The stablecoin ecosystem was thrown into disarray recently when USD Coin (USDC) depegged from the U.S. dollar due to a subsequent sell-off after Silicon Valley Bank (SVB) did not process $3.3 billion of Circle’s $40 million transfer request. This had a ripple effect on other major stablecoin ecosystems, with Dai (DAI) being the most affected.
As of June 2022, $6.78 billion worth of DAI supply was collateralized by $8.52 billion worth of cryptocurrencies, with USDC representing 51.87% of DAI’s collateral, worth $4.42 billion. This caused DAI to depeg from the dollar and momentarily touch $0.897. The stablecoin has since recovered to trade around the $0.92 mark.
USD Digital (USDD) and fractional-algorithmic stablecoin Frax (FRAX) also felt the effects of the USDC sell-off, with USDD dropping nearly 7.5% to trade at $0.925, while FRAX dipped even further to $0.885. Other popular cryptocurrencies, such as Tether (USDT) and Binance USD (BUSD), however, continue to maintain a 1:1 peg with the U.S. dollar.
The entire depegging ordeal started after Circle announced that $3.3 billion of its funds were not processed for withdrawal by SVB. SVB was shut down by the California Department of Financial Protection and Innovation for undisclosed reasons. However, the California regulator appointed the Federal Deposit Insurance Corporation as the receiver to protect insured deposits.
The depegging of USDC has had a significant impact on the stablecoin ecosystem, with other major stablecoins following suit. It remains to be seen how the market will respond in the coming days and weeks.