Stablecoin Price Changes and What They Mean
Crypgoat returns to examine the price change of stablecoins
Theoretically, the value of stablecoins like USDT, USDC, and DAI, each of which is pegged to the value of the United States Dollar, should be, well, stable. But as Crypgoat points out in his recent bounty submission, that isn’t always the case.
As can be seen in the chart above, DAI is clearly the least tethered to its peg, in this case, a grouping of overcollateralized vaults, with significant changes in value, particularly prior to November of last year. USDT and USDC, however, a pair of stablecoins backed by fiat currency, have not seen nearly the same fluctuations in value.
Even if only temporary, these fluctuations can have big impacts on users. For example, in November of 2020, DAI hit roughly $1.30 for just four minutes, resulting in $88 million in liquidations on Compound.
Meanwhile, in the chart above, we can see just how often these stablecoins exceed their peg in terms of value. Once again, DAI leads the way, showing several days in August and September of 2020 in which DAI was trading off its peg by more than 2% for 24 hours in a row, most recently on September 14.
Factors influencing the price of stablecoins
So what factors are causing the crazy fluctuations in value? Crypto offers three possible explanations: general fluctuations in user demand, fluctuations in demand from changing prices, and demand for yield farming.
According to Crypgoat’s analysis, however, the second of those options, the changing demand that can result from falling crypto prices, is the strongest predictor of stablecoin prices. Crypgoat noted that with Flipside’s labeled, on-chain data, we can disprove the idea that the number of investors holding a stablecoin impacts its price in a significant way.
When it comes to yield farming, meanwhile, DAI actually tends to come to its peg the more it is used in decentralized finance (DeFi), which helps to disprove that theory. So, Crypgoat says, we’re left with one most likely option: that the demand for stablecoins exceeds their minted supply on days in which other, more volatile cryptocurrencies decrease in value.
There’s a lot of great analysis from Crypgoat that we couldn’t fit into this blog post, so if you want the full store on stablecoin prices, make sure you check out the original bounty submission this data came from!
