A quick update on the crypto stablecoin meltdown
Why the stablecoin market is blowing up
A quick update on what’s happening with crypto stablecoins. Coinbase manages the popular USDC stablecoin in conjunction with Circle. The companies had about $3.3 billion in cash at Silicon Valley Bank and that’s now frozen. According to Chris Whalen it’s likely that most depositors will be made whole again, but it could take weeks.
In the meantime Coinbase has stopped converting USDC into USD and there is a bank run happening on the stablecoin. People are scared that the Silicon Valley Bank insolvency might blow a big enough hole in Coinbase’s balance sheet that it’s forced to shut down USDC. Presumably stablecoin holders would be on the hook for losses.
Ironically Tether is proving to be the safest asset to hold (for now…). Tether is now trading at $1.06 against USDC! As you can see, this is slightly unusual. Everyone in USDC is trading their coins for Tether because it’s partially backed by some shady toxic and exotic blend of assets, which in this particular case is advantageous.
So the year is 2023 and Tether is the safe asset, but it doesn’t stop there. The algorithmic stablecoin DAI is 50% backed by USDC with USDC collateralizing half of all the $5.6 billion DAI in existence. Due to collateral fears, DAI has depegged. If USDC goes down DAI will be in for a very rough ride, so it’s also trading at a large discount to Tether.
DAI is managed by an organization called MakerDAO and its native token MKR. In the event of unrecoverable liquidations, MakerDAO will print a gobsmacking amount of MKR and sell it into the open market in an attempt to restore the $1 DAI peg.
That might work if USDC was ~5% of collateral but it’s unclear if MakerDAO can print enough MKR to prop up DAI with USDC being ~50% of its collateral. At some point the market for MKR might go no bid.
I don’t want to fear monger! I don’t know if DAI will blow up and personally I hope it doesn’t happen, but it’s not a 0% chance either. We shall see.
Conclusions?
I have no idea how this all works out. If I was a guessing man I would wager that USDC will be OK in the long run, but the next week could be pretty bad. Along the way there is a possibility that even if USDC survives it might depeg enough to bring down DAI in the interim. Or not! In twenty-four hours this might all be relatively OK.
But the irony of all ironies is that Tether is proving to be the safest asset in crypto land at the moment!
