Could USDT & USDC Depeg and Crash?

Reserve assets

USDT

Source: Tether’s Q1 2022 assurance report
Source: Tether’s Q1 2022 assurance report

Total market cap & buyback amount

Having checked the reserve assets of the two stablecoins, let’s now turn to the root cause of crypto meltdowns: depegs. USDT and USDC are both stablecoins pegged to a fiat currency, which means that they can depeg from the dollar under two scenarios:

  1. Hit by extreme market conditions, the project team does not have enough funds to pay for massive redemptions. This would result in poor liquidity performance of the stablecoin, which leads to its depeg.
  2. The stablecoin suffers from malicious shorting and scandals, which leads to market panic and causes a run. In the end, the stablecoin depegs due to insufficient liquidity.

Transaction statistics

Next, let’s turn to the second scenario where the two stablecoins are threatened by malicious shorting, exit scams, or runs. If that were to happen, the on-chain statistics would show a massive withdrawal of funds. According to the on-chain statistics, USDC seems to have been hit by the panics, while USDT has not been much affected.

The on-chain transaction trend of USDT
The on-chain transaction trend of USDC

Conclusion

In terms of market cap, USDT takes a lion’s share of the stablecoin market, which has led to the excessive concentration of funds. Plus, this has also made the market unnervingly vulnerable. In addition, USDT also continues to hold risky commercial papers. Fortunately, Tether has started to reduce its CP holdings.

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