When Stablecoins Are Not Stable: The Summary Of SVB Collapse and USDC De-pegging

Last weekend was hard for so many people from different backgrounds because of the collapse of Silicon Valley Bank on March 10 and the events occurred after that.

It was marked as the second largest bank crash in the United States after Lehman Brothers in 2008. Thousands of employees and founders of the US-based startups, traditional investors, crypto investors, VCs, and blockchain users are affected. But how?

Circle Discloses $3.3B Tied Up At SVB

SVB’s significant percentage of depositors were non-blockchain tech startups; both Unicorn companies like Shopify and small-scale startups. However, Circle, the issuer of USDC which is the second largest stablecoin by market size confirmed on March 11 that $3.3 billion USDC reserves - about 8% of its total - were held at SVB and disclosed as not possible to be withdrawn.

Timeline of the Silicon Valley Bank Collapse and USDC De-pegging
Timeline of the Silicon Valley Bank Collapse and USDC De-pegging

USDC And Other Stablecoins Lose Peg To The Dollar

After that confirmation, and right after the depositors of SVB started the ‘bank-run’ (When customers withdraw their money from a bank because they are worried about the bank collapsing), basically, crypto-related people started the ‘stablecoin-run’. Not more than 15 hours after Circle reveals locked reserves at the SVB, USDC dipped as low as $0.87.

The affected stablecoin was not only USDC but the other largest stablecoins like DAIUSDD, and Frax due to USDC’s significant influence as collateral to them.

DAI, a stablecoin issued by Maker DAO, had 51.87% of its collateral (worth $4.42B) in USDC resulting in DAI to depeg from $1 to $0.88. USDD, a stablecoin issued by Tron, experienced a nearly 7.5% drop to $0.92 and Frax, a fractional-algorithmic stablecoin, dipped even further to $0.885.

People ironically ran to USDT, which is a stablecoin mostly criticized for not being transparent since years. Well, in this incident not being transparent worked on USDT’s favor as they didn’t reveal any reserves in affected banks or USDC.


Joint Statement by Treasury, Federal Reserve, and FDIC

The statement published on Sunday, March 12 said the depositors of SVB will have access to all of their money starting by Monday, March 13.

Third US Bank Failure In A Week

Notably, the statement also announced the shutdown of Signature Bank -which was known as a crypto-friendly bank- as they saw ‘a similar systemic risk exception’. It’s marked as the third US bank failure in a week after Silvergate and SVB.

USDC:USD Back At $1

As of March 13, the $3.3B USDC reserve deposit held at Silicon Valley Bank was made fully available and transferred to new banking partners by Circle. Markets responded by getting USDC back to $1.


The Reason Behind Crypto Investors Loses Their Cool That Bad During 3 Days:

We all have PTSD because of the UST crash.

It wouldn’t be wrong to say there is a loss of confidence in the entire stablecoin market after last year’s UST stablecoin crash of Luna. Those who did not sell their UST in time in 2022 before it hit a nonreturnable point, lost a lot and last weekend they thought USDC was going to share the same destiny as UST.

However, there are significant differences between USDC de-pegging and the big failure of UST.

  • UST was not backed by an actual US Dollar but was rather an algorithmic stablecoin. Every single USDC is 100% backed by cash and short-dated U.S. treasuries.

  • UST failed because it wasn’t backed by cash, treasuries, or other traditional assets. The stability of UST was derived from algorithms that linked the value to Luna, which failed hard and created a catastrophe for almost 6 months in the entire crypto ecosystem.

Optimistic: The DeFi Protocols Got Battle-Tested For How Much Volume They Can Take And The Results Seems Pretty Optimistic

Pessimistic: The Slippage Issues of DeFi Protocols Are Scary And Web3 UX Is Still In Its Stone Age Era

🎨Not a popular idea: DeFi projects should stop outsourcing UI/UX/Interaction Design and start hiring people.

Optimistic: It Was One Of The Historical Moments Where We Experienced What Cryptocurrencies Are Actually Designed For

Most of the traditional banks are gg ez 🏦

The Lessons I Learned

  • Going fully ‘bankless’ is not a realistic option still, because of regulations but also there are no perfect on-chain solutions yet. It is revealed that it doesn’t matter if you are depositing all your savings in a Ledger in stablecoins when those stables are collateralized with banks.

  • It is absolutely not so smart to hold on to one stablecoin. Diversify as much as possible and select the ones that are backed with real-world assets (BTC and ETH are real world assets too.) and not algorithm. (Even FRAX is moving away from its original algorithmic backing approach.)

  • Learn more about decentralized stablecoins like LUSD and RAI which are Ether-backed and GHO the upcoming stable of AAVE, which is suppose to be a decentralized multi-collateral stablecoin.

Gho Stablecoin
Gho Stablecoin
  • Do not panic sell or panic buy anything. Chances are it’s the wrong choice you will do when you are panicking. Take time and then make an action.

  • Always have a plan in case of ‘tail risk’ aka ‘black swan’. It is the risk of extreme and unexpected events which are unlikely to happen but can have a significant impact if they happen.

Black Swan Theory
Black Swan Theory
  • We all know already that it’s a deadly mistake to invest only in cryptocurrencies. Also, it’s as dangerous to invest only in just one blockchain ecosystem, one exchange, one protocol, one asset, one founder, and one narrative. You never know what kind of obstacles may occur.

  • There is no such thing as zero risk, but you can evaluate the risks early and take action accordingly in case you ever need to stop loss.

DISCLAIMER: The content here is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product.

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