The price of USDC has been unanchored, and Binance, Coinbase, etc. have announced the closure of USDC exchange services. Facing panic and runs, will USDC enter a death spiral?
In 1 day, the ripple effect of SVB came to the crypto market. This morning, due to some deposits in SVB, Circle, the USDC stablecoin issuer, suddenly faced a severe run, and USDC continued to de-anchor. At the same time, centralized trading platforms such as Binance and Coinbase announced the closure of some USDC exchange services. As of writing, the price of USDC has de-anchored to around $0.933, and more than 2.7 billion USDC have been destroyed in the past 24 hours. Facing panic and runs, will USDC enter a death spiral?
Why Is There a Run? $3.3 Billion in SVB Savings
Circle, a stablecoin issuer, posted on social media today that Silicon Valley Bank is one of Circle’s six bank partners and is responsible for managing about 25% of USDC’s cash reserves with other banks. Circle is currently waiting to see the impact of the FDIC takeover of Silicon Valley Bank on its depositors, but Circle and USDC continue to operate normally.
According to the latest data released by Circle’s official website, the total market value of USDC in circulation is about 43.4 billion U.S. dollars, and the total fund reserves are 43.5 billion U.S. dollars, of which cash reserves are 11.1 billion U.S. dollars, accounting for about 25%, and the remaining 33.4 billion U.S. dollars in reserves are Short-term treasury bond portfolio. It was confirmed at the end of the day that the order to remove the balance initiated on Thursday had not yet been processed, so $3.3 billion of the roughly $4 billion in USD stablecoin (USDC) account reserves remained in SVB. Like other customers served by SVB Bank, Circle will follow guidance provided by state and federal regulators.
What Would Send Circle Into a Death Spiral?
According to the information currently collected by BlockBeats, the losses Circle faces in the “SVB incident” should not be large. However, judging from the current degree of panic in the market, USDC still has the risk of continued unanchor. So under what circumstances will USDC experience serious unanchoring? BlockBeats sorted out several key influencing factors.
First of all, the premise of the USDC crash must be the continuation of panic. Most of Circle’s endorsement reserves are U.S. treasury bonds. If the panic continues and Circle’s cash reserves are depleted, Circle will have to sell its treasury bonds immediately to meet the market’s redemption demand. Unfortunately, the global interest rate hike has brought the yield of the entire bond market to an unprecedented high. If it sells government bonds at this time, Circle will face serious losses like SVB, making it unable to effectively respond to market redemption. At this time, the redemption cycle of Circle becomes longer, which once again promotes panic, the redemption intensifies, and USDC enters a death spiral.
The second is price anchoring and liquidity. USDC that cannot be redeemed in time will try to escape through market liquidity. It is undeniable that in terms of on-chain liquidity, USDC is the current leader among stablecoins, and its shadow can be seen in the LP pools of various AMMs and lending agreements. What I want to explain here is that because most of the on-chain lending activities do not use USDC as collateral, the risk of price liquidation is not high, and the key factor leading to unanchoring is actually the liquidity on the AMM. Now, let’s use Curve and Uniswap as the main basis to see how much liquidity is available for USDC to escape.
On Curve, USDC’s main means of escape is the 3Crv pool. At present, the TVL of the pool exceeds US$400 million, of which USDC accounts for nearly 50%, with a value of about US$220 million, DAI accounts for about 47%, and USDT accounts for about 3%. If the panic persists, one of two things can happen:
- Most holders regard DAI as a decentralized shelter and exchange USDC for DAI. At this time, there is about 200 million US dollars of liquidity on the 3Crv pool to protect the anchor of USDC.
- Some holders find that most of DAI’s anchors are endorsed by USDC, and choose to convert USDC to USDT. At this time, the weak liquidity of 14 million US dollars in the 3Crv pool will cause continuous or even serious unanchoring of USDC.
Another escape method on the chain is the AMM pool of assets such as USDC against ETH, such as the USDC/ETH pool of Uniswap V3. At present, more than 86% of USDC’s 41 billion market value is on the Ethereum mainnet, worth about 35 billion US dollars. Compared with other public chains, the Ethereum mainnet is still the main caliber for USDC to escape.
At present, the liquidity pool with the highest TVL on Uniswap V3 is also the USDC/DAI 0.01% and 0.05% pools, with a TVL of about 400 million US dollars, followed by the USDC/ETH liquidity pool. 0.3% plus 0.05% The two pools have a TVL of about 335 million US dollars. Among them, there are currently about 110,000 ETH in the two pools, worth about 160 million. From the perspective of the entire Ethereum mainnet, the current TVL is 26 billion, and its proportion to the market value of stablecoins is also the smallest among all public chains (excluding Tron).
Therefore, if the market panic persists for a long time, USDC holders will choose AMM as a means of escape after the Curve pool is exhausted, and exchange USDC for various blue-chip or even non-blue-chip assets such as ETH. At this time, on the one hand, USDC may face a price death spiral, and on the other hand, asset prices such as ETH may also rise.
What’s more terrible is that the centralized trading platform has also begun to cut off the liquidity of USDC. This morning, Binance temporarily closed the function of automatically converting USDC to BUSD, and posted on social media that due to the large inflow of USDC assets, the burden of automatic conversion has increased. This is a routine risk management procedure step taken by Binance. Subsequently, Coinbase also made the same statement. You know, when CEX big brothers also start to evade USDC, it may only be a matter of time before other trading platforms do the same. When the centralized platform also cut off liquidity, the nightmare of USDC really came.
What Happens When USDC Crashes?
Obviously, Circle’s loss in the SVB matter is not much. The unanchor of USDC this time is a panic or a deliberate run. Turned into a real asset deficit. What Circle has to do at this time is to close the redemption, announce financing and other external financial support, and then wait for the market to restore confidence. Of course, as mentioned above, in the process of waiting for the recovery of confidence, a serious de-anchor of USDC is inevitable.
The most worrying thing is not only the unanchoring of USDC, but the run risk of the entire stablecoin ecosystem. Think about it, most of USDT’s savings are also treasury bonds. If Circle eventually sells its treasury bonds due to huge unanchoring pressure and causes losses, won’t the fire spread to USDT?
The second is DAI, FRAX and other decentralized stablecoins that are mainly endorsed by USDC. BlockBeats once pointed out the serious centralization of the current stablecoin ecology in “Crypto Civilian War, The Way to Defend the “De-USDC” Stablecoin”. The most important factor is the widespread application of the centralized stablecoin USDC. If USDC really breaks the anchor seriously, then within a day, the endorsement of stablecoins such as DAI and FRAX will be greatly reduced, and they will also face the risk of a run.
The collapse of the stablecoin market means that the entire encryption industry has regressed for more than 5 years, because for now, DeFi applications such as AMM, lending, derivatives, and even NFT and NFTfi have long been inseparable from the support of stablecoins. CeFi Even more so. Stablecoins collapsed, retail investors had no access to deposit funds, the industry lost liquidity, and the entire crypto ecosystem fell into a state of shock.
Of course, the reality is not necessarily so pessimistic. We have found that the prices of “old and stable” governance tokens like LQTY are rising. That’s right, the algorithmic stablecoin that was once “falsified” by Luna is back. At this moment, Suanwen has become the most decentralized and even “safest” stablecoin. If this logic is recognized by the market, ancient stable projects such as Liquity and Tribe will temporarily become refuges for crypto users.