One of the easiest ways for investors to trim their positions is to turn to stablecoins. Centralized stablecoins, unlike their algorithmic counterparts, are resistant to volatility and maintain their peg in even the most violent market conditions.
In the last two years, the stablecoin market has grown significantly and has become one of the most important parts of the crypto ecosystem. At its peak, the market cap of stablecoins reached $160 billion.
The importance of stablecoins was further solidified in 2022 as the industry saw an unprecedented amount of value drain from volatile crypto assets. All of the value-leaving volatile assets triggered by the Terra (LUNA) implosion and ensuing liquidity crisis found its way into stablecoins.
The amount of value entering the stablecoin market saw the four largest stablecoins outperform Ethereum (ETH) in terms of market cap.
In early June, the USDT, USDC, DAI, and BUSD market caps surpassed the Ethereum market cap for the first time ever. The fact that this is the first time a group of ‘stable’ assets has outperformed a volatile asset shows the severity of the deleveraging we witnessed in June.
However, the increase in speculation surrounding Ethereum’s upcoming merger in September has propelled ETH’s price higher, bucking the prevailing bearish market trend. Ethereum’s price rally saw it regain its dominance over stablecoins, with its market cap now just over $243 billion.
One of the biggest factors that led to the drop in Ethereum’s price and market cap was the drastic drop in the Total Value (TVL) locked in its DeFi protocols. Terra (LUNA) setback caused massive deleveraging at DeFi, with investors pulling their tokens from lending logs en masse.
The deleveraging of 2022 was the complete opposite of the DeFi boom that the market saw in 2020 and 2021 with the introduction of yield farming. With new lending logs emerging almost daily, the Total Value (TVL) on Ethereum peaked in 2021 at $253 billion. This year’s deleveraging has seen the TVL fall over 70% to just $72 billion.
According to data from Glassnode, Ethereum’s TVL may have bottomed in June. TVL remained pegged at $72bn for a short while, staging a modest recovery in mid-June and rising further in early August.
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