The Decline of Stablecoins: Reasons and Implications
The stablecoin market has experienced a significant decline over the past eighteen months. The collapse of Terraform and its native stablecoin UST contributed to a 35% drop in the overall market capitalization of stablecoins. According to DeFiLlama, the market reached its peak at $189 billion in May last year but has now settled at $124 billion.
Reasons for the Decline
Vaidya Pallasena, co-founder of Bluechip, attributes the decline to various factors. Retail participation has significantly decreased, with daily trade volumes averaging $50 billion compared to $150-300 billion in 2021. Additionally, the surge in US treasury yields and the lack of volatility within crypto have led to high opportunity costs for holding stablecoins when risk-free yields are around 5%.
Nic Carter, a partner at Castle Island Ventures, explains that the primary driving factor behind the drop is traditional finance rates exceeding crypto-native yields. Stables started selling off back into fiat when this crossover occurred in 2022.
Concentration and Resilience
The stablecoin market is highly concentrated, with only a few assets making up more than 95% of the entire market capitalization. USDT has proven to be the most resilient despite recent depegging fears. It now has an $83 billion market cap and dominates the stablecoin sector with 67% of all volume passing through it.
On the other hand, USDC has plummeted to multi-year lows due to various factors, including its depeg amid banking turmoil. The disparity between USDT and USDC can be attributed to U.S. regulators’ hostility towards on-shore stablecoins like USDC.
Implications and Future Outlook
Stablecoins outside the United States, particularly USDT, have emerged as the winners in this market decline. They are considered crypto’s “killer app” as they constitute only 10% of the total market share but account for 70-80% of all settlement activity on public blockchains.
To reverse the current trend, a revived interest in crypto trading/investing, steady interest rate cuts, and a pro-crypto regulatory environment could be key factors. The stablecoin market is expected to recover when these conditions change.
Hot Take: The Future of Stablecoins
The decline of stablecoins has been largely driven by traditional finance rates exceeding crypto-native yields. Until either traditional finance rates come down or crypto yields pick up, the stablecoin selloff is likely to continue. However, stablecoins remain an important component of the crypto industry, accounting for a significant portion of settlement activity on public blockchains. The future recovery of stablecoins depends on factors such as renewed interest in crypto trading/investing and favorable regulatory environments that support the growth of these digital assets.
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