Exploring the Changes in the Stablecoin Market Landscape: Analyzing USDT's Continued Dominance

After a series of events in 2023, despite Tether's low trust level, it has become the dominant stablecoin. This article will explore whether this phenomenon indicates that trust is no longer as important for cryptocurrency investors, who seem to prefer anchored stability, liquidity, and versatility.

Main points:

• Although USDT is the least trusted, it has become the dominant stablecoin.
• USDC and DAI decoupled during the banking crisis, BUSD has a set expiration date due to regulatory measures.
• The trading volume share of centralized and decentralized exchanges reflects different stablecoin preferences.
• Investors seem to value the anchoring stability, liquidity, and versatility of USDT more than its opaque reporting.

In 2023, the stablecoin market underwent tremendous changes. At the beginning of the year, BUSD was set to expire in 2024, and the banking crisis in March severely impacted USDC and DAI, with a certain trading platform choosing TUSD as its preferred zero-fee Bitcoin trading pair. These events had a significant impact on the structure of the stablecoin market: BUSD was gradually phased out, USDC and DAI decoupled after the banking crisis, and TUSD rose. In this process, USDT became the most reliable stablecoin in the industry.

The importance of stablecoins to the cryptocurrency industry reached unprecedented heights in 2023. With the disappearance of fiat channels, the trading volume share of stablecoins rose from 60% in 2022 to now 76%. The strict regulations in the United States and the closure of fiat payment channels have made it more efficient to use stablecoins for trading on cryptocurrency exchanges. Therefore, the influence of dominant stablecoins on market health is greater than ever before.

Stablecoin Landscape

The changes in the market value of stablecoins reflect the evolution of the competitive landscape:

• In early 2021, Tether was the largest stablecoin, over 5 times larger than USDC. The bull market of 2021 witnessed a significant increase in the market value of stablecoins.
• In the bear market of 2022, the market capitalization of USDC and BUSD grew year-on-year, while Tether suffered a loss of over $12 billion due to the decoupling after the FTX collapse.
• In 2023, the banking crisis led to a significant devaluation of USDC, resulting in a market cap loss of 14 billion USD. BUSD was set to expire, with a market cap shrinkage of over 66%, while TUSD grew due to preferential treatment from a certain trading platform.

Trading Volume Share

The trading volume share reflects the actual usage of stablecoins. The trading volume share of TUSD has increased from 0% two months ago to over 30% now, highlighting the influence of a certain trading platform on the stablecoin market. The trading volume of USDC on centralized exchanges has nearly dropped to zero, while USDD has almost no trading volume on the exchanges involved.

The market share of decentralized exchanges presents a different picture:

• DAI has fallen out of favor, dropping from a 28% market share in 2021 to the current 2%.
• USDC has risen as a market leader in decentralized finance trading, while USDT's share has declined.
• Users of decentralized exchanges tend to prefer more transparent stablecoins like USDC over USDT.

The usage differences between USDC and USDT in centralized and decentralized exchanges highlight two different types of investors. Traders on centralized exchanges seem less concerned about centralized risks and prefer to use USDT as their stablecoin of choice.

Reserve Status

Tether's reserves still contain 3% unknown categories. In the first quarter of 2023, Tether achieved a profit of $1.48 billion, equivalent to an annual interest rate of 7.9%, which is 3.15% higher than the risk-free rate, indicating that its holdings are carrying additional risks.

Tether announced that it will purchase 1.5 billion USDT worth of Bitcoin in the first quarter and commit 15% of its net profits for future Bitcoin purchases. Currently, Bitcoin accounts for 2% of its holdings, and this ratio will gradually increase in the future.

Tether currently has $12.5 billion (15% of reserves) invested in risk assets (Bitcoin, gold, other and secured loans). In contrast, USDC's allocation is more liquid, has government support, and objectively poses a lower risk.

Reasons for USDT's Leadership

1. Anchored Stability: USDT has maintained a stable peg while other stablecoins struggle.

2. Liquidity: USDT is the most liquid stablecoin among centralized exchanges, with the market depth of top cryptocurrencies exceeding 130 million USD at 1%.

3. Versatility: USDT offers the most trading pair options, being the quoted asset for 3,347 trading pairs on centralized exchanges.

Conclusion

Despite issues with Tether's reserve composition, USDT will continue to dominate the centralized stablecoin market due to its stable pegging rate, greater liquidity, and trading flexibility. The key to USDC's enhanced competitiveness lies in improving its pegging stability, but its growth is affected by the regulatory environment in the United States in the short term.

Decentralized finance requires better and more decentralized solutions than DAI to guard against the potential issues of USDT or USDC. Emerging stablecoins like crvUSD and GHO may provide investors with healthier decentralized options to address the uncertainties of centralized stablecoins.