Crypto analysts caution that USDC and DAI are at higher risk of losing their dollar parity than other stablecoins.
There were a few such examples in the crypto industry in the past few years, with USDC and DAI both actually doing so briefly.
Assessing USDC’s and DAI’s Depegging Risk
The study compared five stablecoins: USDT, USDC, BUSD, USDP, and DAI. Four of these are majorly collateralized with Real-world assets (RWA), while the fifth, DAI, is backed partly by RWA as well as other stablecoins and crypto-assets.
The paper looked at 24 months of historical price data, concluding in June 2023. During this period, the prices of all five stablecoins were meant to maintain a $1 parity. However, it found that USDC and DAI suffered the most significant falls, dropping to as low as $0.87 and $0.85 during the Silicon Valley Bank collapse in March 2023.
Interestingly, stablecoin prices are influenced by events within the cryptocurrency ecosystem and external factors in the broader financial industry. In the case of USDC and DAI, both displayed a high degree of correlation, particularly during the SVB event, indicating a potential vulnerability to idiosyncratic events and targeted actions.
In contrast, the USDP coin, despite having a smaller market cap and trading volume, showed more considerable deviation from the $1 peg, both above and below. Yet, it exhibited less correlation with other stablecoins, suggesting greater independence.
The study also noted that the likelihood of a stablecoin depegging from its $1 value could be influenced by the day of the week. For instance, the price of USDC fell to $0.87 over the weekend of March 11-13, 2023, when traditional banking systems were closed, thereby impacting liquidity.
Factors Influencing Stablecoin Depegging
Depegging happens when stablecoins deviate from their pegged value. Factors like underlying collateral, reserve governance, and market volatility influence this susceptibility. Such deviations can result in losses for buyers or sellers, depending on whether it occurs above or below the pegged value.
Depegging events have multiple causes. Market volatility can cause stablecoin prices to decrease or lead to a shift towards higher-quality assets, resulting in increased demand and prices exceeding the peg. Liquidity challenges, often due to high volatility, can also affect stablecoin prices.
Mismanagement of reserves, impaired assets, sudden demand hikes, excess supply, lack of transparency, and loss of confidence can all impact stablecoin stability and trigger depegging as well.