and openness over further, unproductive U.S. litigation.” Here’s more from the USDT issuer:
An important consideration here is Tether’s position as the largest stablecoin in the digital asset ecosystem and its polarizing reputation. USDT arose because early crypto traders longed for a safe haven in the event of a market decline or crash. If the price of bitcoin began to drop rapidly, a holder might want to convert their portfolio to some cash-like asset on a single platform to avoid potentially massive losses. In those days, the exchanges were locked out of the fiat system and so emerged the first stable cryptoasset – Realcoin, which shortly renamed as Tether (USDT).
It’s interesting to me that USDT’s market share has grown so significantly since the U.S banking crisis. Tether released their Q1 reserves attestation in May, which was published by BDO, the world’s 5th largest accounting firm. The balance sheet shows a surplus over its liabilities of $2.4B and the company recorded a $1.5B profit during the quarter. However, even as the industry leader with a seemingly strong capital position, a healthy portion of market participants stood ready to dump USDT in size on what appear to be rumors.
Aquanow’s Digital Dives doesn’t speculate on hearsay, so we’ll have to wait and see if more information comes to light in this story. However, I wanted to reinforce the importance of stablecoins in the digital asset ecosystem and highlight the 3Pool as marketplace to keep an eye on. Observers get free and easy to access sentiment signals from its composition. Further, I rarely (if ever) pass up an opportunity to shill Aquanow’s indices, which again proved to be a helpful barometer in this recent debacle.
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