“There can’t be more than 3 billion UST withdrawals at once.”
“One stETH should at least remain equivalent to one ETH as people believe in faster delivery of The Merge.”
“Fed won’t let stocks fall more!”
“BTC never had 6 consecutive red weeks, next one should be green!”
Each such presumption is slowly fading away, and every related narrative continues to lose steam.
Terra governance didn’t expect billions of UST to try to exit the system at once; it happened, and it all crashed. Staked Ethereum (stETH) continues to trade below Active Ethereum (ETH), with a rate of about 0.95 ETH per stETH. The Federal Reserve seems to care more about inflation than falling stock prices. BTC never had six consecutive red weeks before, but we already witnessed nine red weeks in this bear run. So, what’s up next?
If the biggest decentralized stablecoin can crash and take out about $400 billion of the total digital currency market capitalization simply due to “fear,” it is hard to imagine what the biggest centralized stablecoin crash could do to the industry. Tether, the biggest stablecoin with about 73 billion USDT in circulation and responsible for roughly half of the digital currency trading according to CoinMarketCap, can take down the whole industry for years to come in case of de-pegging.
The curve stablecoin pools: UST vs. USDT
Before the collapse of UST, there were some early warning signs. The most significant sign was the substantial concentration of UST versus the other stablecoins in the Curve pool of the Curve protocol.
Curve protocol is responsible for handling billions of stablecoin trades at a very low fee, and in the case of UST, the curve pool “USTw-3CRV” consisted of four stablecoins (UST + USDT + USDC + DAI), all with 25% weightage each. Later, close to the de-pegging event, UST was almost 85% of the pool, with others just about 5% each. UST was still being traded at $1 at that point. Afterward, the collapse began everywhere, from the Binance exchange to the Curve protocol.
So, what does USDT have to do with that? Well, unfortunately for Tether, USDT in the 3Crv pool of the Curve now makes up about ~66% of the total pool, with DAI and USDC being just about ~17% each in the pool. Is this the early sign of the upcoming ultimate depeg? Time will tell, but if there is anything that we can learn from the UST collapse, it is the early warning signals that it showed a few days or weeks before the big collapse.
Drying liquidity
Though there is no accurate tracker of available liquidity, the current liquidity levels across all of the digital currency markets seem to be getting exhausted, especially if compared with the past couple of years. With just a few hundred thousand dollars, one can make big changes across many of the top 100 digital currencies (by market capitalization), which was not the case just a few months back.
There is definitely some realization across most of the professional traders and institutions that liquidity is drying out. As the Fed continues to move towards tightening monetary policy, retail traders are expected not to return any time soon. However, provided the current level of fear in the digital currency markets, it is hard to imagine a single good scenario that can bring back the volume and liquidity this industry had in late 2021.
The Goblin Town
Are recession fears happening? Check. Does the Fed continue to hike at high levels? Check. Are there no stimuli or zero rates? Check. Are institutions poor due to stocks falling? Check. Did Tether stop printing? Check. Is retail holding bags? Check. Are pyramid schemes & easy-to-break infrastructures like UST/LUNA and Celsius falling? Check. Is Coinbase, Gemini, etc., laying off staff? Check. Is BTC below the average entry points of MicroStrategy and El Salvador president? Check. Record Tether withdrawals? Check. Record consecutive red weeks? Check.
This is what the Goblin Town looks like, and we seem to be entering or at least struggling in one.
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