Credit rating agency warns potential risks of stablecoins | How are stablecoins doing so far?

Credit rating agency Fitch noted this week that the growth of stablecoins not fully backed by safe assets could pose risks for the financial markets. As the stablecoin market experiences a fast-paced growth, they are grabbing more attention from the regulators. A fresh round of debate around Tether’s reserves sprung once again since its March 2021 reserve breakdown that revealed cash accounted only for 2.9% of the reserves. Last month, Mark Cuban, a billionaire investor and the owner of the Dallas Mavericks basketball team, called for tighter regulation in the stablecoin space after IRON, a stablecoin project, lost its peg falling to $0.66 and its native token TITAN’s value fell by almost 100%. 

Stablecoins have witnessed hypergrowth in 2020. From $5 billion in January 2020, the overall market capitalization of stablecoins  skyrocketed to $29 billion by the end of 2020. Since the beginning of 2021, the market almost quadrupled to $112 billion. Unlike the rest of the crypto market which went through a deep correction, stablecoins have shown a relatively stable performance. This indicates that as the crypto market exhibits extreme volatility, crypto investors and traders are looking for a safe way to preserve their crypto wealth. 

Let’s have a deep dive into stablecoins this week.

The graph below illustrates the market capitalization and daily trading volume of the top 5 stablecoins.

Source: Novum Insights up to June 30

Tether dwarfs the rest of the stablecoin market with its $62.8 billion market capitalization. The runner up stablecoin is USDC with $25 billion in market capitalization. Commonly regarded as the most reliable stablecoin on the market, USDC publishes monthly attestations by a third party accounting services firm to provide some (not full) level of disclosure of their reserves. 

In terms of trading volume, Tether dominates the entire crypto market. Tether is the most traded cryptocurrency with its $57.8 billion 24h trading volume. Bitcoin is the second most traded asset with $28.5 billion daily volume. This is less than half of Tether’s daily trading volume. Ethereum follows suit with $24.9 billion. 

Binance’s BUSD comes second after Tether in terms of 24h trading volume ($3.7 billion). BUSD is actively used across Binance Smart Chain DeFi protocols. Issued in partnership with Paxos, BUSD is approved by the New York State Department of Financial Services. Paxos PAX and Gemini GUSD have been  regulated by the same entity since September 2018.

Stablecoin projects growing at a faster pace than Tether have an eye on its throne. Below we chart the supply growth of the stablecoin market since the beginning of the year. 

Source: Novum Insights up to July 1

Gemini’s GUSD grew by more than 1400%! However GUSD had also indicated the most severe dip during the crypto selloff in May. Terra’s UST and Binance’s BUSD have also shown a stellar growth of almost 1000% in the same period. Tether’s growth rate stands at 200% and Tether has shown the most stable growth pattern. Along with Tether, stablecoins that exhibited “stable” growth patterns include BUSD and USDC launched by Circle and Coinbase.

Stablecoins in DeFi

Stablecoins have proven their value in the DeFi space. They provide a stable basis for activities such as saving, borrowing and lending. Depositing stablecoins into DeFi lending protocols such as Compound or Aave can provide handsome passive incomes. For example, supplying USDC to Compound and Aave yielded 1.38% APY and 2.10% APY respectively. 

DeFi users can also provide liquidity to stable-stable pools on AMM DEXes like Uniswap. Below, we take a look at annualized Uniswap V3 fees from stable token pairs. This data is taken from July 1st 2021, and this does not guarantee that the same APY will be earned everyday.

Source: Novum Insights July 1

1. Fees are calculated from 24hrs and this is NOT representative of 365 days 

2. The chart  shows fees on average divided by TOTAL liquidity, so some will make NOTHING and others will be making a lot

In the current zero-interest economy, returns calculated above look way better than traditional high yield savings accounts. In particular, pools paired with Terra’s algorithmic stablecoin UST gave stablecoin liquidity providers on Uniswap a handsome return.

Conclusion

Despite the hurdles and scandals outlined above, stablecoins have provided a great way to protect money during trading, or to use as a base currency. The most important  use case of stablecoins is stability to help cryptocurrency users, especially traders, hedge against volatility. They have provided a bridge between the fiat world and the crypto world. However, due to the lack of auditing and regulation, it is hard to be sure if stablecoin users will be able to redeem fiat at face value. Tether moving to full disclosure is a good start, and regulations around stablecoins will assure crypto traders and provide a healthier crypto space.