Partnered With:

USDC's comeback, DEFI's victory with compliance

Read this article in 13 Minutes

The market pattern of cryptocurrency has become increasingly clear. USDT mainly serves the trading and transfer scenarios of centralized exchanges, while USDC tries to become the main medium connecting the traditional financial world with the crypto world

USDC Strives Back, DEFI and Compliance Victory

Author: Hu Tao

As the stapecoin war enters 2021, it has taken on a very different picture than in the past few years. USDT's position on the exchange is still solid, but its position on the DEFI market has been reversed by USDC, which has been particularly favored by DEFI users, according to various data.

At the same time, stablecoin has become not only a tool for crypto users to reduce asset risks, but also an important and compliant medium for traditional financial market funds to enter crypto market and DEFI field.

Stabilecoin has always been the focus of the cryptocurrency market. The relatively centralized mechanism plays an important role in the decentralized cryptocurrency field, especially the trading and transfer scenarios in the centralized exchange, which can help users reduce the volatility risk of their cryptocurrency assets and fix the benefits.

Stablecoin's status has even been recognized by U.S. regulators. In January, the Office of the Comptroller of the Currency (OCC) announced on its website that it would allow US banks to use the stablecoin for payments and settlement. Banks may be able to use stablecoins to facilitate payment transactions on the network verified by customers at independent nodes, including issuing stablecoins and exchanging them for legal tender, the document said.

In the strong cryptocurrency market this year, the demand for stablecoin as the main cryptocurrency settlement asset has increased, and stablecoin issuers have been increasing their offerings, with the total market capitalization of stablecoin growing from $28 billion at the beginning of the year to $108.1 billion today.

In the past few years, due to the high opacity of the USDT in terms of reserves, the market has been expecting the emergence of a new stablecoin to replace the leading position of the USDT and reduce the potential risks in the market. Although USDC, BUSD, PAX, GUSD and other compliance stables have launched an attack on USDT in the past few years, USDT is still the absolute leader in the centralized exchange due to the problem of user habits.

In May, USDT issuers, under regulatory pressure, disclosed detailed data on their reserves for the first time since 2014. As of March 31, 2021, nearly 76% of Tether's reserves were in cash or cash equivalents, which include commercial paper, trust deposits, cash, and the like. The rest were in secured loans, bonds, and other investments, including Bitcoin.

The security of the USDT has been initially assured, but its position in the overall crypto market has changed. According to Messari, the total issuance of USDT now stands at $64.3 billion, up nearly threefold from the start of the year and accounting for about 58% of the total stabilecoin issuance. At the beginning of the year, however, the ratio was still as high as 75%, which indicates that the USDT's overall dominance in the stablecoin industry is declining, largely due to the explosive growth of the DEFI market.

Since this year, more and more emerging DEFI projects have emerged, especially income category, DEX category and lending category. In order to maintain high liquidity, they will launch the liquidity mining activities of stable currency, among which the situation that the annual return of stable currency is more than 50% often occurs. However, with the increase of hacker attacks and the market downturn, Now it is mostly down to around 10%.

In the DEFI market, for compliance and security reasons, most projects prefer to use ETH and USDC to establish trading capital pools. The USDT no longer has the trading depth and liquidity similar to the centralized exchange, and users have higher selectivity due to the AMM mechanism. Therefore, the more compliant USDC has become the stablecoin of choice for most DEFI users and project parties.

As of 18:30 July 1, the UNISWAP pool had more than double the USDC's $3.34 billion and USDT's $1.66 billion locked positions. In terms of trading volume, the USDC trading volume reached $6.02 billion, while the USDD trading volume reached $1.85 billion, which was more than three times that of the USDC trading volume. This also reflected the more obvious tendency of Uniswap users to use USDC trading volume.

In the AVE capital pool, which is the highest in TVL, USDC's deposit amount is $3.89 billion and its loan amount is $2.77 billion, both of which are the highest assets in the platform's data, while USDT's deposit amount is $950 million and its loan amount is $820 million. It can be seen that USDC is far ahead of USDT in terms of the amount of deposits and loans.

