Following the collapse of Terra in 2022, the industry saw an enormous exodus of wealth from volatile crypto assets, which bolstered the significance of stablecoins.
Since 2020, the use of stablecoins recorded on public blockchains like Ethereum, Binance Smart Chain, and Polygon has increased significantly. Yet in just the last four months, the circulating supply plummeted by 10% ($14.94 billion) after the Terra Luna crash. Despite this the total supply of stablecoins, as of 17 August 2022 is $142.82 billion, an increase of 816% from August 2020.
Another potential risk to DeFi stability is the forthcoming Ethereum merge, which will shift the Ethereum blockchain (native token ETH, or ether) from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism.
In contrast to heavyweight support for the merge from leading stablecoins Circle and Tether in contrast MakerDAO (MKR), the builder of the stablecoin DAI, has claimed in a twitter thread that the merge could do more harm than good.“They explained that the merge could lead to perpetual contract backwardation and negative funding. Additionally, MakerDAO mentioned that the launch itself could trigger selling pressure across chains existing on PoW,” according to the report.
MarkerDAO has even more reason to feel cautious in the current DeFi climate after the US Treasury sanctioned Tornado Cash on August 7, 2022 for allegedly helping North Korean hackers launder billions of dollars worth of cryptocurrency.
After a crypto community backlash when Circle (USDC) started blacklisting 45 Ethereum addresses shortly after the US Treasury’s fresh penalties on Tornado Cash became public knowledge, MakerDAO whose stability mechanism depends on USDC also came under the spotlight.
‘In light of this, MakerDAO may confront an existential crisis. The system, which promotes itself as an ‘impartial’ and ‘decentralized’ stablecoin accessible by anybody, has become dependent on USDC to maintain its dollar peg,’ the report reveals. Half of all its DAI stablecoin were originally created from USDC deposits, but MakerDAO today backs its stablecoin with around a third of USDC.
Joining the race to attract more DeFi users and liquidity on July 27, Aave proposed a new stablecoin, GHO on the Aave protocol, allowing users to mint additional GHO tokens in return for sufficient collateral. Like the troubled Terra, this stablecoin will be an algorithmic currency that in addition pays interest on the underlying asset, and it is backed by many crypto currencies as opposed to US dollars.
Popular Ethereum-based memecoin Shiba Inu also revealed its own stablecoin contender, a new token, and a collectable card game for its future metaverse. The project’s creator Kusama said the collapse of Terra had prompted the Shiba Inu community to create its own stablecoin SHI, which would be able to ‘avoid the flaws discovered’ in similar stablecoins due to the fact that it was independently developed by ‘a group of developers in our decentralized network”.
The report also reviews the current state of play regarding stablecoin regulations across the world, focusing on the United Kingdom, European Union, United States, and Singapore. In the EU the key Regulation of Markets in Cryptoassets (MiCA) aims by 2024 to provide a unified licensing system across the EU. The approval of MiCA by the European Parliament has opened the door for a crypto-regulation that is conducive to innovation and with the potential to become a global standard.
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