Stablecoin Stress Test: USDC & DAI More Prone to Depegging Than USDT, Says S&P Global

In the crypto world, stablecoins are often touted as the safe havens, designed to mirror the stability of traditional currencies like the US dollar. But are they really as rock-solid as we believe? Recent analysis from S&P Global sheds light on a crucial aspect of these digital assets: depegging. While the promise is a steady $1 value, the reality, as the data reveals, is a bit more nuanced. Let’s dive into what S&P Global’s research uncovered about the depegging tendencies of some of the leading dollar-pegged stablecoins.

Are All Dollar Stablecoins Created Equal? The Depegging Dilemma

Think of stablecoins as the bridge between the volatile crypto market and the steadier world of fiat currencies. They’re designed to hold a 1:1 peg with a fiat currency, most commonly the US dollar. This peg is crucial for their utility in trading, lending, and as a store of value within the crypto ecosystem. However, the keyword here is designed. Maintaining this peg isn’t always guaranteed, and sometimes, stablecoins can ‘depeg,’ meaning they drift away from their intended $1 value.

S&P Global analysts, Dr. Cristina Polizu, Anoop Garg, and Miguel de la Mata, recently published a deep dive into this very issue. Their research paper, “Stablecoins: A Deep Dive Into Valuation and Depegging,” examined five major players in the stablecoin arena:

• Tether (USDT): The veteran and largest stablecoin by market cap.
• Binance USD (BUSD): The stablecoin previously associated with the Binance exchange.
• Paxos (USDP): Another regulated and fiat-backed stablecoin.
• USD Coin (USDC) USDC$1.00: Issued by Circle, known for its regulatory compliance.
• Dai (DAI) DAI$1.00: A decentralized stablecoin managed by MakerDAO, backed by crypto collateral.

Their findings? Not all stablecoins behave the same when it comes to maintaining their dollar peg. Let’s break down the key discoveries.

USDC and DAI: More Prone to Minor Depegging

The S&P Global research revealed a striking trend: USDC and DAI have spent noticeably more time below the $1 mark compared to USDT and BUSD over the past two years. This doesn’t mean these stablecoins are constantly in freefall, but it does indicate a higher frequency of minor depegging events.

To put it in perspective, consider the most significant depegging instances observed in the study:

• USDC: Dipped below $0.90 for a total of 23 minutes.
• DAI: Fell below $0.90 for 20 minutes.
• USDT: Briefly touched below $0.95 for just one minute.
• BUSD: Maintained remarkable stability, never dropping below $0.975 during the studied period (June 2021 to June 2023).

While these durations might seem short, they highlight a crucial difference in the stability profiles of these stablecoins. Even brief dips below the peg can trigger concerns and potentially impact trading strategies and investor confidence.

Furthermore, the frequency of depegging events paints an even clearer picture. USDC and DAI experienced significantly more instances of slipping below the $1 peg compared to USDT and BUSD during the two-year analysis period.

Noise or Signal? Understanding Depegging Events

The S&P Global researchers acknowledge that very short depegging events, particularly those lasting just a minute, could be attributed to market ‘noise’ – minor fluctuations due to rapid trading or temporary imbalances in supply and demand. However, they emphasize that longer depegging episodes are more meaningful indicators of potential vulnerabilities or market stress.

Even when considering these longer, more significant events, USDT appears to demonstrate greater peg stability compared to USDC, according to the research. This is a noteworthy finding, especially considering the long-standing scrutiny and FUD (fear, uncertainty, and doubt) that Tether has faced over the years regarding its reserves and backing.

The Silicon Valley Bank Effect: A Case Study in USDC Depegging

The research paper also touches upon specific instances of significant depegging. A prime example is USDC’s drop to $0.87 in March 2023. This wasn’t just market noise; it was a direct consequence of the Silicon Valley Bank (SVB) collapse. Circle, the issuer of USDC, disclosed that $3.3 billion of its USDC reserves were held at SVB at the time.

This news triggered a wave of concern, leading to a significant depegging event as investors worried about the potential impact on USDC’s backing and redeemability. MakerDAO, heavily reliant on USDC as collateral for DAI, also experienced depegging of DAI during this period, highlighting the interconnectedness within the stablecoin ecosystem.

What Factors Influence Stablecoin Peg Stability?

So, what determines how well a stablecoin maintains its peg? According to Dr. Polizu and her colleagues, several key elements are at play:

• Good Governance: Strong and transparent management practices are essential for maintaining trust and stability.
• Adequate Collateral and Reserves: Robust backing with high-quality assets ensures the stablecoin can meet redemption requests and withstand market shocks.
• Liquidity: Deep and liquid markets allow for efficient trading and redemption, helping to maintain the peg.
• Market Confidence: Positive market sentiment and trust in the stablecoin issuer are crucial for stability.
• Adoption: Widespread use and integration within the crypto ecosystem enhance a stablecoin’s resilience.

USDT’s Resilience and Growing Market Dominance

Despite facing persistent regulatory scrutiny and questions about its reserves, Tether’s USDT has not only demonstrated notable peg stability, as highlighted by the S&P Global research, but has also significantly expanded its market share. Since the beginning of the year, USDT supply has surged by 25%, reaching a commanding 67% of the total stablecoin market. This growth has largely come at the expense of Circle’s USDC, which has seen its supply shrink by over 40% and market share decline to 21% during the same period.

Key Takeaways for Stablecoin Users and the Crypto Market

The S&P Global analysis offers valuable insights for anyone involved in the cryptocurrency space:

• Depegging is a Real Risk: Even dollar-pegged stablecoins are not immune to losing their peg, albeit temporarily in many cases.
• Stability Varies: Different stablecoins exhibit varying degrees of peg stability. USDC and DAI, while prominent, have shown a higher propensity for depegging compared to USDT and BUSD in the studied period.
• Transparency and Backing Matter: Understanding the reserves, collateral, and governance of a stablecoin is crucial for assessing its potential stability.
• Market Events Can Trigger Depegging: External events like bank collapses can have a significant impact on stablecoin pegs, as seen with USDC and the SVB situation.
• USDT’s Dominance Continues: Despite ongoing debates about its transparency, USDT remains the dominant stablecoin and has shown resilience in maintaining its peg, according to this research.

In Conclusion: Navigating the Stablecoin Landscape

Stablecoins are a vital component of the cryptocurrency ecosystem, offering stability in a volatile market. However, the S&P Global research serves as a timely reminder that ‘stable’ doesn’t necessarily mean ‘perfectly pegged’ at all times. Understanding the nuances of different stablecoins, their depegging tendencies, and the factors that influence their stability is crucial for making informed decisions in the crypto space. As the market evolves, continuous monitoring and analysis of stablecoin performance will be essential for both users and regulators alike.