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At the time of writing, <a href="https://coinmarketcap.com/currencies/usd-coin/" rel="noopener noreferrer nofollow">USDC</a> is currently sitting at $0.961 on CoinMarketCap. The depeg of USDC led the entire DeFi industry to experience record-breaking daily trading volume as crypto whales and punters fight to trade assets and exit their positions. How did we get here and what does the depeg of the second large stablecoin mean for #DeFi and the wider industry? Let’s take a closer look. Circle (The USDC Issuer) recently announced that it had been <a href="https://blockchain.news/news/circle-unable-to-withdraw-33-billion-from-svbcausing-usdc-sell-off" rel="noopener noreferrer nofollow">unable to withdraw</a> $3.3B USD worth of funds from its total of 40B held with the failing SVB (Silicon Valley Group Bank). With the timing of the USDC depeg just before the weekend with the banks shut and with <a href="https://twitter.com/coinbase/status/1634399032767307776?ref_src&#61;twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1634399032767307776%7Ctwgr%5E425296677bed289c673e68f649ea6af90b14e59e%7Ctwcon%5Es1_&amp;ref_url&#61;https%3A%2F%2Fcryptoticker.io%2Fen%2Fwill-usdc-crash-usd-coin-trading-at-a-discount%2F" rel="noopener noreferrer nofollow">redemptions currently paused</a> by Circle, the price of USDC went into freefall and hit a recent low of 0.87. <h2 id="header-0">Stablecoins and their types</h2><img src="https://academy-public.coinmarketcap.com/optimized-uploads/2c273444e22849c5af1755dcd1b67352.png" />(Total Stablecoins Market Share. Source from <a href="https://defillama.com/stablecoins" rel="noopener noreferrer nofollow">DefiLlama</a>)What are stablecoins? Stablecoins are a type of cryptocurrency designed to have a stable value relative to a specified asset or a pool of assets, typically a fiat currency such as the U.S. dollar, euro or Japanese yen and can be collateralized, un-collateralized or algorithmic in nature.USDT is the most widely known and used stablecoin with a market share of 54%. USDT or ‘Tether’ stepped onto the scene in <a href="https://cointelegraph.com/news/tether-brings-benefits-of-p2p-transactions-to-fiat-currency-transfers" rel="noopener noreferrer nofollow">early October 2014</a> and provided a much needed medium of exchange at the time for people to hold their value. With Tether, 1 dollar of USDT would always be redeemable and worth 1 physical USD. Over time, USDT has faced a variety of challenges and controversies but despite this, USDT appears to be the most widely trusted stable currency in the industry and is widely considered to be the original or OG stablecoin in this space.The growth in stablecoins over the past 5 years has been almost unmatched by any other sector in crypto. USDC was first issued by Circle in <a href="https://www.forbes.com/sites/sarahhansen/2018/09/26/circle-launches-usd-backed-stablecoin/" rel="noopener noreferrer nofollow">September 2018</a> and hoped to pave its way in the market alongside popular competitors. USDC’s backing collateral was made up primarily of cash and treasuries held in US banks like <a href="https://techcrunch.com/2023/03/10/uncertainty-stands-around-multi-billion-usdc-empire-as-issuer-circle-held-reserves-at-silicon-valley-bank/?guccounter&#61;1&amp;guce_referrer&#61;aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&amp;guce_referrer_sig&#61;AQAAAJWX3xsuaqz9qp1MxGTDnI5C50TNd5AozWrp7Fjgt55Yymdnjofkt-tEvT9w_i492tn00-fiHmS8msEIV7NZsPgfJi-m1v2xi3ItOrEnfQJxdcYU9euEbSmDjwhDnA-smVGO9wQEqOXA30BV2N1fWtSVi0Lejx57-lK3x6aVRiFl" rel="noopener noreferrer nofollow">Blackrock, New York Mellon</a> and SVB with the former two considered for the most part to be ‘safe’ by the wider legacy markets..There are other alternative stablecoin competitors which have been popularized with the ‘fully reserved’ model and are still growing today. DAI, an algorithmic stablecoin issued by the MakerDao has a 1:1 value with the USD, has also run into some depegging trouble like USDC, from its $1 peg down to a low of 0.88. MakerDao backs DAI by using the overcollateralization of USDC and ETH, currently over 50% of the reserves backing the popular stablecoin are based in USDC. One of the most notable competitor examples includes <a href="https://www.trueusd.com/" rel="noopener noreferrer nofollow">TUSD (TrustUSD)</a> and <a href="https://www.liquity.org/" rel="noopener noreferrer nofollow">LUSD (Liquity USD)</a>. The hope with the likes of TUSD is that each and every single dollar is backed on a chain and 100% verifiable through the likes of Chainlink. The same goes for LUSD, whilst it’s not backed with USD it is instead carefully controlled fully with ETH reserves and operates at a constant 110% collateral ratio.<h2 id="header-1">Roles of stablecoins - Importance of stablecoin pegs</h2>Stablecoins are vital building blocks for crypto, the very notion of their absence in a composable decentralized money market would render the markets highly ineffective.It’s important that consumers are able to hold stable value tokens, especially on-chain value and know that it will always be redeemable for that value. Stablecoins that tightly hold their pegs are the most desirable for cryptocurrency trading, payments, and DeFi. They offer stability and predictability, allowing traders to enter and exit positions without being subjected to price fluctuations and to know they can hold value. Stablecoins that deviate from their intended pegs too often can rattle consumer confidence and won’t provide a trustworthy and fulfilling experience in crypto.