Have Stablecoins Failed? Analyzing the USDC Depeg
I have talked in-depth about the shortcomings so far of the blockchain economy and why crypto assets still have a ways to go before achieving true global adoption. Stablecoins offered some stability within the crypto market where other volatile assets (like Bitcoin) have failed to deliver.
However, the recent depeg of USDC (and the contagion that followed) has proven that not only do stablecoins not provide an advantage over fiat currency in terms of purchasing power, they also come with heightened risks.
Utilizing fiat-backed, centrally managed stablecoins goes against the entire ethos that is DeFi — and now everyone is aware of the risks associated with the model.
After another brutal recession in crypto markets, despite the introduction and adoption of major stablecoins, ~$2 trillion still completely exited the ecosystem.
It is clear why investors did not even trust stablecoins during the 2022 market contraction. All of the following stablecoins have gone through depeg events and needed some form of bailout mechanic to achieve full functionality again:
- USDC
- Tether
- DAI Token
- FRAX
- Terra USD
- Binance USD (Discontinued by regulators)
The above list is only some examples, not all. In the case of UST, billions of user funds were lost. At this point, trust in stablecoins is (rightfully so) been damaged in even the largest, most “stable” options on the market.
The question all participants of the blockchain economy should be asking: how do we retain, at least in part, that $2 trillion that left the ecosystem?
The answer: by implementing a durable, decentralized currency that has long term stability, survivability, and inflation-resistance.
Where stablecoins have failed, the Ampleforth monetary policy with SPOT/AMPL will succeed.
Read on to find out why.
Why Have Stablecoins Fallen Short?
Stablecoins, despite holding massive valuations in the crypto market, also lost market capitalization in the 2022 bear market. When Terra Luna failed, it took down billions of user funds along with it in what was supposed to be a decentralized, stable asset.
There was also fear that Tether was insolvent, which saw the asset bleed out billions in value as it either exited the market entirely or went to competitor coins like USDC.
Now, in March 2023, the USDC depeg created a fear in essentially all stablecoins as multiple assets lost their dollar peg and plummeted by over 10% in some cases. At the time of writing, most stablecoins on the market are within 1–2% of their dollar peg again.
USDC created shockwaves throughout the blockchain economy because it is so integrated in basic financial activities across all chains. There are outstanding debt obligations, trading pairs, liquidity pools, and more that suffered when USDC depegged. Some major pools remain unbalanced after the event.
The deeper damage here was due to the incentives that USDC offered holders in terms of security. USDC is fully regulated, backed by Coinbase/Circle with verifiable reserves. Yet, the token still depegged by over the $3 billion lost by Circle in the Silicon Valley Bank failure.
This doesn’t even go as far as to mention the regulator-enforced shutdown of the BUSD stablecoin, which was issued and managed by Paxos, that saw the asset lose 48% of its market capitalization.
Stablecoins Have Failed to Outcompete Fiat
The vast number of failures in the stablecoin market since 2021 have shown that the governing ideas behind the stablecoin concept have failed in practice.
To summarize: stablecoins have no meaningful advantages over fiat currencies.
Compared to fiat currencies, stablecoins:
- Come with far greater risk of devaluation, as shown in the most recent USDC depeg
- Offer access to immature, speculation-driven financial markets
- Are subject to the same degrading forces of inflation as fiat currencies
- Can be, in some circumstances, censored by regulators which results in the blacklisting of identified wallet addresses
- Require third party, centralized management and bailouts during periods of stress, like black swan events
Considering all of the above reasons, it is no surprise as to why investors choose to exit the blockchain economy during the 2022 bear market. Stablecoins lack stability, decentralization, and a value-add versus just holding USD outright.
The SPOT Token’s Advantage
The first major distinction to know about SPOT as an asset is that it is not a stablecoin. SPOT makes no efforts to maintain a stable peg, nor does it need external management or off-chain collateral to achieve stability.
Instead, SPOT functions as a stable store-of-value asset, maintaining a functional unit of account properties and inflation resistance due to the unique mechanics of its on-chain collateral model.
I highly encourage everyone to read this article about how SPOT is collateralized and the role that AMPL plays in that process.
Comparatively, SPOT versus fiat currencies is an entirely different conversation than stablecoins.
The SPOT token:
- Has no peg mechanic and therefore is not subject to a rapid devaluation due to a depegging event
- Offers financial markets the ability to transaction in a stable, store-of-value token that operates entirely on-chain
- Does not require bailouts or third party interference, meaning SPOT is not subject to bankruns
- Is inflation-resistant by design due to the properties of its collateral stack, made up of rotating AMPL tranches
- Operates independently and with an immutable protocol, meaning that the currency itself is completely decentralized
This paints a very different story for the blockchain economy. SPOT offers an immediate advantage and incentive to investors over fiat currencies due to the inflation-resistance mechanic. This protects the investor’s purchasing power which can be highly valuable in high-inflation macro environments. Additionally, the currency is completely decentralized and requires no third party management for it to function. In other words, SPOT is entirely resistant to black swan events.
SPOT is the first digital currency to truly offer advantages over the fiat system outside of potential returns by speculating on asset prices. As Evan Kuo, co-founder of Ampleforth, puts it: “A better money doesn’t rely on bailouts.”
Creating a More Resilient Blockchain Economy
It is clear through actions over recent years that the blockchain economy still has a ways to go before it offers the mass market a signature advantage over the traditional economy. At the most basic, fundamental level of both economies, it comes down to the strength of the base layer currencies. For the traditional economy, that is the reserve currencies (notably the USD). For the blockchain economy, that is stablecoins in 2023 (USDT, USDC).
In 2023, fiat currencies are outperforming stablecoins in several key ways. This is a problem for wider adoption of the blockchain economy and DeFi as a concept.
We may never manage to necessarily prevent recessions in the blockchain economy, but the strategic implementation of the right protocols can absolutely give the blockchain economy a MASSIVE advantage over that of the traditional economy.
Recession-Resistant Monetary Policy
What Ampleforth has managed to create is, at a high level, recession-resistant monetary policy.
By utilizing SPOT over stablecoins, the blockchain economy gains protection in a number of ways, including from purchasing power degradation and bank runs. This could help alleviate a potential massive exodus in capital whenever a downturn in the economy occurs, just like in 2022. These macro-level advantages not only have incentives for people to join the economy, but also to retain those new stakeholders.
Therefore, with mass adoption of SPOT across the blockchain economy, we could expect the following during economic downturns:
- Less value lost overall in the blockchain economy
- Less project failures due to loss of funds
- Less layoffs and better resiliency in terms of talent retention
- No compounding losses due to inflation exposure
- Faster recovery times and/or less severe economic downturns due to the system not requiring bailouts to maintain functionality
These same advantages are passed through the economy at the micro level as well. Individual micro-economies, ecosystems, and projects have the ability to use SPOT as an asset to hedge against market downturns, insulating everyone from the effects of a recession. The success of how insulating individual projects or ecosystems might be during these periods ultimately falls as a responsibility on the communities in governance.
This is an incredibly important concept because it actually situates the blockchain economy as a viable alternative financial ecosystem with which to seek refuge from recessions and inflation.
To learn more about SPOT, visit spot.cash for documentation, staking opportunities, and additional information.
