The competition in the stablecoin market has already burned from the centralized field to the decentralized field. The situation has changed again.
On December 23, Coingecko data showed that the market value of the decentralized stable currency UST reached 9.479 billion U.S. dollars, surpassing the DAI of the same track, which had a market value of 9.035 billion U.S. dollars. UST is built on the blockchain network Terra. DAI is the largest decentralized stable currency on the Ethereum network.
The rise in the market value of UST makes it ranked fourth in the stable currency market value rankings. The top 3 are still occupied by centralized stablecoins. They are Tether’s USDT, Circle’s USDC, and Binance Ecosystem’s BUSD.
The latest report from The Block Research shows that the total supply of stablecoins has surged from US$29 billion in early 2021 to over US$140 billion, with a growth rate of 388% during the year. UST has not been included in the report statistics, which means that the current market size of stablecoins may be larger than the statistics. Some believe that DeFi and derivatives are important reasons for the increase in demand for stablecoins.
Regulators, especially US legislators, have not loosened their attention to stablecoins. The 2021 Congress Report released by the Financial Stability Supervisory Board of the United States last Friday indicated that the United States’ attitude towards stablecoins is primarily a defensive stance rather than financial innovation.
UST market value rises Terra chain TVL super BSC chain
At present, the stable currency field is dominated by USDT and USDC. Both are issued by centralized companies, and traditional currency instruments such as U.S. Treasury bonds, cash, and corporate bonds are anchored in the value of the U.S. dollar.
According to CoinGecko’s data, USDT issued by Tether accounts for more than 60% of the total amount of stablecoins issued in the current all-encrypted asset market, and tops the list of stablecoins with a market value of 77.4 billion U.S. dollars. The market value of USDC, a compliant stablecoin issued by Circle, ranks second, at approximately US$42.6 billion. Another compliant stablecoin issued by Binance, BUSD, ranked third with a market capitalization of US$14.7 billion.
The stablecoins, which are the fourth and fifth in market value, are taken over by the decentralized track, and the changes have also occurred. UST, a stable currency pegged to the U.S. dollar based on the Terra chain, has surpassed DAI, occupying the fourth place in the stable currency market value rankings.
DAI is the longest-running decentralized stablecoin on the market, which was created based on the MakerDao protocol on the Ethereum network. Whether it is supply or market value, it has always been the king of the decentralized stable currency market. Today, the crown has changed hands. The current market value of UST is approximately US$9.4 billion, and the market value of DAI is approximately US$9 billion.
Centrally issued stablecoins have traditional financial assets as reserves, so it is easier to maintain a 1:1 anchor with the U.S. dollar. In comparison, UST and DAI are decentralized stable currencies supported by the mortgage of encrypted assets. The highly volatile cryptocurrency constitutes its underlying asset. When the decentralized stable currency appears in extreme market conditions, it will be decoupled from the value of the U.S. dollar due to untimely liquidation.
From the perspective of market value and market demand for smart contracts on the chain, decentralized stablecoins are growing. The corresponding on-chain infrastructure has also risen with the tide. The Terra chain, the underlying facility of UST, is a case in point. Only 13 applications on the chain have locked up more than $18 billion in encrypted assets, and TVL once surpassed the public chain unicorn BSC.
On December 21, data from the analysis tool DeFi Llama showed that the TVL of the Terra chain exceeded 18.2 billion U.S. dollars, and the average TVL applied on each chain exceeded 1.4 billion U.S. dollars. The average TVL of the agreements on the BSC chain is $73 million, of which $16.5 billion of encrypted assets are locked in 225 agreements.
The increase of TVL on the Terra chain coincides with the increase in the price of its governance token LUNA. According to CoinGecko data, LUNA’s 7-day increase was 48.5%, setting a record high of US$97.9 on December 22, which also pushed LUNA’s total market value into the top ten (9th) of the crypto asset market value rankings. If the stablecoin is eliminated, LUNA’s market value ranks 7th.
Some people attribute the surge in LUNA’s market value to the token mechanism and its use in DeFi applications. And Web 3 game company Spielworks CEO Adrian Krion said that LUNA’s market demand mainly stems from the demand for UST. Casting UST requires burning LUNA on the Terra chain.
The market’s demand for the stable coin UST caused the deflation of LUNA. This is an important reason for both the market value of UST and LUNA to rise.
DeFi and derivatives drive stablecoin supply growth by 388%
The Block Research pointed out in the latest “2022 Digital Asset Outlook” report that the total supply of stablecoins has surged from US$29 billion in early 2021 to more than US$140 billion. The growth rate during the year was 388%.
In addition, the annual stable currency adjustment trading volume will exceed 5 trillion U.S. dollars in 2021. This is a year-on-year increase of more than 370% compared to 2020.
There are many different factors behind the surge in the supply of stablecoins. For crypto-asset trading companies, stablecoins are a way to suppress the fluctuations in the trading of different cryptocurrencies.
In 2021, a large number of individual traders will input stablecoins into decentralized finance (DeFi) protocols on various chains, creating new demand for stablecoins. Traders may exchange new assets in DEX, a decentralized trading application. Or use stablecoins for pledges, borrowing and arbitrage of other assets. Or pair the stable currency with other assets to obtain new asset rewards in the liquidity supply pool to make a profit.
DeFi provides a new market scenario for stablecoins and also promotes the transition of stablecoin output from a centralized method to a decentralized method. The algorithmic stablecoin UST is the product of this trend.
In addition to DeFi, the derivatives market is also an important driving force for the growth of stablecoins.
Paolo Ardoino of Tether pointed out that most derivatives of encrypted assets (future contracts, option contracts, etc.) are settled in stable currencies. And Circle’s CEO Jeremy Allaire predicts that 2022 is expected to be the year of evolution for stablecoins. As more and more institutions and individuals want to hold stablecoins, their demand will continue to increase. Including the purpose of payment.
Nevertheless, The Block Research also pointed out that the market will also face more scrutiny in 2021. In terms of supervision and review, the United States is particularly vigilant against stablecoins, and regulators have repeatedly reiterated their potential threats to the US financial system.
Senator Elizabeth Warren stated:
“Stablecoins are not always stable. In times of economic hardship, people are most likely to cash out high-risk financial products. And turn to real U.S. dollars. This results in the stability of stablecoins when people need stability most. A sharp decline. And this kind of run mentality may eventually destroy our entire economy.”
The Financial Stability Supervisory Board, the main agency responsible for monitoring the financial system of the U.S. Department of the Treasury, warned:
“These stablecoins are often marketed in a way that is backed by traditional financial assets. It is claimed that assets provide a promise of stable value. But when investors doubt their credibility, stablecoins may be subject to widespread redemption and asset liquidation. This It will cause a liquidity problem similar to a bank run on deposits. This may harm users and the wider financial system.”