<h2 id="header-2">The challenges caused by the USDC unpeg</h2>Along with the news of SVB bank closure, Circle had then announced it had $3.3 billion of exposure from USDC reserve holdings with SVB, and with the timing of that release came a perfect storm for market panic and a depeg on the stablecoin fuelled even further by the halting on Binance and Coinbase USDC Conversions.Subsequent problems arose with numerous platforms that had hardcoded USDC with a value 1-1 with the USDollar, this meant there were many problems with liquidity providers, farming and decentralized futures markets. Popular platforms like MakerDAO who issue the DAI stablecoin have had to file <a href="https://news.bitcoin.com/makerdao-issues-emergency-proposal-to-address-3-1b-in-usdc-collateral-after-stablecoin-depegging-incident/" rel="noopener noreferrer nofollow">emergency proposals</a> to combat excessive USDC redemption to shield the platform from USDC’s 3.1b of SVB exposure. <a href="https://steemit.com/hive-101145/&#64;sofina/makerdao-files-emergency-proposal-addressing-3-1b-usdc-exposure" rel="noopener noreferrer nofollow">Maker expressed</a> wanting to eliminate exposure to DeFi platforms like Curve and Aave completely. With concerns spreading, the banks cut-off and USDC price sinking the most likely exit course for USDC was through market liquidity.<h2 id="header-3">Traders react on-chain - Exiting USDC</h2>On-chain data shows that people rushed to swap USDC into other stables and tokens which could be considered ‘safer’ at the current time, stables such as USDT, TUSD and LUSD were trading over-peg showing their demand. As we know, USDC has the most liquidity on-chain, especially in AMM and lending liquidity pools. The key factor leading to a sustained unpeg is the AMM liquidity, especially on deep-pools such as Curve’s 3Crv and Uniswap’s USDC/ETH pool.At the time of writing the Curve 3Crv pools exceeds US$400 million and is currently imbalanced with 50% of the pool in USDC, DAI at  47% and USDT at negative -3%. If panic continues into next week and there are issues with redemptions, USDC holders will continue to choose AMM as a means of selling if the Curve pool continues to be exhausted.With the market in its current state it’s always best to use a Dex Aggregator instead of just one DEX or CEX. Dex Aggregators like OpenOcean utilize multiple pools of liquidity to provide the best consistently priced swaps even on very large trades or between tokens with no correlating pools.<img src="https://academy-public.coinmarketcap.com/optimized-uploads/70953fc2b1764279b0ac24fd0839725d.png" /><h2 id="header-4">Conclusion</h2>Circle insists that redemptions will resume upon the banks reopening on Monday morning. By then we will have more information on how SVB, USDC and Circle will all handle what has happened. There have been numerous rumors that SVB could be looking at a bailout and subsequently the USDC peg has rebounded slightly to settle on 0.967 at the time of writing. A bailout and subsequent plan forward should see the stablecoin start to regain its peg, only time will tell if market confidence has been shaken. One popular CT pundit ended a large analytical USDC thread with the following:“91.75% of<a href="https://twitter.com/search?q&#61;%24USDC&amp;src&#61;cashtag_click" rel="noopener noreferrer nofollow"> $USDC</a> reserves are fully liquid. A private deal or bailout will recover the additional 8.25%. Example of unnecessary market panic. Markets are irrational and exaggerated.”If you’re going to be holding stablecoins or value in crypto long term it would be best to spread your risk amongst multiple tokens. You can lower your risk potential and avoid a single-point of error by diversifying amongst different stables and precious metals to hedge against strong movements in the underlying dollar.**Monday Update - March 13th UTC Late on March 12 UTC, the Fed announced its $25 billion funding program to support liquidity-troubled banks such as SVB. This along with efforts from Circle have removed the immediate reserve risk. The USDC dollar subsequently bounces back to $0.995 towards it’s peg after the announcement. USDC’s market cap has now returned to above US$40 billion. After this SVB crisis, the crypto communities will further understand the risks of centralized institutions and legacy markets and may instead choose to use DEX, <a href="https://app.openocean.finance/" rel="noopener noreferrer nofollow">DEX aggregators</a> and DeFi more in the future.About OpenOcean <a href="https://openocean.finance/" rel="noopener noreferrer nofollow">OpenOcean</a> is the widest reaching DEX Aggregator, a cross-chain swap aggregator, and Web 3 middleware developer in the crypto space. Offering a suite of tools across 20 networks and 270&#43; unique sources of liquidity, OpenOcean is building tools for now and for the future. Experience what it’s like to trade with ease, the way that you want to with #OpenOcean.

Will USDC enter a Death Spiral? A closer look at stablecoins

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