Let's first assume under what circumstances a spiral will occur: the current risk is that the panic continues to make large payments until Circle's cash reserves are exhausted, and then he has to sell his own government bonds to meet the market's redemption demand!

However, the current wave of global interest rate hikes has brought the yields of the entire bond market to unprecedented heights. If it sells government bonds at this time, Circle will face serious losses like SVB, making it unable to effectively respond to market redemptions. At this time, the Circle redemption cycle becomes longer, which again promotes panic and intensifies redemptions, making USDC likely to enter a death spiral.

Secondly, there is the level of price anchoring and liquidity. USDC that cannot be redeemed in time will try to escape through market liquidity. In terms of on-chain liquidity, USDC is the current leader among stablecoins, and its shadow can be seen in the LP pools of various AMMs and lending protocols. What should be noted here is that because most on-chain lending activities do not use USDC as collateral, the risk of price liquidation is not high. The key factor leading to de-anchoring actually lies in the liquidity on AMM.

Let’s take a look at the escape path: On Curve, USDC’s main escape route is the 3Crv pool. Currently, the TVL of the pool exceeds US$400 million, of which USDC accounts for nearly 50% and is worth approximately US$220 million, DAI accounts for approximately 47%, and USDT accounts for approximately 3%. Another on-chain escape method is the AMM pool of USDC against ETH and other assets, such as the USDC/ETH pool of Uniswap V3. Currently, more than 86% of USDC’s 41 billion market value is on the Ethereum mainnet, worth approximately US$35 billion. Compared with other public chains, the Ethereum mainnet is still the main escape route for USDC.

If the market panic continues for a long time, USDC holders will choose AMM as an escape method after the Curve pool is exhausted, and exchange USDC for various blue-chip or even non-blue-chip assets such as ETH. At this time, on the one hand, USDC may face a price death spiral, on the other hand, the prices of assets such as ETH may also rise.

I chatted with a few friends:

The summary is: (it is not a big problem to be able to pay) the usdc to busd channel is closed and the usdc to usdt is not deep enough. Currently only the big pie and the second pie can undertake these funds, which will lead to a wave of price increases. In addition, there is a reserve of 40 billion Usdc Gold, only twenty or thirty in Silicon Valley Bank, so the problem is not big. In addition, this USDC is not its own problem. Unlike FTX, there is no crime. Coinbase and other consortiums are more likely to support it.

I think: What Circle needs to do at this time is to close redemptions, announce financing and other external financial support, and then wait for the market to regain confidence. However, while waiting for confidence to be restored, USDC’s serious de-anchoring is inevitable.

If USDC is seriously unanchored and cannot pay compensation, and Circle really sells its investment portfolio, which is mainly treasury bonds, then we need to consider another issue. Most of USDT’s savings are also treasury bonds. If Circle eventually sells its hands due to the huge pressure of unanchoring National debt caused losses, will this fire not spread to USDT? What needs to be worried about is the run risk of the entire stablecoin ecosystem.

Circle's losses in the SVB incident were not large. USDC's unanchoring this time was caused by panic or a deliberate run. It depends on how Circle responds. It is unlikely that USDC will survive its own problems. In addition, God V also bought some, although it was not much, but it could also replenish faith in the market! Panic brothers can reduce their positions to maintain risk response. I am not prepared to move my position and have enough funds to cope with changes. In addition, I don’t panic and just lie down and wait and see how the incident is handled! #BTC #crypto2023