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Footprint | Will the stablecoin market see new opportunities after the collapse of UST?

2022/6/24

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After the collapse of UST, the stablecoin market has undergone subtle changes. Will this lead to a new landscape in the entire market?

• June 2022, Simon
• Data Source: Footprint Analytics Stablecoins After the UST Event Dashboard

Once highly anticipated stablecoin UST started to plummet from May 9, shaking the entire stablecoin market. People thought UST had finally found a way out for algorithmic stablecoins, only to almost collapse overnight.

The main reason for UST's failure came from a sudden massive sell-off in the market, causing UST to detach and leading to an excessive Minting of LUNA, rapidly depreciating the value of LUNA, which was insufficient to peg UST back to $1. UST and LUNA both fell nearly to zero. While they were designed to support each other, they ended up dragging each other down.

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UST had surpassed BUSD to become the third largest stablecoin after USDT and USDC, as well as the largest algorithmic stablecoin, but its collapse was swift. Stablecoins are no longer stable; the crisis of trust is the ultimate killer of projects.

However, crises often bring opportunities. What changes will the stablecoin market see in its landscape?

Fiats Stablecoin Market

Fiat stablecoins, led by USDT and USDC, account for nearly 80% of the stablecoin market value. Although fiat-backed stablecoins contradict decentralization and face transparency and compliance issues, the demand for stablecoins as a hedge in the high-risk cryptocurrency world remains strong.

USDT has faced negative news before this crisis, such as lack of transparency and multiple fines from US regulatory authorities for lying. The issues with UST have brought back past negative news about USDT, reflected in a more than $10 billion decrease in USDT market value, dropping to $72.5 billion as of June 5th.

The outflow of USDT users is also reflected in Curve's 3pool. According to data from Footprint Analytics, USDT had mostly maintained a 20% to 30% share in the pool before the UST incident. After the UST incident, the share of USDT in the pool rapidly increased, peaking at 83%. This indicates that users, concerned about the security of USDT, frantically sold their USDT for DAI and USDC.

The price of USDT has mostly been slightly above $1, and this incident also brought the price of USDT to a near three-month low. However, Tether's Chief Technology Officer, Paolo Ardoino, stated that $7 billion has been withdrawn from the stablecoin to re-collateralize it with the US dollar, and mentioned that they could continue if the market demands.

This move has restored confidence in some users, and the proportion in the Curve 3Pool has slightly decreased, standing at 61% as of June 5th. While USDT has seen a decrease in market value, the overall proportion change is not significant, still around 46%. UST, which went from a 10% share to less than 1%, where did the share lost by UST go?

According to data from Footprint Analytics, USDC is the biggest beneficiary of this incident. USDC's market value has risen from $48.3 billion to $54.1 billion, and its market share has also increased from 27% to 34%. USDC, which has always been ranked second, seems to have found a new opportunity.

Overcollateralized Stablecoin Market

The overcollateralized stablecoin market has also been significantly affected in this incident, with DAI and MIM losing $2 billion in market value each. MIM's market value has dropped to a level similar to LUSD. However, this downward trend had already started on May 6th before the UST crash.

Since DAI is mostly collateralized by assets like BTC and ETH, and MIM is backed by interest-bearing assets, and most cryptocurrency prices are positively correlated with BTC, when the prices of most cryptocurrencies drop rapidly, the overcollateralized stablecoins generated as collateral will also be affected.

The recent decline in Bitcoin, which drives cryptocurrency prices, is also related to the US market. The Federal Reserve's interest rate hike measures to prevent inflation have caused a drop in the US stock market. A noticeable downward trend can also be seen in the Nasdaq 100 Index.

Data from Footprint Analytics shows that before July 2021, the price of BTC was not significantly related to the Nasdaq 100 Index, but the correlation between the two has been strengthening since then. The volatility of the entire cryptocurrency market is influenced by the US stock market, and it seems that some users who entered the cryptocurrency market for hedging purposes have not achieved their goal.

The UST crash undoubtedly dealt another blow to overcollateralized stablecoins. Terra's founder, Do Kwon, purchased a large amount of BTC as collateral for UST, further downward pressure on the market, leading to more panic selling of BTC. Do Kwon's plan to save UST failed, setting a near one-year low for BTC's price, further affecting the liquidation of overcollateralized stablecoins.

However, DAI's minting is not only backed by assets like ETH and BTC but also by a significant amount of stablecoins like USDC and USDP. Therefore, DAI has kept the impact within a limited range and has shown an upward trend recently. In comparison, the situation for MIM is not as favorable, with its market value dropping by $2 billion in January and another $2 billion in May.

Algorithmic Stablecoin Market

The de-pegging of UST shattered the confidence that people had just built in algorithmic stablecoins. The price of USDN, which has a similar mechanism on the Waves blockchain, also de-pegged to $0.8 on May 11th, gradually recovering afterward. However, as of June 5th, the price is still not fully pegged at $0.989. According to Footprint Analytics, USDN has experienced such severe de-pegging before, and its peg to the US dollar has always been unstable.

FRAX, which once had a market value comparable to UST, also experienced a sudden $1 billion drop. As FRAX minting requires both USDC and FXS, with USDC as collateral and FXS as part of the algorithm, this sets FTAX apart as relatively more stable than fully algorithmic stablecoins. While the price of FXS also dropped, due to its low overall percentage, after dropping to a market value of $1.4 billion, FRAX has seen some recovery.

FEI allows users to mint stablecoins with $1 worth of assets, with a collateral ratio of 168%, and around 70% of the protocol's assets are in ETH. FEI's market value is not significant, at only $500 million, and has not been greatly affected.

Notably, while most stablecoins saw a decline in market value, USDD was on the rise. USDD is a stablecoin issued by Tron, surpassing FEI's market value at $670 million as of June 5th, making Tron the third-largest TVL blockchain after Ethereum and BSC.

From the successful case of UST, users choose stablecoins based on security and profitability. USDD can be seen as an optimization of UST, but the issuance, burning activities, and primary market activities of USDD are managed by the Tron DAO Reserve, and regular users can only trade USDD in the secondary market. Therefore, the stability of USDD is mainly related to the Tron DAO Reserve and its approved whitelist, rather than the algorithm itself.

This shift of user trust in algorithms to trust in the Tron DAO Reserve is evident. Additionally, USDD offers a 30% fixed interest rate, which is highly attractive to users.

Conclusion

The UST incident shows how a protocol can go from its peak to a trough, with a whale's sell-off igniting the spark, ultimately hurting retail investors. The stablecoin market has also taken a significant hit, but the landscape has subtly changed as a result.

In the fiat stablecoin market, USDC has found new growth momentum, but it seems to lack a more fatal blow to completely surpass USDT.

In the overcollateralized stablecoin market, DAI remains in the lead, with a widening gap from its competitors. MIM, once promising, has now fallen to a value similar to LUSD.

In the algorithmic stablecoin market, the impact varies depending on the algorithm mechanism, with the rising trend of USDD catching attention. However, in a blockchain world where smart contract code is law, does USDD's mechanism concentrating rights in the Tron DAO Reserve still qualify it as an algorithmic stablecoin?

This article is contributed by Footprint Analytics.

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