Stablecoins address the need for digital tokens that maintain a consistent value relative to a reference asset such as fiat currency (for example, US dollar). Stablecoins play an essential role in decentralized finance (DeFi) protocols, acting as a medium of exchange between other cryptocurrencies. They allow users to borrow against other crypto-assets, to hedge against a long position, to create a short position or to take out a personal loan with an asset with stability closer to a strong fiat currency.
The stablecoins covered by this study are: Tether (USDT), USD Coin (USDC), Multi-Collateral Dai (DAI), Binance USD (BUSD), USDP Dollar (USDP).
What Causes Stablecoins To Depeg?
- Market volatility can put downward pressure on the price. It could also trigger a flight to quality and increase demand for stablecoins as a store of value, which in turn could increase the price of the stablecoin above its peg.
- Liquidity stresses, caused by high market volatility, may impact demand and distort the stablecoin’s price from its peg.
- Impairment of the reserves or assets backing the stablecoin may cause a shortfall in collateralization, triggering a loss of confidence and, potentially, legal action.
- Counterparty performance is relevant as any financial, operational, legal or regulatory issues the counterparty responsible for the stablecoin’s peg has may negatively impact the ability to preserve the peg. For centralized stablecoins minted by an issuing entity that also has control of the reserves, insolvency or fraud could result in losses for the holders of the stablecoins if the accounts are not held in a separate special purpose vehicle or the creditors’ rights are not clearly delineated.
- Financial markets events can spill over into the stablecoin ecosystem, put downward pressure on a stablecoin’s value and cause depeg events.
- And more.
How Often, by How Much and for How Long Do Stablecoins Depeg?
Analysis of Depeg Events Below $1
BUSD’s price did not drop below $0.975, while USDT bottomed out at $0.945. Both USDC and DAI dropped below $0.90 in March 2023 in connection with the SVB collapse. Total depeg time is positively related to the thresholds, i.e., the lower the threshold, the less time the price remains below it. This is because the time spent below a threshold is counted when analyzing the time spent below higher thresholds that are closer to $1.
The frequency can increase as the considered thresholds are lowered. For example, if the consecutive prices each minute were $0.99, $0.98, $0.95, $0.98, $0.95 and $0.99, we would have one event lasting four minutes for a threshold of $0.99, and two events lasting one minute each for the $0.98 threshold. We then analyzed the lowest threshold considered in our study and noted that USDT and BUSD did not depeg below $0.90, while the price for USDC, DAI and USDP remained below $0.90 for a total of 73 minutes, 63 minutes and 82 minutes, respectively.
Analysis of Depeg Events Above the $1 Pegged Value
Depeg events above $1 are both less frequent and of shorter duration. In the 24 months ending June 2023, USDC, USDT and DAI did not depeg above $1.02.
By contrast, BUSD and USDP depegged above $1.1. USDP exhibited 7,581 depeg events above $1.005 for a total depeg time of 51,217 minutes (about one month and five days). BUSD depegged 73 times above $1.005 for a total of 1,060 minutes (about 17 and a half hours). These figures drop significantly for higher thresholds. USDP stayed above $1.01 for a total of 3,732 minutes (about two and a half days) and above $1.1 for 26 minutes. Similarly, BUSD’s price exceeded $1.01 for 171 minutes (about three hours) and $1.1 for two minutes.
Conclusion
Stablecoins have grown in popularity and there are 96 listed stablecoins (as of August 2023). They are expected to increase their role in the crypto ecosystem as it rapidly evolves alongside traditional finance. While stablecoins are meant to maintain a stable value, and therefore counter the high volatility of other crypto currencies, they are not immune to fluctuations in price, market capitalization and liquidity. A range of factors can cause stablecoins to depeg below or above the pegged value. They also differ in how often they depeg and for how long. Maintaining the peg and a stabilization mechanism requires good governance, adequate collateral and reserves alongside liquidity, market confidence and adoption.
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