What the crypto world lacks the least is narrative. From the Shanghai upgrade, BRC20, Meme, and even the old halving narrative, every hype will arouse new market attention, and the rotation and evolution of some of these key narratives are also opportunities that we should pay attention to and seize.

Among them, as the "DeFi Summer" that started in 2020 has been three years old, many DeFi projects have begun to have some narratives worthy of attention, and the stablecoin market has also experienced a huge wave of structural adjustments in the first half of the year, with interesting changes in both total volume and structure.

01. Development and changes in the total amount and structure of stablecoins

As a semi-closed and relatively small market, the ups and downs of the crypto industry generally depend on changes in the size of U.S. dollar stablecoins. Since the beginning of this year, especially recently, the total amount and structure of stablecoins on the entire network have changed significantly.

On the one hand, since mid-to-late February, affected by the overall market environment and the subsequent Silicon Valley Bank incident, the total amount of stablecoins in the entire network has entered a downward trend from US$136.3 billion, and has dropped by about US$7.5 billion in about four and a half months.

The most important changes during this period are mainly in three dimensions:

First, since U.S. regulators closed Silicon Valley Bank on March 10, USDC Token net outflows have exceeded $15.7 billion, and the total circulation has dropped to around $27.7 billion, a drop of about 36%, which is an astonishing rate.

This also led to a series of chain reactions, including DAI and FRAX, which used USDC as their main reserve assets, which were severely affected. In particular, the circulation of DAI dropped from about US$5 billion to about US$3 billion at the time of writing, a drop of nearly 40%.

BUSD is also subject to continuous destruction due to regulatory pressure, and its circulation volume continues to decline. It has decreased by more than US$4.5 billion since March and has now dropped to about US$4 billion, which is already halved.

Secondly, USDT's position as the "stablecoin leader" has become increasingly solid. While the circulation of USDC, BUSD, and DAI has been declining, the total amount of USDT has soared from 70.9 billion to 83.4 billion at the time of writing, an increase of more than 12.5 billion US dollars.

Finally, Binance’s newly-backed TUSD has been lingering for months after hitting the $2 billion mark in mid-March.

However, it is worth noting that starting from June (especially in mid-to-late June), major stablecoins also had some small changes:

The downward trend of USDC, BUSD, and DAI was temporarily suspended, and the growth trend of USDT also began to pause (but a chain swap of tens of billions of dollars was carried out to transfer liquidity from Tron to Ethereum). Only TUSD started printing money in about half a month, and its market value increased by 1 billion US dollars, an increase of more than 50%. At that time, the total market value of stablecoins in the entire network remained unchanged at around 129.6 billion US dollars.

That is to say, with the USDT market value remaining unchanged in June, the $1 billion increase in TUSD issuance just made up for the slight decline in USDC, BUSD, and DAI. In addition, Binance began to delist BUSD, BNB and other related trading pairs in June, further concentrating liquidity.

During this period, BNB stopped falling and Bitcoin and other currencies began to rise sharply. From the perspective of incremental funds, the issuance of TUSD may play a key role in supporting/pulling the market.

In the second half of the year, the changes in USDT, USDC, BUSD, and TUSD, especially whether USDT can maintain sustained growth and USDC will stop its downward trend, are likely to have a major impact on the market again.

02. DeFi blue chips embrace RWA

In addition to stablecoins, the introduction of RWA is also a variable worthy of attention. Recently, DeFi's old blue chips represented by MKR and COMP seem to have gradually awakened and have successively risen in the secondary market, which is closely related to RWA.

The first is MakerDAO. As one of the earliest DeFi projects focusing on real-world assets (RWA), as early as 2022, MakerDAO began to try to enable asset initiators to convert real-world assets into tokens for loan financing, and recently it has taken advantage of the popularity of RWA.

Especially combined with the recent changing trends in the stablecoin market, this is also the key for DAI to further expand its usage scenarios. Whether it is DAI or other stablecoins, most of them rely on the substantial growth of stablecoins linked to fiat currencies such as USDT and USDC to drive their growth.

This includes wrapping USDC in MakerDAO and "changing its skin" to DAI, which can further meet the decentralized needs of some users who do not need KYC. Only with this anchor can its development be promoted.

