Author: Pedro Solimano, Decrypt; Translated by: Songxue, Golden Finance

The past eighteen months have been horrible for most stablecoins.

Following the collapse of Terraform and its native stablecoin UST last year, the overall market capitalization of these digital assets has plummeted by 35%. According to cryptocurrency data provider DeFiLlama, the stablecoin market peaked at $189 billion in May last year, but 18 months later, the market reached $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 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 since mid-2022, U.S. Treasury yields have “started to surge” without significant volatility within cryptocurrencies. Combining these factors with the high opportunity cost of holding stablecoins when the risk-free rate is around 5% “has led to the decline,” he said.

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

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

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

It is worth noting that despite recent concerns about decoupling, USDT has proven to be one of the strongest stablecoins. Although it suffered a sharp loss of interest after the collapse of UST, it has recovered and now has a market value of $83 billion, slightly higher than the level in May 2022. The coin dominates the stablecoin industry, with its circulation accounting for 67% of the total circulation.

The second stablecoin, USDC, has suffered the opposite fate. It has fallen to multi-year lows, running counter to the massive expansion being undertaken by its parent company Circle. Many factors have contributed to its weakening, including its own decoupling during the banking turmoil that hit the industry earlier this year.

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

Carter mentioned what he called the difference between onshore and offshore stablecoins while speaking at Token2049 in Singapore.

He said the hostility of U.S. regulators and their “desire to suppress the stablecoin market” has driven a “dramatic decline” in the market share of U.S.-based stablecoins such as USDC.

The big winner? Stablecoins outside the U.S., led by USDT.

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

For cryptocurrency investors, this happens even in a bear market — a sign of product importance and product-market fit.

So we are faced with a somewhat paradoxical situation. What is going to happen?

Pallasena noted that a trend can reverse when the opposite of what caused it occurs. “Renewed interest in cryptocurrency trading/investing and steadily lower interest rates” and a regulatory environment that supports cryptocurrencies “can also play a role.”