USDC and DAI at Risk of Losing Dollar Parity, Warns Study
Crypto analysts are cautioning that stablecoins USDC and DAI are more susceptible to losing their dollar parity compared to other stablecoins. This has been witnessed in the past, with both USDC and DAI briefly depegging from the dollar.
Assessing the Risk of Depegging for USDC and DAI
A recent study compared five stablecoins: USDT, USDC, BUSD, USDP, and DAI. While four of these are primarily collateralized with real-world assets (RWA), DAI is backed by a combination of RWA, stablecoins, and crypto-assets.
The study analyzed 24 months of historical price data until June 2023. It found that during this period, both USDC and DAI experienced significant drops in price, falling as low as $0.87 and $0.85 respectively during the Silicon Valley Bank collapse in March 2023.
Interestingly, stablecoin prices are influenced by events within the crypto industry as well as external factors in the broader financial industry. USDC and DAI displayed a high degree of correlation, particularly during the SVB event, suggesting vulnerability to idiosyncratic events and targeted actions.
In contrast, despite its smaller market cap and trading volume, USDP showed greater deviation from the $1 peg but exhibited less correlation with other stablecoins, indicating more independence.
The study also highlighted that the day of the week can influence the likelihood of a stablecoin depegging. For example, USDC’s price fell to $0.87 over the weekend when traditional banking systems were closed, impacting liquidity.
Factors Influencing Stablecoin Depegging
Depegging occurs when stablecoins deviate from their pegged value. Factors such as underlying collateral, reserve governance, and market volatility influence this susceptibility. Deviations can result in losses for buyers or sellers depending on whether the price goes above or below the pegged value.
Market volatility, liquidity challenges, mismanagement of reserves, impaired assets, sudden demand hikes, excess supply, lack of transparency, and loss of confidence are all factors that can impact stablecoin stability and trigger depegging events.
Hot Take: Stability Concerns Surrounding USDC and DAI
The study raises concerns about the stability of USDC and DAI, highlighting their vulnerability to depegging from the dollar. With previous instances of brief depegging, these stablecoins face a higher risk compared to others. The correlation between USDC and DAI during events like the Silicon Valley Bank collapse suggests they are susceptible to idiosyncratic events and targeted actions.
On the other hand, USDP demonstrates more independence despite experiencing greater deviations from the $1 peg. Understanding the factors that influence stablecoin depegging is crucial for investors and users to assess the risks associated with these digital assets.
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