1. Current market conditions

The past eighteen months have been terrible for most stablecoins.

Following the collapse of Terraform and its native stablecoin UST last year, the entire market capitalization of these digital assets has plummeted by at least 35%. According to cryptocurrency data provider DeFiLlama, the market peaked at $189 billion last May, but 18 months later, the market is only $124 billion as of this writing.

Vaidya Pallasena, co-founder of Bluechip, a nonprofit dedicated to assessing the security of stablecoins, said there are many reasons for the red ocean.

He noted to Decrypt that retail participation is a fraction of what it was at its peak in mid-2021, with daily trading volumes averaging $50 billion, compared to $150-300 billion in 2021.

Pallasena also said that U.S. Treasury yields "started to surge" since mid-2022, while there has been no significant volatility in the cryptocurrency space. He noted that combining these factors with the high opportunity cost of holding stablecoins when the risk-free rate of return is around 5% “leads to a drain on capital.”

Nic Carter, a partner at Castle Island Ventures, explained to Decrypt that the reason for this drop is simple: “It’s really just traditional funding rates exceeding crypto native yields,” he said. “When this crossover happens in 2022, stablecoins start to convert to fiat currencies and sell off.”

Crypto investors “expect” the stablecoin sell-off not to end until traditional finance rates, i.e. three-month Treasuries, fall, or DeFi or Ethereum-collateralized cryptocurrency yields recover.

Additionally, the stablecoin market is highly concentrated, with just a few assets (USDT, USDC, DAI, TUSD, and BUSD) accounting for more than 95% of the entire market capitalization.

2. Mainstream Stablecoins

Notably, USDT has proven to be the most resilient of them all, despite recent decoupling concerns. Although its interest fell sharply following the UST collapse, it has since recovered and today has a market cap of $83 billion, slightly above its May 2022 level. The token dominates the stablecoin space, with 67% of its total trading volume passing through its issuance. Arch.

Number two, USDC, has suffered the opposite fate. It has fallen to multi-year lows, in contrast to the extensive expansion being undertaken by its parent company Circle. Many factors have exacerbated the market's lower interest in USDC, including the banking turmoil that hit the industry earlier this year, which led to USDC's break from its peg to the U.S. dollar.

There is a seemingly obvious reason for the difference between USDT and USDC.

Speaking at the Token2049 event in Singapore, Carter mentioned the distinction between what he called “onshore” and “offshore” stablecoins. He said that the hostility of U.S. regulators and their “desire to suppress the stablecoin market” has led to a “dramatic decline” in the market share of U.S.-based stablecoins such as USDC.

The biggest winners were stablecoins outside the United States, with USDT leading the pack.

Carter believes these assets are the “killer app for crypto,” explaining that stablecoins only account for 10% of the total cryptocurrency industry market share but account for 70-80% of all settlement activity on public blockchains.

For crypto investors, the fact that this has happened even in a bear market shows its importance and product-market fit.

3. Summary

We are currently facing a relatively contradictory situation, so what will happen next?

Pallasena told Decrypt that he expects the trend to reverse when the factors that led to this situation reverse. He said that the situation will change when interest in cryptocurrency trading/investing returns and interest rates continue to fall. In addition, he believes that a regulatory environment that supports cryptocurrency may play a key role.

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【Disclaimer】The market is risky, so be cautious when investing. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions in this article are suitable for their specific circumstances. Investing based on this information is at your own risk.