Arcane Analysis: USDC Leads Stablecoins in October, Algorithmic Stablecoins Still Have Potential for Growth

The blockchain data research company Arcane Research released its annual summary and 2022 forecast report at the end of December last year. Now that 2022 is already halfway through, Arcane has also revisited its initial predictions for the stablecoin sector and compared them to the actual situation.

2022 Stablecoin Predictions

Arcane's predictions at the end of last year:

1. Stablecoin supply continues to surge, leading to more stringent regulatory scrutiny.
2. USDC will replace USDT.
3. Scrutiny of centralized stablecoins will lead to the rise of algorithmic stablecoins.

Potential for Mass Adoption of Stablecoins

Arcane believes that while users may not consider stablecoins to be important since they hover around $1, in the highly volatile crypto space, stablecoins serve as a safe haven and are considered a killer app among crypto professionals.

Arcane categorizes stablecoins into three types:

1. FIAT Reserve: Backed by a 1:1 reserve system pegged to the US dollar.
2. Crypto Reserve: Supported by cryptocurrency reserves.
3. Algorithmic Stablecoins: Also known as non-collateralized stablecoins, typically maintained through market incentive mechanisms.

Prediction One: Surge in Stablecoin Supply

The growth in Q1 this year differs from the average annual growth rate of 500% in previous years, with an annualized growth rate slightly slowing to 50%.

In April and May, the impact of Terra's collapse spread throughout the crypto space, breaking the multi-year growth trend of stablecoins with the first negative growth, leading stablecoins to face their largest retreat ever:

• 5/16 - 7/1, stablecoin supply decreased by 5.4% annually -35.8%.
• Stablecoin supply in Q2 decreased by 18.8% year-on-year, the largest quarterly retreat in history.
• In the first half of 2022, stablecoin annual growth rate was -16.1%.

Thus, Arcane acknowledges the inaccuracy of Prediction One:

Stablecoins had been growing steadily for a long time, including the first four months of this year, but quickly reversed the trend due to Terra's collapse. As of now, the projected growth in stablecoin supply has not materialized.

Prediction Two: USDC Overtaking USDT

Since Tether introduced USDT, it had a significant first-mover advantage, but after its market share fell below 50% in November last year, Tether has been unable to reverse its decline:

• Market cap decreased from $78.4 billion to $66.3 billion.
• Total supply decreased by 15.5%, equivalent to an annualized -28.7%.

In contrast, USDC has been thriving this year:

• Market cap increased from $42.2 billion to $55 billion.
• Annualized growth rate of 70.4%.
• USDC's market share increased from 25.8% to 36.3%.

By using the annualized growth rates of 70.4% for USDC and -28.7% for USDT from the chart above for prediction, the golden cross position shown in the following chart can be obtained. Arcane points out:

Based on the annualized growth rates, USDC is expected to surpass Tether's dominance with a market value of $61.3 billion by 10/10. Although there is a lot of uncertainty, it is still an interesting data point worth noting, and Arcane's prediction that USDC will overtake USDT remains valid as of now.

Prediction Three: Scrutiny to Drive Rise of Algorithmic Stablecoins

The total stablecoin supply reached a peak of $187.4 billion on 4/25 this year, with TerraUSD at $18.1 billion, and the market share of algorithmic stablecoins also reached 11.9%.

Subsequently, after Terra's collapse, the total market value of algorithmic stablecoins plunged from $13.3 billion to $3 billion, a -77.4% decrease, and their market share also dropped to 2%; meanwhile, centralized and fiat-collateralized stablecoins benefited from this decline. Arcane notes:

While this year saw greater regulatory scrutiny on centralized stablecoins, it did not benefit algorithmic stablecoins as anticipated.

Expectation of Increased Regulatory Scrutiny

Based on the above three predictions, Arcane still believes that regulations such as the European MiCA Markets in Crypto Assets, the US Stable Act, and other crypto asset market laws essentially place stablecoins into an ill-suited banking regulatory framework.

This could significantly weaken the profitability of stablecoin issuers, leading to the rise of algorithmic stablecoins. Furthermore, it is evident that USDC, which better meets regulatory requirements, is standing out, while algorithmic stablecoins continue to experiment and iterate, potentially giving rise to more stable models in the future.