The competition in the stablecoin market has long been burning from the centralized field to the decentralized field, and the battle situation has changed again.

On December 23, Coingecko data showed that the market value of the decentralized stablecoin UST reached 9.479 billion US dollars, surpassing the market value of DAI on the same track, which had a market value of 9.035 billion US dollars. UST is built on the blockchain network Terra, and DAI is the largest decentralized stablecoin on the Ethereum network.

The rise of UST’s market value made it ranked fourth in the list of stablecoin market capitalization, and the “top three” are still occupied by centralized stablecoins, namely Tether’s USDT, Circle’s USDC and Binance Ecosystem’s BUSD.

The latest report from The Block Research shows that the total supply of stablecoins has surged from $29 billion in early 2021 to more than $140 billion, a growth rate of 388% during the year. UST has not been included in the reported statistics, which means that the current market size of stablecoins may be larger than the statistics. There is a view that DeFi and derivatives are important reasons for the increase in demand for stablecoins.

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UST market value rises Terra chain TVL surpasses BSC chain

Currently, the stablecoin space is dominated by USDT and USDC. Both are issued by a centralized company and supported by traditional monetary instruments such as U.S. Treasury bonds, cash, and corporate bonds as anchors to the value of the U.S. dollar.

According to data from CoinGecko, Tether’s USDT accounts for more than 60% of the total number of stablecoins issued in the entire encrypted asset market, occupying the top of the stablecoin market capitalization list with a market capitalization of US$77.4 billion; the market capitalization of the compliant stablecoin USDC issued by Circle It ranks second with approximately US$42.6 billion; another compliant stablecoin issued by Binance, BUSD, ranks third with a market value of US$14.7 billion.

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The market value of UST exceeds that of DAI

You know, DAI is the longest-running decentralized stablecoin in the market. It was created based on the MakerDao protocol on the Ethereum network. Whether it is supply or market value, it has always been the king of the decentralized stablecoin market. Today, the "crown" has changed hands. The current market value of UST is about 9.4 billion U.S. dollars, and the market value of DAI is about 9 billion U.S. dollars.

Centrally issued stablecoins are easier to maintain a 1:1 anchor with the U.S. dollar due to traditional financial assets as reserves. In comparison, UST and DAI are decentralized stablecoins supported by encrypted asset mortgages. Highly volatile cryptocurrencies constitute its underlying assets. When decentralized stablecoins appear in extreme market conditions, they will be decoupled from the value of the US dollar due to untimely liquidation.

Judging from the market value and the market demand for smart contracts on the chain, decentralized stablecoins are growing day by day, and the corresponding infrastructure on the chain is also rising with the tide. UST's underlying facility, the Terra chain, is a case in point. Only 13 applications on the chain have locked more than $18 billion in encrypted assets, and the TVL (total value of locked encrypted assets on the chain) once surpassed the public chain unicorn BSC.

On December 21, the analysis tool DeFi Llama data showed that the TVL of the Terra chain exceeded 18.2 billion U.S. dollars, and the average TVL of each application on the chain exceeded 1.4 billion U.S. dollars; the average TVL of the BSC chain protocol was 73 million U.S. dollars, of which 165 billions of dollars in crypto assets locked on 225 protocols.

The increase in TVL on Terra’s chain coincides with an increase in the price of its governance token, LUNA. According to data from CoinGecko, LUNA rose by 48.5% within 7 days and hit a record high of $97.9 on December 22, which also pushed LUNA’s total market capitalization into the top ten (9th) in the list of encrypted asset market capitalizations. Excluding stablecoins, LUNA ranks 7th in terms of market capitalization.

Some people attribute the surge in LUNA's market value to the token mechanism and its use in DeFi applications, while Adrian Krion, CEO of Web 3 game company Spielworks, said that the market demand for LUNA is mainly due to the demand for UST, casting UST needs to burn LUNA on the Terra chain.

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DeFi and derivatives boost stablecoin supply by 388%

The Block Research pointed out in the latest "2022 Digital Asset Outlook" report that the total supply of stablecoins has surged from $29 billion in early 2021 to over $140 billion, a growth rate of 388% during the year.

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The Block Research: Supply Changes of Stablecoins Over the Years

There are several different factors behind the surge in stablecoin supply. For crypto asset trading firms, stablecoins are a way of dampening the volatility of trading different cryptocurrencies.

In 2021, a large number of individual traders will enter stablecoins into decentralized finance (DeFi) protocols on various chains, creating new demand for stablecoins. Traders can either exchange new assets in the decentralized trading application DEX; or use stablecoins as pledges to borrow other assets for arbitrage; or pair stablecoins with other assets to obtain new asset rewards in the liquidity provision pool so as to profit.

DeFi provides a new market scenario for stablecoins, and also promotes the transition of stablecoin output from a centralized method to a decentralized method. The algorithmic stablecoin UST is a product of this trend.

In addition to DeFi, the derivatives market is also an important driving force for the growth of stablecoins.

Paolo Ardoino of Tether pointed out that most derivatives of encrypted assets (futures contracts, options contracts, etc.) are settled in stablecoins. Jeremy Allaire, CEO of Circle, predicts that 2022 is expected to be the year of the evolution of stablecoins. As more and more institutions and individuals want to hold stablecoins, their demand will continue to increase, including for payments. use.

Nonetheless, The Block Research also pointed out that the market is also facing more scrutiny in 2021. In terms of regulation and scrutiny, the United States has been particularly wary of stablecoins, with regulators reiterating their potential threat to the U.S. financial system time and time again.

Senator Elizabeth Warren has stated on many occasions that stablecoins are not always stable, "In times of economic hardship, people are most likely to cash out from high-risk financial products and switch to real dollars. Stablecoin stability drops dramatically when stability is needed, and this run mentality could end up destroying our entire economy.”

The Financial Stability Oversight Board, the U.S. Treasury Department's main agency that monitors the financial system, warned that these stablecoins are often marketed as being "backed by traditional financial assets," claiming that assets offer the promise of stable value. But when investors doubt their credibility, stablecoins could be “subject to widespread redemptions and liquidations of assets, which could trigger liquidity issues similar to bank deposit runs, which could harm users and the wider financial system.”