Just as stablecoins were becoming, well, stable again after the $60B collapse of the Terra ecosystem in May, the FTX disaster struck and pegged tokens have been whipsawed ever since.
The total value (TVL) of the top five stablecoins in DeFi has dropped 18%, to $2.64B since Nov. 6, according to DeFi Llama.
That’s the day Binance CEO Changpeng Zhou said his company would dump FTX’s homegrown FTT token, which was the linchpin of its financial model, and the cornerstone of the balance sheet at Alameda Research, the interdependent hedge fund also controlled by Sam Bankman-Fried.
The Curve pool, which allows trades between DAI, USDC, and USDT, has lost $97M in stables since FTX’s collapse hit the news cycle. Uniswap’s DAI-USDC pool on the other hand has gained $86M.
Yet now it looks like the market is finally settling down. The yields offered on those five tokens have stabilized with none further than 30 basis points from where they were before the FTX crisis.
Deposits in Compound, the lending protocol are the highest of the five at 1.29% as of Nov. 21, a level which pales in comparison to the 3.79% available on short-term U.S. treasuries, according to YCharts.
Moving the Proceeds
The market action suggests that when investors pull stablecoins out of DeFi they’re not necessarily selling the tokens because they gained in value or out of concern that’ll drop in price. Rather, it looks like investors perceive the space as too risky and are either choosing to hold their dollar-pegged assets in their wallets, or moving the proceeds into TradFi where rising interest rates are finally providing meaningful returns on deposits.
In other words, investors are taking off risk to the entire asset class.
Still, the stablecoin picture is muddled. The TVL of stablecoins in DeFi has dropped since FTX’s collapse for a variety of reasons. People who had been holding out despite rising interest rates in traditional finance may be throwing in the towel as the perceived risk-reward of staying in crypto has become too great.
FTX’s insolvency has shown a spotlight across crypto. Everywhere that an institution custodies assets have come under scrutiny about whether — USDT, crypto’s largest stablecoin at a $65.5B market capitalization, has had perpetual doubts about whether it is fully backed by reserve assets. The FTX fiasco may have spooked people to not only pull out stablecoins out of DeFi, as well as out of crypto as a whole.
In this vein, the supply of the top five stablecoins has dropped about 2% since Nov. 6 to $138B, according to CoinGecko. With a $3.8B drop, USDT contributed the most to that decrease in supply.
FRAX, crypto’s fifth largest stablecoin with a $1.18B market capitalization hasn’t been immune to a dropping supply — it’s down 3.3% since CZ said he would sell what turned out to be FTX and Alameda’s Achilles’ heel in FTT.
Sam Kazemian, founder of Frax Finance, a DeFi protocol which produces FRAX, doesn’t see the drop in supply as the end-all-be-all. “I think we’ll grow again slowly but every big insolvency sucks out some stablecoin liquidity which is to be expected,” he told The Defiant.
Stablecoins have continually become a larger part of crypto transaction volume. According to a chart provided by Chainalysis, a blockchain analytics firm, 2021 was the first time that the majority of the value of crypto transactions happened in stablecoins.
Moving forward, Kazemian said he was preparing for anything. “We have no idea where the market is headed,” the Frax founder said. “So we have to be prepared for truly the worst and make sure our peg, our products, and our protocol excels in the most vicious of environments.”
With interest rates climbing higher in the last six Fed meetings, it’s going to be tough for DeFi’s major stablecoin yields to compete with traditional assets like U.S. treasuries.
“It’s just overall a very harsh market environment,” Kazemian said. “Things break with these interest rate hikes.”