One of the surviving stablecoins, USD Coin (USDC), may be approaching a death spiral. USDC lost its dollar peg today and over 2.7 billion USDC was destroyed. How will USDC crash affect the market? Which altcoins are in danger? Let’s answer all the questions…
USDC loses price stability
The influence of Silicon Valley Bank, which was close to bankruptcy after Silvergate, spread to the entire crypto money market in one day. This morning, Circle, the company behind the USDC stablecoin, was suddenly hit by volatility due to some deposits in the SVB. USDC lost its dollar peg at one point. At the same time, centralized exchanges such as Binance and Coinbase announced the shutdown of some USDC clearing services.
The price of USDC has dropped to about $0.88 so far, with over 3.1 billion USDC destroyed in the last 24 hours. Faced with panic and escapism, USDC is heading for the death spiral that befell Terra in May.
Circle was among Silicon Valley Bank’s largest partners
Circle, the company authorized to issue USD Coin, reported on social media today that Silicon Valley Bank is one of Circle’s six bank partners and is responsible for managing approximately 25% of USDC’s cash reserves with other banks. Circle currently expects to see the impact on depositors of the FDIC’s takeover of Silicon Valley Bank, but Circle and USDC continue to operate as normal.
According to the latest data published on Circle’s official website, USDC’s total market capitalization in circulation is approximately $43.4 billion and total fund reserves are $43.5 billion, of which cash reserves are $11.1 billion. 25% of reserves and the remaining $33.4 billion are short-term treasury bills portfolio. The unbalance order initiated on Thursday was confirmed at the end of the day as yet to be processed, so $3.3 billion of the approximately $4 billion USDC account reserves remained in the SVB. Like other clients served by SVB Bank, Circle will follow the guidelines provided by state and federal regulators.
Billions of dollars USDC outflow started with the crisis triggered by the SVB bankruptcy
After Circle announced that some of its reserves were stuck in the SVB, USDC outflows of up to $7.4 billion from central exchanges. According to data from Periscope Protocol, many big players in the cryptocurrency market have turned away from USDC after the news. Dune Analytics data shows that more than 3.1 billion USDC was destroyed. In decentralized DeFi protocols such as Aave and Compound, the USDC price fell to $ 0.80. 124 million USDC was sold on decentralized platforms.
What would send the Circle into a death spiral?
According to the information currently collected by BlockBeats, the losses Circle faced in the “SVB incident” are not on a massive scale. However, given the current degree of panic in the market, USDC risks losing its dollar peg. So, under what conditions can USDC completely lose its dollar peg? On-chain researcher BlockBeats lists a few key factors.
First of all, the mainstay of the USDC collapse should be the continuation of the panic. Most of Circle’s turnover reserves are US Treasury bonds. If the panic continues and Circle’s cash reserves run out, Circle will have to sell its treasury bills immediately to meet the market’s demand for redemption. But unfortunately, the global interest rate hike has increased the yield of the entire bond market in an unprecedented way. If Circle currently sells its government bonds, it will face serious losses like the SVB and may not be able to meet its repayment demands. In the worst scenario, the Circle’s redemption cycle lengthens, which once again encourages panic, redemption intensifies, and USDC enters a death spiral.
Second, price stability and liquidity. USDC that does not repay on time will try to escape market liquidity. Note that USDC is the leader among stablecoins in terms of on-chain liquidity, and its shadow can be seen in LP pools and lending deals of various AMMs. The important point here is that since most on-chain lending activities do not use USDC as collateral, the risk of price liquidation is not high and the main factor causing price volatility is actually liquidity in AMM. Now, let’s take Curve and Uniswap as the main basis to see how much liquidity there is for USDC to escape.
How good is Curve and Uniswap’s USDC liquidity?
The main escape route for USD Coin on Curve is the 3Crv pool. Currently the TVL of the pool exceeds $400 million, of which approximately 50% is USDC worth $220 million, DAI approximately 47% and USDT approximately 3%. If the panic persists, one of two things can happen:
- Most owners see DAI as a decentralized haven and are replacing USDC with DAI. Currently, there is approximately $200M in liquidity in the 3Crv pool to maintain USDC price stability.
- Some holders find that most of the DAI’s stability is USDC certified and choose to convert USDC to USDT. Currently, the weak liquidity of $14 million in the 3Crv pool will help USDC maintain its price fixation consistently and even seriously.
Another way to escape is the AMM pool of assets like USDC versus ETH, like Uniswap V3’s USDC/ETH pool. More than 86% of USDC’s 41 billion market cap is currently in the Ethereum network, which is worth approximately $35 billion. Compared to other Blockchains, Ethereum is still the main caliber for USDC to escape.
Currently, the liquidity pool with the highest TVL in Uniswap V3 is 0.01% and 0.05% USDC/DAI pools with approximately $400 million TVL, followed by the USDC/ETH liquidity pool. 0.3% plus 0.05% The TVL of the two pools is approximately $335 million, among which there are approximately 110,000 ETH currently worth approximately 160 million in the two pools. From the perspective of the entire Ethereum network, the current TVL is 26 billion and the ratio of stablecoins to market cap is also the smallest of all Blockchains (excluding Tron).
Therefore, if the market panic continues for a long time, USDC holders will choose AMM as an escape route after the Curve pool is depleted and replace USDC with various blue-chip or even ERC20 assets. Currently, USDC may face a price death spiral, while the prices of assets such as ETH may also rise.
What’s worse is that exchanges are starting to cut USDC’s liquidity as well. This morning, Binance temporarily turned off the automatic conversion of USDC to BUSD functionality and posted on social media that the load of automatic conversions has increased due to the large influx of USDC assets. This is a routine risk management procedure implemented by Binance. Subsequently, Coinbase made the same statement. Once centralized exchange giants start to dodge USDC, it may be a matter of time before other exchanges do the same. When the central platform also cuts liquidity, USDC’s nightmare can really come.
What if USDC crashes?
Honestly, Circle’s loss on SVB isn’t much. The surge of USDC this time could be a panic or deliberate. What Circle now has to do is make payments, announce financing and other external financial support, and then wait for the market to regain confidence. Of course, as mentioned above, it is inevitable to see serious price imbalances in USDC while waiting for confidence to re-establish.
The most worrying thing is not only the USDC volatility, but the risk that the entire stablecoin ecosystem will collapse. Think about it, most of USDT’s reserves are also treasury bills. If Circle eventually sells its treasury bills due to massive liquidity pressure and causes losses, wouldn’t the fire spread to USDT?
The latter are mainly DAI, FRAX and other decentralized stablecoins endorsed by USD Coin. The most important factor is the widespread implementation of the centralized stablecoin USDC. If USDC is indeed severely broken, within a day, stablecoins like DAI and FRAX will be drastically curtailed, and they will also be at risk of an escape. The good news is, as we quoted by Kriptokoin.com, a large number of people think that Circle has enough reserves to support the UDC price.
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