Both of these figures reflect the fact that USDC has become the preferred stablecoin asset for Defi users and plays an irreplaceable role in Defi's ecosystem of trading and lending.

From the recent actions, USDC is not satisfied with the existing media role in DEFI Ecology, but hopes to become the main channel for traditional financial market funds to enter the crypto market and DEFI market, and to challenge USDT from a higher dimension.

Compliance has always been USDC's key concept, and its issuers Circle and Coinbase are both well-established companies in the industry. Circle was the first company to obtain a Bitpcense license in New York, and has since been granted a payment license in the UK and the EU. Coinbase, on the other hand, is the world's most licensed cryptocurrency exchange.

As a result, as well as a change in attitude by US regulators this year, USDC has gained acceptance among many traditional financial institutions and seen a significant increase in usage scenarios. In March, Visa said it would allow the stable currency USDC to be used to settle transactions on its payments network.

In May, Circle raised the largest single funding round in the crypto industry's history -- $440 million, mostly from well-known venture capital and hedge funds in traditional finance -- and has since stepped up its efforts to market USDC to financial institutions. To build "a complete set of digital currency native payment and financial infrastructure."

In June, Circle, Compound, and Coinbase all launched USDC Savings Yield products with a yield of around 4%. Circle partnered with Grayscale's Genesis lending platform, generating revenue from institutions willing to pay interest rates for additional capital; Compound deposit product is a Compound of borrowing income and COMP mining income. Coinbase's savings products generate revenue from the platform's verified lenders.

Circe also launched the DEFI API, which enables institutional users to access the various DEFI protocols. "By using the DEFI API, enterprises will be able to easily and quickly access the DEFI protocol, where they can earn interest, governance tokens, And provide the same access to their customers." Circle said.

The APY on traditional savings accounts in the United States has long been low. For example, the APY on Bank of America is no higher than 0.05%. Even for some banks offering high savings rate accounts, the APY is usually around 0.60%.

At the same time, traditional financial users often face high barriers to enter the DEFI market, such as private key management, on-chain interaction, etc., which brings the increase of management cost and supervision cost. These difficulties also limit the larger scale of funds to enter the DEFI market. The agency abstracts these processes so that users can simply transfer dollars into their accounts and receive an annualized 4% return.

It is predictable that a large amount of money from traditional financial markets will emerge as a crypto market, bringing more US dollar liquidity into the DEFI market and becoming "the first institutional bridge to DEFI".

"This event will be something we will look back on in a few years, as it started the institutionalization of DEFI, just as we look back at the Compound Comp launch, which started the liquid mining boom." "Anthony Sassano, founder of The Daily Gwei.

Driven by demand from the DEFI market and the traditional financial markets, USDC supply has soared nearly 20-fold since the beginning of the year, from $1.3 billion to $25.1 billion. In the coming months, USDC will also launch on 10 blockchain networks including Avalanche, Celo, Flow, Hedera, Kava, Nervos, Polkadot, Stacks, Tezos, and Tron, To further amplify USDC's advantage in the on-chain DEFI market.

Now, encryption market stable currency market pattern has increasingly clear, USDT and USDC as dual drive the development of the market, including USDT in view of its compliance weaknesses and content with the status quo, mainly in the service of centralized exchange trading and transfer scene, USDC is trying to be connected to the traditional financial world and encryption main media of the world, Enhance the adoption rate of cryptocurrencies by financial institutions and help traditional funds access the DEFI service in a compliant and easy way.

In addition, DAI and BUSD each have their own specific application scenarios and positioning. For example, DAI mainly serves the various needs of the native population of DEFI, while BUSD has a solid position in Binance Exchange and BSC chain as the main stablecoin settlement asset, while other stablecoins are more complementary to the market.

As the crypto market matures and stablecoin plays an increasingly important role, USDC has become the benchmark and driving force in the sector, much like Coinbase, which has become the most influential exchange in the market due to its compliance despite not having the highest volume.