Changes in the stablecoin market landscape: USDC rises in the Decentralized Finance field

The competitive landscape of stablecoins has undergone significant changes in 2021. While USDT still maintains a dominant position on exchanges, USDC has gained a leading edge in the Decentralized Finance market. Data shows that USDC is gradually winning the favor of DeFi users. Meanwhile, stablecoins are no longer just tools for cryptocurrency users to manage risk; they are also becoming important compliance channels for traditional financial funds entering the cryptocurrency and DeFi markets.

Stablecoins have always been a core track in the cryptocurrency market, playing an important role in the decentralized cryptocurrency ecosystem, especially in the trading and transfer scenarios of centralized exchanges, helping users reduce asset volatility risks and lock in profits.

In January of this year, the Office of the Comptroller of the Currency (OCC) announced that it would allow U.S. banks to use dollar stablecoins for payments and settlements, marking a recognition of the status of stablecoins by regulatory authorities. Banks can use stablecoins to facilitate customer payment transactions on independent node verification networks, including issuing stablecoins and converting them into fiat currency.

In the strong cryptocurrency market in 2021, the demand for stablecoins as a major settlement asset significantly increased. Major stablecoin issuers frequently issued more coins, and the total market value grew from 28 billion USD at the beginning of the year to the current 108.1 billion USD.

In recent years, the market has been hoping for a new stablecoin to replace the dominant position of USDT to reduce potential risks. Although compliant stablecoins such as USDC and BUSD continue to challenge USDT, due to user habits, USDT still maintains an absolute advantage on centralized exchanges.

In May of this year, the issuer of USDT disclosed the details of its reserves for the first time. As of March 31, 2021, nearly 76% of Tether's reserves are cash or cash equivalents, including commercial paper, trust deposits, and cash, while the remaining portion consists of secured loans, bonds, and other investments (including Bitcoin).

Although the security of USDT has been preliminarily confirmed, its market position has changed. According to data platform statistics, the total issuance of USDT is currently 64.3 billion USD, which is nearly three times higher than at the beginning of the year, accounting for 58% of the total issuance of stablecoins. At the beginning of the year, this ratio was as high as 75%, indicating that the overall influence of USDT in the industry is declining, largely due to the explosive growth of the DeFi market.

Since the beginning of this year, a large number of emerging DeFi projects have emerged, especially yield-generating, DEX, and lending projects. To maintain high liquidity, these projects have launched stablecoin liquidity mining activities, with early stablecoin annual yields even exceeding 50%, but most have now dropped to around 10%.

In the DeFi market, for compliance and security reasons, most projects prefer to use ETH and USDC to establish trading pair liquidity pools. USDT no longer has the trading depth and liquidity advantages similar to centralized exchanges. Users have more options due to the AMM mechanism, so the more compliant USDC has become the preferred stablecoin for DeFi users and project parties.

As of July 1, the locked amount of USDC in a certain DEX liquidity pool was $3.34 billion, more than twice that of USDT. In terms of trading volume, the USDC trading pairs reached $6.02 billion, more than three times that of USDT, reflecting that users prefer to trade with USDC.

On the lending platform with the highest TVL, the USDC deposit amount is $3.89 billion, and the loan amount is $2.77 billion, both of which are the highest on the platform. Meanwhile, the USDT deposit amount is $0.95 billion, and the loan amount is $0.82 billion, with USDC significantly outperforming USDT in both deposits and loans.

These data indicate that USDC has become the most favored stablecoin asset among DeFi users, playing an irreplaceable role in trading and lending activities within the DeFi ecosystem.

USDC's recent actions indicate that it is not satisfied with its current position in the DeFi ecosystem, but rather aims to become the main channel for traditional financial market funds to enter the cryptocurrency and DeFi markets, challenging USDT on a higher level.

USDC has always marketed itself on compliance, and its issuer holds a high position in the industry. One of them is the first company in the world to obtain a BitLicense in New York, and subsequently received payment licenses in the UK and the EU. The other is the cryptocurrency exchange that has obtained the most regulatory licenses globally.

For this reason, along with the shift in the US regulatory stance, USDC has gained recognition from many traditional financial institutions, and its use cases have significantly increased. In March of this year, a major payment giant announced that it would allow transactions settled in USDC on its payment network.

In May of this year, the issuer of USDC secured the highest single financing in the history of the cryptocurrency industry - 440 million USD, with investors mainly being well-known venture capital firms and hedge funds from the traditional financial sector. Since then, the company has significantly accelerated its marketing efforts for USDC aimed at financial institutions, in order to build "a complete set of native digital currency payment and financial infrastructure."

In June of this year, multiple institutions successively launched USDC savings yield products, with yields around 4%. The sources of these products' returns vary; some come from institutional borrowers, some from a combination of lending yields and mining yields, and others from verified lenders on the platform.

At the same time, the issuer of USDC has launched a DeFi API, allowing institutional users to easily access various DeFi protocols. "By using the DeFi API, businesses will be able to quickly and easily access DeFi protocols, where they can earn interest, governance tokens, and provide the same access for their clients."

For a long time, the interest rates on savings accounts at traditional American banks have been low, with the annual percentage yield (APY) for small deposits at a certain large bank not exceeding 0.05%. Even for some high-interest savings accounts, the APY is usually only around 0.60%.

At the same time, traditional financial users often face high barriers when entering the DeFi market, such as private key management and on-chain interactions, which increase management and regulatory costs, restricting large-scale capital from entering the DeFi market. The aforementioned institutions simplify these complex operational processes, allowing users to enjoy an annualized yield of 4% by simply transferring USD into their accounts.

It is foreseeable that a large amount of traditional financial market funds will flow into the cryptocurrency market, bringing more USD liquidity to the DeFi market and becoming "the first institutional-level bridge connecting DeFi."

An industry insider stated: "This will be an important event for us to look back on in a few years, as it marks the institutionalization process of Decentralized Finance, similar to how we reflect on the release of a lending platform's token, which sparked the liquidity mining craze."

Driven by the demand in the DeFi market and traditional financial market, the supply of USDC has surged nearly 20 times since the beginning of this year, rising from 1.3 billion USD to 25.1 billion USD. In the coming months, USDC will also be issued on 10 blockchain networks such as Avalanche, Celo, and Flow, to further expand its advantage in the on-chain DeFi market.

Currently, the landscape of stablecoins in the crypto market has become increasingly clear. USDT and USDC serve as the dual-core drivers of market development, with USDT being content with the status quo due to its compliance disadvantages, primarily serving the trading and transfer scenarios of centralized exchanges. USDC, on the other hand, aims to become the main medium connecting the traditional financial world and the crypto world, enhancing the adoption rate of cryptocurrencies by financial institutions and helping traditional funds enjoy DeFi services in a compliant and convenient manner.

In addition, DAI and BUSD each have their specific application scenarios and positioning. DAI mainly serves the various needs of the DeFi native population, while BUSD has a solid position as the main stablecoin for settlement assets on certain exchanges and certain public chains. Other stablecoins exist more as market supplements.

As the cryptocurrency market matures, the role of stablecoins is becoming increasingly significant. USDC has now become the benchmark in this field and is driving development. Just like a certain well-known exchange, even though its trading volume is not the highest, it has still become the most influential exchange in the market due to its compliance.