On-Chain Data Shows USD Stablecoins Lost Peg During Market Crash

A recent report revealed that stablecoins, the subject of a recent congressional hearing, have experienced increased volatility and traded above or below their pegged value during the recent market crash.

The increased volatility resulted from crypto investors converting their holdings to protect themselves from the current market downturn. According to Coingecko, the total market capitalization of stablecoins is over $174 billion with $96 billion in trading volume.

Even Stablecoins Experience Volatility During Market Chaos

A closer look at the Kaiko report shows that all stablecoins within the market experienced volatility to varying degrees. Despite being pegged in value to the US dollar, some witnessed more significant capital inflow than the others and could not hold on to the peg.

Across the board, DAI, the stablecoin regulated by MakerDao, maintained the closest peg to the US dollar (USD).  The USD Coin (USDC) managed by the Center consortium, which recently increased its cash reserves to ensure transparency, also held its value closely. 

Tether (USDT), holding 53% of the stablecoin market share, traded above its peg. The Binance USD (BUSD) traded below the $1 mark and True USD (TUSD) saw the wildest swings from its pegged value. 

In all, stablecoins have continued to offer investors a safety net from declining prices in the market. These traders have rapidly transitioned from their volatile assets into dollar-pegged cryptocurrencies, as seen from the general sentiment across social media

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Regulatory Woes For USD Pegged Stablecoins and Algorithmic Stablecoins Gain Ground

Due to their increasing adoption globally, stablecoins have become a subject with increased regulatory attention. This comes in light of doubts on the USD’s collateralization of these digital assets. In October, Tether received a $40 million fine from the Commodity Futures Trading Commission (CFTC) over false claims of being fully backed by the USD.

A US financial institution Paxos also accused stablecoin providers of being unregulated and opaque in their services. Circle and Tether were major targets, with the former increasing its cash reserve as mentioned earlier. Tether’s reserve was 2.9% cash at the time of Paxos’ claims. USDC’s had 61% cash equivalent, while PAX and BUSD had pools of 96% cash.

The transparency challenges faced by these USD-backed stablecoins have seen the emergence of algorithmic options. These are digital assets supported by cryptocurrency collateralization. TerraUSD (UST) and Dai have seen massive adoption due to their innovative approach to pegging. 

The UST has a one-of-a-kind pegging system in which Terra’s native cryptocurrency, LUNA, is burned if the UST value surpasses the USD peg. DAI is the most decentralized stablecoin, with the peg to USD maintained by MakerDAO smart contracts. It is also partially backed by ETH and USDC.

Analysts and investors are enthusiastic about the performance of these algorithmic stablecoins, especially as they held their pegs in the recent sell-off. Ran Neuner, Co-founder, and CEO of Onchain Capital was ecstatic with their performance and claimed the world was embracing a new monetary paradigm.

The Future Of Stablecoins

The future of stablecoins is still unclear. According to reports, the US government will release an executive order regarding cryptocurrencies as early as February. It is believed that Central bank digital currencies (CBDC) will be a significant component of the directive.

There are concerns already raised over the possibility of stablecoins and CBDCs coexisting. The directive given will play a significant role in what direction stablecoins evolve. 

However, the increased transparency and innovation within stablecoins augur well. With their growing adoption of investors, they may flourish even more as more investors need this financial tool in the future.

Do you think stablecoins have a future as a financial tool? Let us know your thoughts in the comments below.