On June 16, the cryptocurrency data provider Kaiko revealed that USDC became the most liquid stablecoin on centralized exchanges, with $38 million worth of bids.
These figures provide a measure of market depth for all currency pairs with USDC as the base currency. As such, USDT has now slipped to the second spot in liquidity terms on centralized exchanges, with approximately $26 million in bids. It is trailed by BUSD (Binance USD), TUSD (True USD), and DAI.
Stablecoin liquidity infographics on centralized exchanges. Source — twitter.com/KaikoData
The recent power shift marks a significant milestone for USDC, which has traditionally played catch-up to its competitor USDT in various aspects, including market capitalization.
At the beginning of 2023, USD Coin had limited adoption as a financial instrument on centralized trading platforms. According to Kaiko analysts, the stablecoin was primarily utilized within DeFi platforms. Now, let's explore the key factors driving the surge in USDC liquidity on centralized exchanges.
Triggers for USDC Liquidity Rise
Just the day before, on June 15, USDT slightly deviated from its peg to the US dollar. Its price dipped by 0.3% to $0.997, marking a new yearly low. However, by June 19, the stablecoin almost reclaimed parity with the dollar, bouncing back up to $0.999.
The de-pegging led to a liquidity imbalance in the 3pool stablecoin pool on Curve, a decentralized crypto lending marketplace. The portion attributed to USDT rocketed from 33% to a hefty 75%. A similar scenario was last witnessed in 2022, against the backdrop of the FTX bankruptcy.
The notable surge in the decentralized pool indicates a substantial sell-off of Tether's stablecoin. This imbalance was primarily influenced by a specific address holder who borrowed more than 31 million USDT and exchanged them for USDC.
In response to the event, Tether's CTO shared a lighthearted meme and reassured users that there is no cause for concern regarding the stablecoin's temporary depeg from the dollar.
Tether CTO's response to the USDT depeg. Source — twitter.com/paoloardoino
The same day Tether experienced this hiccup, Coinbase raised the rewards for users holding USDC in their accounts. They bumped up the rate from 2% to 4%, which proved to be a major contributing factor to the dominance of Circle's stablecoin in liquidity on CEXs.
Drop in USDC's Market Capitalization
The overall scenario for USDC seems less than rosy. By the end of May 2023, its piece of the market pie had shrunk to 23% from 34% in year-over-year terms. In contrast, the similar metric for USDT increased to 65% from 47%. As per CoinGecko, the capitalization of Circle's stablecoin dropped to 29 billion dollars, while the market value of Tether climbed to 83 billion dollars.
Compounding matters, towards the end of March 2023, USDC lost its dollar peg following a partial meltdown of the US banking system. The price saw a 13% dip, landing at $0.88. The plunge was mainly because Circle had about 3 billion dollars (8% of its total reserves) tucked away in the now-insolvent Silicon Valley Bank. However, by the end of Q2, the stablecoin had almost bounced back and was trading around the $0.99 mark at the time of penning this article.
Circle's CEO points out that the primary headwind for USDC is the antagonistic stance of regulators towards the cryptocurrency sector.
