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Introduction
Despite the inherent volatility of the cryptocurrency market, stablecoins have emerged as an important innovation that has helped consumers by acting as a reliable means of exchange and a form of wealth storage. Tether (USDT), the cryptocurrency with the most significant market capitalization among stablecoins, has been showing hints that it may be de-pegging as recent events have caused anxiety. In this piece, we will investigate the present status of stablecoins, with a particular emphasis on USDT and the USD Coin (USDC). In addition, we will investigate how recent market volatility has affected the stability of stablecoins.
Volatility in the Stablecoin Market recently saw a decrease of 0.25% in the total capitalization of the stablecoin market, which was accompanied by an average price change of 0.71%. These shifts reflect the persistent volatility in the cryptocurrency market, and they affect stablecoins, which are intended to keep a 1:1 ratio with the underlying asset, which is often the United States dollar.
De-Pegging of USDT
USDT, the biggest stablecoin in market capitalization, has displayed symptoms of de-pegging recently. Its price dropped by 0.23% during the previous day, reaching a local low of $0.997 at one point, leading to a loss of around $270 million in market value. When this article was written, the price of USDT was shown on Trading View as $0.9974. This contrasts with the information provided by Binance, which states that USDT has returned to the $1 level.
In contrast, after the de-peg of USDT, the market value of USD Coin (USDC) has increased by more than $40 million, indicating a growth in demand for the cryptocurrency. Additionally, throughout this period, the 24-hour trading volume of USDC has increased by a whopping 60%. Users are offered an alternative to USDT that is transparent and controlled in the form of USDC, a stablecoin that functions on the Ethereum blockchain and is gaining in popularity.
Other stablecoins have experienced significant swings in addition to USDT and USDC. The market capitalization of DAI and Binance USD (BUSD) has decreased by around $80 million and $90 million, respectively, in recent trading. DAI's trade volume has skyrocketed by 255%. This indicates that there is more trading activity around the stablecoin.
The depegging of USDT co-occurred as a considerable increase in its supply Annual Percentage Rate (APR) on the Aave protocol. Factors That Influenced the depegging of USDT occurred at the same time. Annual Percentage Yields (APY) on both variable and stable forms of borrowing have seen significant increases in the space of fewer than twenty-four hours. These shifts in the interest rates at which people borrow and lend money might contribute to the volatility and depegging of stablecoins like USDT.
Current market situation
The recent events surrounding stablecoins highlight the problems of maintaining stability in a turbulent market. Users depend on stablecoins due to their stability, which bridges the existing financial system and the cryptocurrency system. Trust and greater acceptance depend on the cryptocurrency's capacity to maintain a 1:1 peg with an underlying asset, often a fiat currency such as the United States dollar.
Concerns about stability must be addressed; stablecoin issuers must prioritise transparency and solid reserve systems. Trust in stablecoins may be built by implementing practices, including routine audits, transparent reporting of reserve holdings, and adherence to legal frameworks. As a result of the proliferation of regulated stablecoins like USDC, it has become clear how essential transparency and regulatory compliance are to maintaining the value of stablecoin offers.
Over the last several years, several stablecoin de-peg events have taken place, leading to concerns over the reliability of these digital assets.
Stablecoins that have so far lost their peg
There has been a lengthy history of de-pegged stablecoins. Some were de-pegged, but only temporarily; after a day or two, they returned to where they had been. Typically, slight declines, maybe 10 cents, would be seen in their valuations.
De-pegging has had a devastating effect on the Terra USD (UST). In May of 2022, this algorithmic stablecoin stopped being stable. After entering the death spiral, it continued to decline until finally collapsing. In 2022, the USDN, HUSD, AUSD, MIM, and USDD floated freely. Many are curious as to what triggers the increasingly common occurrence of de-pegging.
The question is why stablecoins eventually lose their peg
Insights on possible causes of de-pegging may be gleaned from recent incidents.
The market panics
A stablecoin may de-peg if market anxiety over it increases. Users are under intense pressure to sell due to this widespread panic to withdraw fiat currency. It's worth noting, too, that widespread anxiety might contribute to such massive cash outflows.
The downward spiral of Tether USD (UST) was accelerated by panic selling. The market had learned some weeks before the UST de-peg that Tether USD needed more reserves to redeem its tokens. Tether's lack of sufficient physical evidence of sustainable reserves contributed to the market panic.
Investors detected massive liquidity withdrawals from the DeFi cryptocurrency exchange Curve after multiple UST holders began withdrawing the token. Consequently, investor anxiety rose, and more money was taken out of the market. After that point, the downward spiral of withdrawal only became worse.
Hypothetical assaults
This is a less probable source of stablecoin de-pegging than others, but it is still possible. When several investors borrow a large quantity of a cryptocurrency to dump it on the market, this is called a speculative assault. The value of Bitcoin drops as people sell their holdings on the market.
In the context of cryptocurrencies, this benefits the speculators since the money they would have made by selling the tokens at a higher price may now be used to purchase further tokens at a lower price. They ultimately pay back the money they borrowed. Short-term de-pegging of stablecoins is an effect of this process. Interest on loans and collateral fees are the expenses of speculation.
Regulatory Shifts
When laws change, and blockchains must adapt to the new norms, stablecoins may de-peg. Blockchains adapt to meet the requirements of new rules introduced by national governments.
This might explain why HUSD has temporarily unpegged from other currencies. This is because, due to changes in rules, numerous market makers in several countries were forced to close their accounts.
Problems with management
Sometimes a stablecoin's developers don't react quickly enough to user requests for updates or concerns. Because of this, USDD became unpegged. The blockchain's original creator, Do Kwon, failed to provide enough warning to the community before a catastrophic event. Worry and panic spread across the neighbourhood as a result.
Tether did the same thing. It needed to be more forthcoming about the origins of its reserves or the company's inner workings. Because of this, there was widespread mistrust and fear in the area.
Conclusion
Stablecoins are digital currencies designed to maintain a stable value relative to a base asset. However, recent developments have shown that stablecoins may de-peg at any moment if certain essential circumstances or underlying assumptions alter. De-pegged stablecoins include UST, USDN, HUSD, AUSD, MIM, and USDD. While the rest of the group managed to get through, UST crashed.