Why Stablecoins Depeg?

May 16, 2023

What You Should Know about Stablecoins

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SVB caused USDC’s de-peg/re-peg in March.
What’s the ripple effect?

A recap for USDC’s Depeg:

Silicon Valley Bank collapsed on March 10.

Circle, the issuer of USDC, announced they had $3.3B in deposits at SVB, which triggered panic among USDC holders.

It fails to reach $0.80.

Why would stablecoins de-peg?

Here are the factors:

1. Collateral Changes

DAI de-pegged because it’s 43% backed by USDC.

DAI, the 4th largest crypto stablecoin hit $0.886 during the panic, raising fears of under-collateralization.

The governance token $MKR fell by 26.1%.

2. Market Conditions

FRAX, the 6th largest #stablecoin, partly backed by USDC, saw the largest de-peg at $0.877 amid USDC fears.

Governance token FXS fell 20.4%.

Some stablecoins act like a safe haven such as USDT.

DeFi users pulled USDT from liquidity pools and lending, avoiding exposure to USDC or USDC-affected assets like DAI and FRAX.

Also, Liquity's LUSD and Synthetix's sUSD.

They traded at premiums, with values as high as $1.08.

Both assets were utilized as safe havens, appreciated for their exclusive use of crypto collateral.

Liquidity pools became imbalanced.

LPs fled to USDT, seeking to reduce their exposure to USDC and DAI.

The 3Pool became heavily imbalanced, holding just 1.5% USDT.

A volatile lending market

Borrow rates for USDC plummeted from 3.4% to 2.1% on Aave V2.
DAI fell from 2.9% to 0.9%.Interest rates for stablecoins like USDT, LUSD, and sUSD soared.
Borrow rates for LUSD rose as high as 75% on March 11.

How did funds react to the de-peg?

Most of them exchanged their USDC funds for other assets.

Some bought in at the bottom: @VitalikButerin, @worthalter, and Taureon Capital. Read more on it, here

Why USDC re-pegged so fast:

Even though it de-pegged, USDC remained redeemable 1 for 1 with the U.S. Dollar.

@Circle stayed true to their 1:1 promise.
Read more on it, here

Smoothie Key Takeaways

  • DeFi will still be fragile, if it highly depends on fiat-backed stablecoins.
  • Stablecoins solely backed by crypto collateral survived the crisis. The trading volumes of LUSD and sUSD soared.


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