Stablecoin market shrank between end-March and end-May amid Terra collapse: Fitch Ratings
Tan Nai Lun
THE stablecoin market shrank between end-March and end-May, largely due to the collapse of algorithmic stablecoin TerraUSD, said Fitch Ratings in a report on Tuesday (Jun 7).
TerraUSD, which was meant to keep a 1-to-1 peg with the US dollar, collapsed after a failure in the algorithmic mechanism pegging its value to the US dollar.
Stablecoins are cryptocurrencies backed by cash or other assets, and which values are typically pegged to a fiat currency. Meanwhile, algorithmic stablecoins may not be backed by other assets, and instead use algorithms to control supply and maintain their peg to fiat currencies.
The de-pegging of TerraUSD saw its market capitalisation fall to US$300 million at end-May, from US$16 billion at the end of the first quarter of 2022, Fitch Ratings said.
It also caused volatility in the rest of the market, with prices of other algorithmic stablecoins falling, and Tether – a stablecoin pegged to the US dollar – seeing its market cap fall by 11 per cent in the period, the research team said.
Fitch Ratings noted, however, that new algorithmic stablecoins were still being launched and have rapidly gained market share since.
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This was partly due to aggressive staking promotions, which attracted retail and institutional investors. Staking allows investors to earn rewards by holding their cryptocurrencies.
For example, USDD, launched by blockchain-based decentralised digital platform Tron in May, is already the eighth-largest stablecoin by market capitalisation at US$576 million. It had offered investors annual percentage yields of between 30 and 60 per cent as time-limited rewards for staking.
However, the research team said further moves in market cap will likely happen after staking promotions for new stablecoins expire.
The research team also noted that the market remains concentrated, with Tether and USD Coin accounting for about 63 per cent of total assets at end-May, although Tether’s portfolio has reduced its credit risk and duration, and increased its liquidity.
Fitch Ratings said the stablecoin market is likely moving towards a more conservative reserve portfolio composition, with more frequent disclosure of these portfolios.
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