Is the USDC entering a death spiral?

Original author: Jack, Logicrw, FYJ, BlockBeats

It took one day for the ripple effect of SVBS to hit the crypto market. This morning, due to some deposits in SVBS, the USDC stablecoin issuer Circle suddenly faced a severe run, and the USDC suffered a sustained anchor break. Meanwhile, centralized trading platforms like Binance and Coinbase have announced that they are shutting down some of USDC's exchange services. At the time of writing, the price of USdcs was off anchor near $0.933, and more than 2.7 billion USdcs had been destroyed in the last 24 hours. Faced with panic and a run, could the USDC enter a death spiral?

Why the run? $3.3 billion in SVB savings

Silicon Valley Bank is one of Circle's six banking partners and is responsible for managing about 25% of USDC's cash reserves with other banks, the Stablecoin issuer said in a social media post today. Circle is currently waiting to see how the Federal Deposit Insurance Corporation's takeover of Silicon Valley Bank affects its depositors, but Circle and USDC continue to operate as normal.

据 Circle 官网发布的最新数据显示，目前流通中的 USDC 市值共计约为 434 亿美元，资金储备共计 435 亿美元，其中现金储备为 111 亿美元，占比约为 25%，其余 334 亿美元储备为短期国债投资组合。今天结束时确认，星期四发起的去除余额的指令尚未处理，因此美元稳定币（USDC）账户储备中仍有大约 40 亿美元中的 33 亿美元储备留在 SVB。 与其他接受 SVB 银行服务的客户一样，Circle 将遵循各州和联邦监管机构提供的指导。

What would send the Circle into a death spiral

Based on the information BlockBeats has gathered so far, the damage Circle faces in the "SVB event" should be modest. But judging by the level of panic in the current market, there is still a risk that USDC will continue to fall anchor. So at what point does a USDC experience a serious anchors loss? BlockBeats breaks down a few key factors.

First, a collapse of the USDC must be predicated on continued panic. The majority of Circle's endorsement reserves are US Treasury bonds. If the panic continues and Circle's cash reserves are exhausted, it will have to sell its own Treasury bonds immediately to meet the market's demand for redemption. Unfortunately, if Circle were to sell at a time when global interest rate increases have pushed yields across the bond market to unprecedented heights, it would face severe losses like SVBS, making it unable to cope effectively with redemptions. At this time, the redemption cycle of Circle became longer, which promoted the panic mood again, aggravated the redemption, and USDC entered the death spiral.

The second is the price anchoring and liquidity level. Usdcs that cannot be redeemed in time will try to escape through market liquidity. There is no denying that USDC is currently the largest stablecoin in terms of on-chain liquidity, and it can be seen in the LP pools of various AMMs and lending agreements. It should be noted here that because most on-chain lending activities do not use USDC as collateral, the risk of liquidation in price is not high, and the key factor leading to unanchoring actually lies in the liquidity of AMMs. Now, let's take a look at how much liquidity is available for USdcs to flee using Curve and Uniswap as the main basis.

In the Curve, the main outflow caliber of USDC is 3Crv pool. Currently, the pool TVL exceeds $400 million, of which USDC accounts for nearly 50 percent, valued at about $220 million, DAI about 47 percent, and USDT about 3 percent. If the panic persists, one of two things will happen:

1. Most holders regard DAI as a decentralized shelter and exchange USdcs for DAI. At this time, approximately $200 million of liquidity in the 3Crv pool temporarily protects the anchoring of the USdcs.

2. Some holders, finding that the DAI anchoring is largely endorsed by USDC, choose to exchange USDC for USDT, in which case the weak liquidity of US $14 million in the 3Crv pool will lead to sustained or even severe unanchoring of the USDC.

Another on-chain escape is the AMM pool of USDC and ETH assets, such as Uniswap V3 USDC/ETH pool. Currently, more than 86% of USDC's $41 billion market capitalization is on Ethereum's main network, worth about $35 billion, which is still the main channel for USDC to escape from compared to other public chains.

At present, the highest liquidity pools for TVL on Uniswap V3 are also 0.01% and 0.05% pools for USDC/DAI, with TVL of about $400 million, followed by the USDC/ETH liquidity pool. 0.3% and 0.05% of the two pools, TVL is about $335 million, among which, there are a total of about 110,000 ETH in the two pools, worth about 160 million. From the perspective of the whole Ethereum main network, the current TVL is 26 billion, which accounts for the smallest share of stablecoin market value among all public chains (excluding Tron).

Therefore, if the market panic lasts for a long time, USDC holders will choose AMM as the exit channel after the Curve pool is exhausted, and exchange USDC for all kinds of blue chip or even non-blue chip assets such as ETH. At this time, on the one hand, USdcs may face a price death spiral, on the other hand, asset prices such as ETH may also rise.

More ominously, centralised trading platforms are also starting to choke off liquidity to USdcs. This morning, Binance temporarily disabled the USDC auto-switch BusDs, stating ina post on social media that this was a routine risk management procedure step taken by Binance due to the heavy inflow of USDC assets making auto-switch more burdensome. Coinbase later made the same claim. After all, when the CEX big brothers start running away from 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?

Clearly, Circle's losses on SVB were not large, and the unwinding of USDC was a panic or deliberate run, but if Circle sold its Treasury-dominated portfolio as a result, it would turn a panic run into a real asset loss. All Circle had to do was close redemptions, announce external funding, such as a capital raising, and wait for confidence to return. Of course, as mentioned above, while waiting for confidence to return, a serious unanchoring of the USDC is inevitable.

The biggest concern is not just the unanchoring of USDC, but the risk of a run on the entire stablecoin ecosystem. Given that most of USDT's savings are also in Treasury bonds, wouldn't the fire spread to USDT if Circle ended up selling its bonds at a loss because of the pressure to unwind?

Then there are the DAI, FRAX and other decentralized stablecoins backed mainly by USDC. BlockBeats was featured inCrypto national war, "de-USDC" the way to defend stablecoin"Pointed out that the current stablecoin ecology is seriously centralized, among which the most important factor is the wide application of the centralized stablecoin USDC. If the USDC does suffer a serious anchor break, the endorsements of DAI, FRAX and other stablecoins will be greatly discounted within 1 day, and the risk of a run will also be faced.

The collapse of the stablecoin market means that the entire crypto industry has gone back more than 5 years, because at present, DeFi applications such as AMM, lending, derivatives, and even NFT and NFTfi have long been inseparable from the support of Stablecoin, and CeFi is even more so. Stablecoin collapse, retail investors have no access to gold, there is no liquidity in the industry, the entire crypto ecology is in shock.

Of course, the reality does not have to be this pessimistic, and we have already seen "established and stable" governance Token prices such as LQTY rise. That's right, the algo Stablecoin, which was "falsified" by Luna, is back, and for the moment, is arguably the most decentralized and even the "most secure" Stablecoin. If this logic is accepted by the market, ancient stable projects such as Liquity and Tribe will temporarily become havens for encrypted users.

Of course, these are pure scenarios, and we still hope that USDC will survive. Now, what is Circle going to do?

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