In the past 24 hours, $USDC and $DAI, two transparent stablecoins in cryptocurrencies and decentralized finance (DeFi), began to depeg from the U.S. dollar. The U.S. dollar is the promised pegging asset for both of these stablecoins. In the meantime, $USDC and $DAI, fall drastically to $0.85.
It is crucial to understand what could have happened to the world that caused two of the most transparent stablecoins depeg to these maniac numbers. What made one of the most decentralized stablecoins fall like that?
Before this depeg happened in the DeFi world, a piece of big news spread around. One of the largest (“centralized”) banks in the United States went bankrupt.
Silicon Valley Bank
As CNBC wrote, California regulators have taken the drastic step of shutting down Silicon Valley Bank (SVB), making this the biggest US banking failure since the 2008 financial crisis. The source of SVB's problems began when it declared a need to acquire $2.25bn in order to improve its finances, which sparked mass withdrawals by customers exceeding $42bn by Thursday's end. Ryan Falvey, a fintech investor at Restive Ventures, believes that venture capitalists were responsible for creating a self-fulfilling prophecy with their actions.
The collapse of SVB is the latest consequence of the Federal Reserve's most aggressive rate-hiking campaign in four decades, which caused dislocations in the startup community. Due to a challenging environment for IPOs and private fundraising, SVB found itself short on capital when clients withdrew deposits to keep their companies afloat. All of the bank's bonds that were available for sale were sold at a loss of $1.8 billion.
By Thursday afternoon, the CEO of SVB, Greg Becker, urged customers to “stay calm,” but it did not instill confidence as the stock continued to plunge, reaching 60% by the end of regular trading. After that day, SVB had a negative cash balance of $958m and was unable to obtain enough collateral from other sources, leading to its collapse, according to the filing.
The tech investing community's tight-knit nature contributed to SVB's unexpected downfall. Union Square Ventures and Coatue Management sent emails to the entirety of their startups advising them to extract funding from SVB due to worries over a bank run, which social media further escalated. The repercussions of SVB's collapse are extensive, with doubts that startups may be unable to pay employees in the short-term and venture financiers may struggle when raising money.
$USDC
Circle mentioned in their Twitter account:
Well, that can cause a big panic. American investors and traders began to sell their $USDC after facing this news. This caused the price to fall under $0.97. At this point, no one calls it a “depeg”. On many days, $USDC fluctuates around $0.05. But, the sun rose in the east part of the world and Chinese, Australian, and Japanese investors and traders woke up to the news of “$3.3 billion stuck in SVB,” and they see the price is less than $0.97. Now, everyone is panicking. They sell and sell. The price falls under $0.85. This is the part where DAI faces a big problem.
$DAI
More than 50% of $DAI reserves are in the form of $USDC. As you can see in the image below, provided by Statista, the $DAI reserve mostly relies on its $USDC backs. Everyone knows this fact in the world of DeFi.
Now that the $USDC price is falling, $DAI falls too. It’s an inevitable fact: when the “stable” collateral loses value, the peg will fall. Now, it’s time for $DAI to fall under $0.85, due to panic. But now, two questions arise: What is the impact? Should I be worried?
What is the impact?
$USDC and $DAI are two of the most important stablecoins, the leaders of this world. If they fall, eventually everything will fall. Because no one will trust something as volatile as Bitcoin when the so-called “stablecoin” is falling.
So, the impact can be big. Actually, it can be huge. If these two stablecoins can not get back to what they were, a $9k Bitcoin can be introduced to the world, again. Therefore, I have to say that this incident can cause a lot of trouble to cryptocurrencies.
Should I be worried?
In my opinion, no. You don’t need to be worried. Let’s state some facts:
Firstly, it is right that around $3.3 billion is stuck in SVB. But, as you can see in the tweet below, the law will cover it up. The whole damage, is no more than $200 million, out of $43 billion.
As we all know, Circle invests most of the U.S. dollar collateral in short-dated U.S. Treasury Bills. In their January 2023 report, we can see that more than $33 billion out of $43 billion is in U.S. Treasury Securities. All of their maturity dates are in less than three months, meaning that they will come back with their assured interest. These interests will cover all the losses ($200 million), and bring more to the company.
Even if the interests cannot cover any of the losses, the fair price for $USDC will be more than $0.99, since the damage is less than $200 million over $42 billion.
I wouldn’t be so worried about $USDC if a sudden sell-out to Circle doesn’t happen. If many $USDC holders decide to sell to Circle and get their money back from Circle, then Circle needs to sell Treasuries sooner than the maturity date, gaining much less profit, and paying less back to $USDC holders. But, if holders decide to wait and get back all of their money back--instead of just a part of it--the short-term future of $USDC is safe.
On the other hand, we know that around 50% of $DAI’s collateral is not in the form of $USDC. So, even if the fair price for $USDC is actually $0.85, this should have had half the impact on $DAI’s price. Meaning that if $USDC is falling 15% of its price, $DAI should not have fallen more than 7.5% of its price.
As we know, not only the fair price of $USDC is much more than what it is now, but the fair price of $DAI must be even more than that. Noticing that $DAI is fully collateralized in a decentralized and transparent way, on-chain.
I would worry about $DAI even less than I worry about $USDC. I believe that if people stop panicking and begin coming back to their senses, both of these stablecoins will go back to their pegged prices and no one will lose any money, except for those who sell under $1.00.
Something to Pay Attention to
The world of decentralized finance and cryptocurrencies is in its baby steps. It is literally a baby. This baby is testing many things and may have a lot of mistakes and fall to the ground many times. But, it is growing. Soon it will be a young adult that no one can stop. In the meantime, it will have its own mistakes and many big adults--like banks, and other centralized companies--will test it and play with it. Many of these adults will fall, causing our little baby to fall. SVB has fallen, recently. Before that, Three Arrows Capital had fallen. Not long before that, Voyager had fallen.
Our baby survived all those and will survive many more. But this doesn’t mean that we don’t need to be careful about our money. As we make a portfolio of assets to hedge against risks, we need to make a portfolio of stablecoins for the same reasons. Terra’s $UST depeg, $USDD depeg, and now $USDC and $DAI depeg teach us that this baby is still testing these stablecoins to find the best or maybe a combination of the bests. It is best for us to make a portfolio of stablecoins to hedge against any risks that may happen in the future.