Mar 13, 2023 - Economy

Debtors in de-pegged stablecoins USDC, DAI saved millions

Loan repayments on DeFi money markets Aave and Compound
Data: Kaiko Research; Chart: Alice Feng/Axios

Circle's dollar-pegged stablecoin (aka usd coin) briefly broke away from its $1 peg over the weekend, as market volatility led to bank failures that incited panic and fear across the industry.

  • However, a few people unexpectedly benefited from the turmoil.

The big picture: Debts denominated in usdc declined in value. That drove an investor frenzy to pay back what they owed before Circle's stablecoin was restored.

  • It was an unlikely silver lining in the various banking crises that struck late last week, as crypto bank Silvergate decided to liquidate, and Silicon Valley Bank rapidly collapsed.

Details: The biggest day, Saturday, saw more than $2 billion in loan repayments on money markets Compound and Aave in USDC, and roughly $300 million in DAI, which had also lost its peg. Sunday was lower, but still unusually high.

Between the lines: Flipside Crypto estimates that USDC debtors saved $84 million, while those in DAI got a discount worth $20.8 million, this weekend.

The big picture: Circle's token plays a prominent role in decentralized finance (DeFi), by facilitating lending on giants such as Aave and Compound.

  • "Borrowers were able to repay their loans at a discount," according to data compiled by research firm Kaiko.
  • Most of the trading for USDC happens on chain. As such, the token actually fell much further than the $0.88 bottom seen on sites like CoinGecko and CoinMarketCap this weekend. Those lower prices were seen on the dominant decentralized exchanges (such as Uniswap and Curve) where most of the USDC selling was happening.

Of note: Prior to the collapse of SVB and the shuttering of Signature Bank, there was little USDC repayment activity, at least for particular venues.

Quick take: Lots of folks were using centralized exchange prices for USDC, raising the specter of another collapsed stablecoin, but prices flashing on those exchanges were not illustrative of Circle's ability to honor usdc redemptions.

  • Kaiko's Clara Medalie took to Twitter over the weekend to explain "#USDC has very little liquidity on CEXs so I wouldn’t overly read into price feeds coming from there."
  • Medalie added that less than 1% of all centralized crypto exchange trading volume is denominated in USDC.

Be smart: Medalie added: "A true de-pegging event is something related to reserves."

How it works: Price-induced panic could trigger a run on stablecoin reserves, the true test of an issuer's mettle and 1:1 backing of the stablecoin.

The intrigue: MakerDAO's debt-backed stablecoin dai—with some $3 billion of its collateral held in USDC —is prompting the organization to reconsider its exposure.

What we're watching: Any stablecoin redemption updates from Circle.

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