The Impact of Terra and UST's Collapse on the Stablecoin Ecosystem

The sudden collapse of Terra and UST caused investors to feel devastated and confused about the future of the cryptocurrency market. The drop in the market worth from 18 billion to 1.2 billion in just one week was caused by the massive sell pressure of big withdrawals from anchor and swaps to other stablecoins. This article analyzes how other stablecoins performed during this time.

Tether's Performance

Tether's dominance in the business is undeniable, and each USDT is backed by USD. Tether's reserves include commercial paper, money market funds, cash, bank deposits, treasury bills, and reverse repo notes. The foundation guaranteed that its stablecoins could be redeemed through specific partner exchanges, and this was proven to be true when UST began to fall. Due to investor skepticism about stablecoins, many people began to switch from USDT to other stablecoins, leading to USDT trading at a discount to several other stablecoins. Tether claimed that 2.3 billion USDT was redeemed between the 11th and 12th of May. The USDT market cap fell by 3.7 billion between May 9th and 13th, and daily trade volume increased to 176 billion on May 12th, which was much more than the normal trade volume of 40 to 60 billion on most days.

USCC's Performance

USCC's market capitalization increased significantly by 1.4 billion from May 9th to May 13th, and it presently has a market capitalization of 52.3 billion, close to its all-time high. Daily volume increased by 480%, and there were massive withdrawals of USCC from smart contracts, with the amount of USDC locked in smart contracts dropping significantly from 42 to 33. One theory is that investors were concerned that any yield farms in which they held USCC may have UST exposure, which would have a negative impact on their holdings.

BUSD's Performance

BUSD's market capitalization fell slightly by about 1 billion from 17.8 billion within the same period of time before rebounding to its previous level. BUSD's market cap has continued to grow since then, standing at 18.2 billion at the time of writing, with a 600% rise in volume.

Other Stablecoins

USDC and Binance USD were two of the biggest gainers from this, as investors rushed to these alternatives during times of crisis. DAI's market capitalization fell by 25% between May 8th and 13th, from 8 billion to a little over 6 billion, and volume surged tenfold during this time from an average of 400 million to over 4 billion. Frax, backed to the tune of 80% by USDC, witnessed some volatility on May 12th when a number of users switched between stablecoins. Frax briefly plummeted below 0.97, but the built-in redemption mechanism kicked in, and arbitrage acquired fracs each time it moved off peg. Overall, the peg was maintained, although Frax's market capitalization decreased by 1 billion between May 8th and 13th, which was a 38% loss.

Conclusion The collapse of Terra and UST had a ripple effect throughout the stablecoin ecosystem. Various algorithmic stablecoins lost their pegs, with most still unable to restore them. However, some stablecoins like USDC and BUSD managed to gain from this scenario as investors rushed to these alternatives during times of crisis.