Now, after the USDC turmoil, RWA can, to some extent, serve as one of the new anchors of DAI. At the same time, assets like U.S. Treasury bonds, which currently have a risk-free return higher than most DeFi returns, can be introduced into DeFi through tokenization, which can further broaden the source of income distribution for DAI and DeFi, which is equivalent to using the returns of real-world assets such as U.S. Treasury bonds to feed back the development of DeFi.

At the same time, Compound also began to bet heavily on the RWA track: Jayson Hobby, former product director of Compound Labs, took over as CEO of Compound Labs, and Compound founder Robert Leshner submitted documents about the new company Superstate to the U.S. Securities and Exchange Commission (SEC).

The new company will purportedly use Ethereum as a secondary record-keeping tool to create a short-term government bond fund that will invest in ultra-short-term government securities, including U.S. Treasuries, government agency securities, and other government-backed instruments.

To put it simply, what Superstate has to do is to work on tokenizing U.S. Treasury bonds on Ethereum, such as purchasing short-term U.S. Treasury bonds and tokenizing them on the chain, using Ethereum as a record of ownership to track the ownership shares of the fund, while supporting direct transactions on the chain.

Of course, whether it is MakerDAO or Compound, the core reason for choosing to focus on the RWA track, especially targeting U.S. Treasury bond returns, is that the current risk-free U.S. Treasury bond yield has exceeded 5%, which is far higher than the returns that most DeFi products can provide.

However, with such a high risk-free return, some liquidity will definitely be absorbed from the existing crypto market funds in the early stage (which is equivalent to providing a channel for on-chain funds to invest in traditional financial assets). Therefore, the booming development of RWA seems to be short-term bearish and long-term bullish for the market.

03. New progress in decentralized stablecoins

In addition, old DeFi projects such as Curve and Aave are focusing on the layout of stablecoins (see "The DeFi track is rigid, can the outdated blue chips come up with new tricks?").

As of the time of writing (July 11, 2023), the top two decentralized stablecoins are still the same old faces, namely DAI with US$4.3 billion (third place) and FRAX with US$1 billion (sixth place). Among them, DAI has almost halved from over US$7 billion at the beginning of the year to US$4.3 billion today, while FRAX has remained relatively stable in the past year, with its circulation volume neither increasing nor decreasing.

Although DAI has surpassed BUSD in market value, its overall market value is actually shrinking. This is related to the impact of USDC decoupling during the Silicon Valley Bank turmoil in March.

FRAX is related to the collapse of UST/Terra in May 2022. Since then, the algorithmic stablecoin track has ushered in a huge shock, and the size of FRAX has shrunk rapidly, halving to US$1.5 billion in just one month, and then gradually fell to around US$1 billion, and has remained stable for a year.

In general, the two decentralized stablecoins, DAI and FRAX, are likely to continue their current trend in the medium and long term, and it is difficult to have big surprises. Among the new decentralized stablecoins worth paying attention to, crvUSD has performed relatively well:

Among them, crvUSD has minted more than 55 million coins since it was launched on May 18, and has successively supported sfrxETH, wstETH, WBTC, WETH and ETH mortgage minting, basically covering the optional market including mainstream LSD assets.

At the same time, Aave's native stablecoin GHO should also be on the way to launch. As two leading DeFi projects with money markets and lending scenarios respectively, the launch of their stablecoins means that there is no lack of sufficient scenario support, which is likely to bring new variables to the decentralized stablecoin market and even the DeFi track.

04. Summary

In general, there is nothing new to say about the current hot spots in the market. The most direct investment and financing data have dropped by 80% year-on-year. The rise of DeFi concepts such as RWA is just old wine in new bottles. The only thing keeping the market going is the ETF applications from traditional institutions such as BlackRock.

In this context, the liquidity of stablecoins such as USDT on the capital side has become a key observation indicator. As mentioned at the beginning of the article, as a semi-closed and relatively small market, the ups and downs of the crypto industry generally depend on the changes in the volume of USD stablecoins:

Among them, in addition to the total amount of stablecoins, the relative changes of the three stablecoins, USDT, USDC, and TUSD, will also have a magnified impact on secondary market prices, which deserves our joint attention.