- Almost 75% of all transactions on centralized crypto exchanges involved a stablecoin.
- The lopsided growth led to concerns about weaknesses in the wider ecosystem.
Stablecoins have proven to be a popular tool in the Web3 domain over the past few years. Combining the benefits of cryptocurrencies while maintaining stable value, they have emerged as the holy grail for new financial investors.
This unique ability has made stablecoins the primary way for traders on non-fiat crypto exchanges to enter and exit trades, acting as a bridge between traditional finance and crypto ecosystems.
Stablecoins are increasing their market share
According to a report by Kaiko, a digital asset data provider dated July 13, nearly 75% of all transactions on centralized crypto exchanges (CEX) involved a stablecoin.
While stablecoin market share has fallen significantly from all-time highs in March earlier this year, stablecoin market share has increased by a whopping 10% since 2020.
Source: Kaiko
While the dominance of fiat currencies on CEXs was clearly waning, the main driver behind the rise in stablecoin volumes was Binance’s [BNB] zero-fee trading program introduced last July. As many as 13 Bitcoin spot trading pairs [BTC] were exempt from exchange charges.
According to a previous report from Kaiko, non-fee trading volume accounted for nearly 66% of total volume.
However, as shown in the chart above, once this promotion ended in March 2023, there was a sharp decline in the total trading volume and, consequently, the market share of stablecoins.
Nevertheless, the recovery of the crypto market in 2023 has put these stable assets back in the spotlight. The cumulative trading volume of the big five – Tether [USDT]USD coin [USDC]DAI, BinanceUSD [BUSD] and TrueUSD [TUSD]by 2023 – was more than $3 trillion, according to the report.
Asymmetrical growth a cause for concern?
The largest stablecoin by market capitalization, USDT, had a massive 70% market share. While this reflected USDT’s supremacy, the skewed distribution highlighted concerns about weaknesses in the broader stablecoin ecosystem.
Source: Kaiko
Incidents of depegging and regulatory action have hampered the growth of other stablecoins in the market.
Earlier in February, Binance USD [BUSD] decoupled from the dollar value. This was done on the orders of a New York-based regulator, who ordered the issuing company Paxos to stop minting new tokens. Since then, at the time of writing, about 75% of BUSD’s market share has been wiped out.
This was followed by the biggest depegging of 2023 so far when USD Coin [USDC]the second largest stablecoin by market cap, fell to a low of 87 cents from the $1 ideal value.
The event caused chaos in the market, with dire consequences for investors’ portfolios. USDC’s market cap has shrunk by 37% since this fiasco.
In addition, the depeg resulted in a knock-on effect on the algorithmic stablecoin DAI, as USDC made up the bulk of its collateral reserves. DAI lost nearly $2 billion in market value.
Source: Glassnode
The shiny spots
Tether, on the other hand, grew from strength to strength and, despite minor hiccups, maintained its luster in the stablecoin ecosystem. Market valuation rose 25% on a year-to-date (YTD) basis as investors built confidence amid negative signals from rivals.
Another success story is that of TUSD. The stablecoin, backed by Binance after BUSD’s failure, showed exciting results. TUSD’s market cap has more than tripled YTD and its market share has increased from 1% to 19%.
The promotional tactics used by Binance to remove trading fees for its BTC-USD pair was a key factor in helping this surge. After seeing encouraging results, Binance extended this service for all TUSD spot trading pairs from June 30th.
CEX over DEX
Despite massive events such as the collapse of the FTX and the depegging of the USDC, decentralized exchanges (DEX) still accounted for a paltry 5% of total stableccoin trading volume, according to the report. Although volumes rose to 45% during the banking crisis in March, this turned out to be just an anomaly.
Higher liquidity, faster transaction times, and user-friendly interfaces make traders prefer centralized exchanges over decentralized counterparts.
Source: Kaiko
The growing relevance of stablecoins, especially USDT, was reflected in their growing demand as a safe haven in countries going through political and financial struggles. However, countries like India have expressed strong reservations about its adoption.
According to a report by The Hindu, the deputy governor of India’s central bank said stablecoins are only useful for a few countries, while in other cases they could negatively impact local currencies.