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Unveiling the Vulnerability: USDC and DAI's Struggles with Stability

Jack Evans
Sep 12, 2023 at 03:45 pm

When it comes to the world of cryptocurrencies, stability is often an elusive concept, but it's the very essence of stablecoins like USDC (USD Coin) and DAI (MakerDAO's Dai). In a recent report by S&P Global, analysts have cast a spotlight on these two prominent stablecoins, revealing a concerning trend: they seem to be more susceptible to depegging than their counterparts, such as USDT (Tether) and BUSD (Binance USD).

The study, led by Dr. Cristina Polizu, Anoop Garg, and Miguel de la Mata, conducted a comprehensive analysis of the valuation and depegging trends of five leading stablecoins: USDT, BUSD, Paxos (USDP), USDC, and DAI. The findings were eye-opening, indicating that USDC and DAI had experienced more frequent depegging incidents over the past two years.

One notable event highlighted in the study was when USDC's value dropped below $0.90 for a staggering 23 minutes, while DAI's value experienced a dip for 20 minutes during the most significant depegging incident in the study period. In stark contrast, USDT's value briefly fell below $0.95 for just one minute, and BUSD consistently maintained a value above $0.975 from June 2021 to June 2023.

The research also revealed that instances of depegging were significantly higher for USDC and DAI compared to USDT and BUSD throughout the analyzed timeframe. The researchers acknowledged that brief, minute-long depegging events could be considered noise, particularly when deviations were near the $1 mark. However, longer durations of depegging were seen as more significant, with the data favoring USDT over USDC.

One significant factor contributing to USDC's devaluation was the collapse of the Silicon Valley Bank in March 2023. At that point, Circle, the issuer of USDC, had placed $3.3 billion of its $40 billion USDC reserves with the bank. Simultaneously, MakerDAO held over 3.1 billion USDC in reserves, which were used as collateral for DAI, leading to its depegging.

The researchers emphasized the importance of robust governance, sufficient collateral, reserves, market confidence, and adoption to maintain a stable mechanism and peg. They concluded that these factors were crucial in ensuring the stability of a stablecoin.

Moreover, market dynamics have shifted significantly, with USDT expanding its supply by 25% since the beginning of the year, capturing a dominant market share of 67%. This growth appears to have come at the expense of Circle, which witnessed a 41.5% reduction in USDC supply and a decline in market share to 21% during the same period.

In the ever-evolving cryptocurrency landscape, the stability of stablecoins remains a critical concern. The vulnerability of USDC and DAI to depegging serves as a stark reminder that even in the world of digital assets, maintaining stability is no easy feat. As the market continues to shift and mature, the lessons learned from these struggles may well shape the future of stablecoins and their path to sustained stability and reliability.

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