Two dark horses emerge in the stablecoin market: USDC and UST

CoinGecko data shows that as of March 4, the total circulation of stablecoins in the entire network has exceeded 180 billion US dollars, of which USDT ranks first with 79.5 billion US dollars and USDC ranks second with 53.2 billion US dollars.

Stablecoins move to the front row of the crypto market

More importantly, the two not only account for more than 70% of the total market value of stablecoins, but also squeeze into the top five in the total market value of cryptocurrencies (ranked third and fifth respectively) , moving to the front row of key seats in the crypto market in addition to Bitcoin, Ethereum, and Binance Coin.

Data source: coingecko

The "DeFi Summer" that began in the second half of 2020 has greatly stimulated the demand for stablecoins through the surge in DeFi native scenarios, especially the exploration of the possibility of profit combinations within the stablecoin market, which has led to a real "demand-driven supply" blowout in the market.

The subsequent gradual rise of secondary market trading models such as U-standard contracts has further expanded the use scenarios of stablecoins represented by USDT. The issuance of stablecoins has also accelerated significantly, entering a typical period of rapid expansion.

After more than a year of expansion, according to Coingecko data, as of the end of 2021, the total market value of stablecoins across the entire network has exceeded US$160 billion. The size of the stablecoin market has increased by more than US$100 billion in one year, and in the past year it has increased 10 times the total amount of the past few years.

At the same time, as the stablecoin market has exceeded US$100 billion and its growth momentum remains unabated, the development trends of the three tracks can also be seen from the market capitalization rankings. Although fiat-anchored stablecoins still occupy the absolute mainstream, the long-tail demand outside the mainstream, asset-backed stablecoins, and algorithmic stablecoins are also growing wildly in their own field.

Internal “replacement” of stablecoins

While the volume of stablecoins is growing rapidly and playing an increasingly important role in the crypto market, there are also quiet changes in the internal structure. The core of these changes are two things:

In terms of centralized stablecoins, USDC has expanded rapidly relative to USDT, effectively challenging USDT’s once unshakable “dominant” position;

At the level of decentralized stablecoins, algorithmic stablecoins represented by UST have emerged as a new force, followed closely by emerging algorithmic stablecoins such as MIM. Algorithmic stablecoins seem to have gradually gained hope of getting out of the "spiral deflation and inflation".

USDT is no longer the only cryptocurrency, USDC is expanding strongly

As "one of the biggest gray rhinos in the crypto world", Tether received a subpoena from the U.S. Commodity Futures Trading Commission (CFTC) in 2017. Even after encountering the trust crisis of "even short positions were cut" on October 15, 2018, USDT still survived with its "too big to fail" attitude, and even issued additional shares crazily in 2020, further deeply binding with the market .

Because of this, even the most anticipated "challenger" USDC had little market confidence before 2021.

It wasn't until 2021 that everything began to change. In addition to USDT, the growth of USDC almost far exceeded all other stablecoins such as DAI, BUSD, UST, TUSD, PAX, and even had the momentum to catch up with USDT.

Data source: coingecko

As of now, the circulation of USDC has grown from US$2.5 billion at the beginning of the bull market to about US$53 billion. In a year and a half, the circulation volume has increased nearly 20 times, and the proportion of USDT has dropped below 50% for the first time in history - and USDC has exceeded half of the market value of USDT (56%) .

This is unprecedented in the history of stablecoin development. If nothing unexpected happens, according to the current growth trend, USDC may be able to counterattack USDT in 2022.

The rise of UST, the “stable leader”

At the level of decentralized stablecoins, the sudden rise of UST (LUNA), the leader in algorithmic stablecoins, in the past six months is the most surprising market evolution.

The biggest difference between algorithmic stablecoins and traditional USDT, USDC, DAI and other generations of stablecoins is that they completely abandon the mortgage anchoring model and only establish a monetary system through market supply and demand (triggering the ridicule of the "Federal Reserve in the cryptocurrency circle"), and there is no specific centralized issuer.

Since the "519 crash" once caused a negative premium of 10%, UST has experienced a long self-recovery in the past six months . With the construction and expansion of ecological "reservoirs" such as Anchor, the completion of the "Col-5 upgrade", and the expansion of Terra's application scenarios, UST has gradually started to accelerate.

Especially after the Terra ecosystem's proposal to "destroy 88.675 million LUNA to mint at least 3 billion UST" was passed on November 10, the total circulation of UST increased significantly from US$3 billion to more than US$7 billion within a few weeks, which also brought sufficient room for imagination for the innovative growth of various DeFi protocols in the Terra ecosystem.

On January 6, Terra launched a new proposal, planning to expand the cross-chain deployment of its UST stablecoin to five DeFi projects (Olympus DAO, Rari Fuse, Invictus DAO, Convex, Tokemak) on Ethereum, Polygon and Solana, providing more than US$139 million in UST and LUNA.

This will undoubtedly further consolidate UST's position as the leader in algorithmic stablecoins. As of now, UST's total market value has exceeded US$10.5 billion, surpassing the old-fashioned collateral stablecoin DAI, which is currently worth US$9 billion (a while ago, the founder of DAI also focused on algorithmic stablecoins represented by UST/MIM on Twitter).

In addition to UST, Magic Internet Money (MIM), as a new generation of stablecoin, has also grown rapidly in recent times, ranking sixth with a scale of US$4.6 billion, just after DAI.

It can be said that after the practical test in 2021, Suanwen has taken the key first step. In particular, UST has blazed a path of application that is sufficient to prove its logic. On this basis, the Suanwen track will undoubtedly become one of the most worthy of attention in 2022.

Outlook for Stablecoins in 2022

The rapid expansion of USDC in 2021 further verifies that "compliance is the biggest variable in the stablecoin market."

However, even USDC, with its rapid expansion, has become more and more delicate in its relationship with regulation. Especially in the context of the gradual emergence of competition in central bank digital currencies (CBDCs), financial regulators in various countries have begun to significantly slow down their attitudes towards compliant stablecoins.

The most regrettable thing is that last year Coinbase cooperated with Circle, the issuer of USDC, to provide digital banks, fintech startups and users holding large amounts of US dollars with a service (Coinbase Lend) that allows them to seamlessly convert US dollars into USDC and deposit them in the Compound lending market .

In this service, a large number of new users do not need to directly access DeFi themselves. They only need to deposit US dollars to enjoy an annualized fixed interest rate of 4%. This will undoubtedly become an interesting attempt to integrate DeFi with the traditional financial world.

In September 2021, the U.S. Securities and Exchange Commission (SEC) quickly stopped the stablecoin lending product launched by Coinbase due to a lawsuit warning. Coinbase immediately gave in and stated that it would not launch the "account interest earning" project.

Immediately afterwards, in November, the U.S. banking regulator issued specific guidelines on crypto custody, loan collateral, and stablecoin issuance in 2022. "These stablecoins are now almost like poker chips in a casino." SEC Chairman Gary Gensler made it clear that he does not like stablecoins and regards this increasingly popular crypto asset as a threat to investors.

The European Union is also taking action. In November last year, the European Commission urged its member states to reach an agreement on the regulation of the cryptocurrency asset market (MiCA), and specifically mentioned the introduction of a customized system for previously unregulated crypto assets (especially stablecoins).

In general, the stablecoin market will continue to expand in size and gain wider recognition and participation in the future, so a certain degree of supervision and regulation is inevitable .