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The stablecoin market has been in turmoil for the past year and a half. After the collapse of Terraform and its accompanying stablecoin UST, the digital currency's market capitalization dropped significantly by 35%. Data from DeFiLlama shows that after reaching a peak of $189 billion in May last year, the figure is now around $124 billion.
Vaidya Pallasena, director of Bluechip, a stablecoin security organization, explained the reasons for this decline. He noted that current retail participation is a shadow of its peak in mid-2021. He added that daily trading volume, which used to range between $150 billion and $300 billion, has now fallen to $50 billion.
1/ Our goal at Bluechip is to provide everyone with free, unbiased and transparent information about the security of stablecoins.
Based on our SMIDGE ranking system, we rank stable coins from F (Unsatisfactory) to A+ (Very Stable).
Below is a mega thread explaining our review, which will be updated over time. ⬇️ pic.twitter.com/OrwLqYLBRP
— Bluechip (@bluechip_org), September 21, 2023
In addition, Pallacena highlighted the rise in US Treasury yields since mid-2022 and the relative stability in the crypto space. With risk-free returns approaching 5% and fees associated with holding stablecoins, the market is under pressure.
If you look at the returns of stablecoins on platforms like the Kucoin exchange, you can see that they usually fall below the 5 percent threshold. Nick Carter of Castle Island Ventures attributed the drop to traditional financial interest rates, which are higher than cryptocurrency interest rates. He noted, "2022 saw a notable shift from stablecoins to fiat as traditional interest rates outpace cryptocurrency returns."
Looking at future trends, Carter predicts that the sell-off will not end unless traditional financial interest rates fall or DeFi or Ethereum revenues increase.
The market in its current form is monopolized by a few major players. It is worth noting that USDT has shown impressive resilience despite the challenges. Its market capitalization has reached $83 billion, which represents a slight increase since May 2022. This is huge: 67% of the total supply of stablecoin.
An additional concern during times of volatility is the payment fees charged by Tether. Currently, if users choose to withdraw more than $1,000 directly from Tether, they will be charged a 0.1% fee, which is equivalent to an effective USDT fee of $0.99. Additionally, there is a $100,000 minimum for withdrawals or deposits. In addition, there is a non-refundable $150 "verification" fee, a step that Tether says will ensure that only genuine candidates proceed. Although these fees are charged for a reason and deter many people from exchanging, many see them as unnecessary and lead to a loss of confidence in the stability of the coin.
Unlike Tether, USDC is not so lucky. It has suffered significant setbacks in recent years and its value has sunk to rock bottom. This stands in stark contrast to the big steps taken by Circle's founding company. Factors such as damage to exchange rate stability amid banking chaos in the industry also contributed to the decline.
Speaking at Token2049 in Singapore, Carter highlighted the key differences between local and foreign stablecoins. Resistance from US regulators has caused local US stablecoins such as USDC to lose market weight, while non-US stablecoins, led by USDT, are filling the gap.
Crypto killer software
According to Carter, these stablecoins, which make up only 10% of the cryptocurrency market but account for up to 80% of all public transactions on the blockchain, are "killer software" for cryptocurrencies. The importance of this is especially evident in bear markets.
Finally, Pallasena expressed optimism and hope for an improvement in the situation, as well as expectations of increased interest in cryptocurrencies and a consistent reduction in interest rates. A supportive regulatory framework can make the difference the market needs.
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