USDC Resiliently Reclaims Its Lead Role as DeFi’s Dominant Stablecoin After Banking Partner Collapse

When cryptocurrency investors abruptly turned their back on Circle’s USD coin (USDC) stablecoin earlier this month, caused by the collapse of its reserve banking partner, they hastened the rise of the largest and often controversial stablecoin, tether (USDT). As the dust began to settle, USDT’s market share rose to a 22-month high with a $80 billion market capitalization. Nevertheless, USDC has managed to reclaim its lead role as the dominant stablecoin within the world of decentralized finance (DeFi) through its own resilience.

The implosion of Silicon Valley Bank sent shockwaves through the ether, making crypto traders race for the perceived safety of USDT. It had an immediate effect for USDC, causing it to lose 23% of its market cap and trade below its dollar peg. This only added to the dismay of investors who had faith in the token and its perceived lack of reliance on the traditional world of finance, but it was also a sign of the increasing scrutiny of stablecoins as they move closer to becoming regulated.

One of the most important pieces of infrastructure in DeFi is Curve’s 3pool exchange pool, a platform which allows crypto investors to switch between USDT, USDC and DAI stablecoins. It became a host to a fear sell-off which moved to USDT in the time of turmoil, and at one point, its liquidity pool had USDT comprising 2. ( 4% of its assets. Now, with the dust almost settled, USDC has regained an impressive 36% share of assets, with DAI and USDT comprising 37% and 27% respectively.

It has been a great show of resilience from USDC, and an impressive demonstration of its internal risk management strategy. Despite the banking troubles, USDC has maintained its lead role as the largest stablecoin being used in DEX pools, with top holders including DEFI protocols, bridges and DAOs. Notably, last week it was also voted to be the top reserve asset for MakerDAO’s DAI stablecoin.

Andrew Thurman, analyst at blockchain intelligence firm Nansen, commented that USDC hasn’t had its dominance “chipped away” too much, but the crisis has opened doors for Tether to surge ahead. Although USDT is mostly used for trading on centralized exchanges, some may still be reluctant due to its past issues with asset backing and opaque corporate structure, prompting questions as to its long-term sustainability.

Despite the stutter, USDC is resiliently claiming its title as the dominant stablecoin in DeFi. This can be seen in part by the swift recovery of its peg after the plan of recovery was announced, showing the faith people still have in the token and the potential of the sector.

Riyad Carey, research analyst at digital asset data platform Kaiko, said: “while USDC has had some large outflows, it appears that the tide could be beginning to turn in DEFI”. One thing is certain – the sector is increasing in scrutiny and regulation, and the market’s reaction to such events as the Silicon Valley Bank collapse show that the liquid needs to be hedged and trust in a token must be earned. That, however, is not to be mistaken for demand for stablecoins weakening, which continues to go from strength to strength.

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Kassidy Florette
Kassidy followed her friends to buy her first Bitcoin in 2015, has been participating in various projects since 2019 as a marketing communication lead. Her knowledge and passion brings her in as a contributor.