Crypto unbanked: A postmortem on the great USDC de-peg of 2023
Last week’s collapse of Silicone Valley Bank (SVB) and the subsequent de-peg of USDC (the second largest stablecoin by market cap) had everyone in crypto rightfully terrified.
To the extent people were doing math on the night of Friday, March 10th (rather than just panic dumping their USDC), the thinking went roughly as follows:
The total supply of USDC is $40 billion, of which $3.3 billion is tied up or lost with SVB. Hence an 8% exposure, putting the redeemable value of 1 USDC at about $0.92.
And lo and behold, by 9PM Pacific, USDC was trading at $0.92.
To me, this message didn’t make a ton of sense.
The entire value prop of USDC is to be an on chain dollar. If it failed to reliably hold its peg, there would be no “haircut.” Large holders would race to redeem their holdings with Circle until there was no more USD, at which point the remaining USDC would sell off and go to zero.
How defi performed
As USDC continued to plummet as low as $0.88, defi protocols held up fairly well for the most part.
Protocols like Curve, Aave and MakerDAO are built on the assumption that every asset is volatile and they were designed to handle it.
Even for stablecoins?
Especially for stablecoins…
Curve for example, did about $10 billion in volume over the weekend. The Curve LPs who white knuckled through it did particularly well, making about 12 percent per day during the de-peg.
A few other stablecoins like DAI and FRAX followed USDC down to $0.88, largely because they held hefty sums of USDC in their treasuries.
DAI had another dynamic at play that kept its price stuck to USDC like a siamese twin.
Savvy arbitrageurs used USDC to mint DAI on MakerDAO and then swap the newly minted DAI back to USDC, scalping a small profit on the price difference.
Because of this trade, all the capacity in the peg stability module on MakerDAO (which creates DAI using USDC) was quickly tapped out.
Chaos on the alt Layer1s and Layer2s
The real fun however, was going down on the alt Layer1s and Layer2s.
USDC on Avalanche completely decoupled from mainnet USDC, never going below $0.96.
That’s because Avalanche LPs pulled all the liquidity, both from USDC trading pairs and from the cross-chain bridges that move USDC between Avalanche and Ethereum mainnet.
So instead of swapping out large chunks of 50k or 100k USDC (which was totally possible on mainnet), Avalanche users were forced to swap out much smaller chunks, or get completely destroyed by slippage.
Arbitrum and Optimism experienced a similar liquidity flight, leaving holders of USDC on these chains stranded as well.
I’ve never seen so much chaos and violence in the mempools.
And that kids is how we spent one dark weekend in March ‘23.
But around 5pm on Sunday afternoon, US regulators announced that all depositors of SVB and Signature Bank would be made 100 percent whole, aka a bank bailout.
USDC and the other affected stables quickly re-pegged, and everyone in the crypto space breathed a collective sigh of relief.
The irony of that however, was not lost on anyone.
For all of us, it was a jolting reminder of the protest that Satoshi saw fit to enshrine on the Bitcoin genesis block back in 2008: “Chancellor on brink of a second bailout for banks.”
And an indictment of sorts for how far we have strayed from the vision of building a completely separate financial system.
You can’t unsee this
Those of us who work in the crypto space often point to the idea of banking the unbanked as one of our primary goals.
It’s almost like a ‘save the children’ campaign for the crypto industry. In the sense that it’s hard to argue against, but the experience of the problem is almost completely removed from the people who are supposedly working to solve it.
Until this week that is, when a huge number of us actually found ourselves unbanked.
I don’t personally have an account with SVB, Signature or First Republic but I know people who do and I heard the stories of people desperately trying every method they had (Venmo, CashApp, Coinbase, MoonPay, Wyre, Link, etc.) to get their money out of their accounts when it became clear that their bank wires were not going to clear.
I could relate though, because I do hold significant amounts of USDC on different chains.
In his newsletter that came out on the Monday following the de-peg, Jeff Dorman estimated that about half of USDC assets under management ($20 billion) would be redeemed that week.
“Even though USDC is itself backed by real assets, those assets are held by Circle, Coinbase and a lazy suzan of exploding banks,” he wrote.
For me, it was surreal going from thinking of my stablecoins as a safe haven from crypto market volatility to scrambling to swap them for Ethereum and Bitcoin as fast as I could in order to limit my exposure to the US banking system.
Back to first principles
It underscores the difference between asset risk and system risk.
Bitcoin the asset is volatile, but the system is rock solid. The US dollar is stable, but the banking system is showing cracks.
For those of us who work in crypto, I hope we never forget what we just saw. That we can renew our focus on building a completely separate financial system, and that we can work harder to keep dependencies on the old system to an absolute minimum.
We probably have some time before the next wave of bank failures, but exactly how much time is anyone’s guess.
If my DMs are any indication, we also just minted a bunch of new users for whom the value prop of crypto just clicked.
All the Tuckers, Parkers and Perrys out there who haven’t seen a war, revolution, famine or any other form of hardship for five generations just had their first scrape with a real systemic failure.
It’s a brand new cognitive data point.
Everything is not gucci.
Yes, you need to write down twelve words. No, you can’t buy a coffee. But you can move $100 million to anywhere in the world essentially free in a few seconds.
It’s a work in progress, but it works. No one can stop it, and it will always be there for you in a jam.
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Thanks for reading until the end. I work in crypto and think about it non-stop. You can find me on Twitter @danajwright_
