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If crypto were an ocean, Terra was a whirlpool the size of a Maelstrom.
And by all accounts, when that Maelstrom collapsed in on itself, in May 2022, the chaos sucked the liquidity right out of crypto markets for a solid year.
Stablecoins were crypto’s primary liquidity machine at the time and massive chunks of the market simply pulled the plug.
Tether withstood a month-long $16 billion “bank run” on USDT, while Circle net burned over $30 billion USDC between June 2022 and November 2023.
At the same time, Paxos was winding down Binance stablecoin BUSD — redeeming about $20 billion worth of stablecoins over a 12 month period. A period that coincidentally ended just as bitcoin’s current run was heating up in late 2023.
Looking back, it’s clear that liquid staking and restaking tokens may have helped plug the leak as the rolling liquidations, bankruptcies, and fraud cases played out.
This chart plots the market cap of stablecoins (blue) alongside liquid staking (purple) and restaking (pink) tokens since Q1 2021.
Combining the three token classes forms what I’ve called crypto’s liquidity engine.
Notice that as tens of billions of dollars were being drained from crypto via stablecoin redemptions — starting with Terra and into the middle of the chart — liquid staking tokens expanded to mitigate those losses.
It kept crypto’s liquidity engine on an even keel for a solid 10 months, with liquid (re)staking tokens taking off at the first hint of a reversal of the stablecoin redemption trend.
Terra is now a blip in crypto market history. Stablecoin supplies have just set a new all-time high close to $194 billion (about $6 billion higher than just before Terra), while liquid staking and restaking tokens are also at a fresh combined peak of $92.5 billion.
That makes crypto’s liquidity engine nearly $300 billion deep — with apparently no Maelstrom in sight.