Market Byte: Stablecoins in Flux

Will Ogden Moore
Last Update 08/11/2023
  • While renewed pressure on Tether — today’s most prominent stablecoin — introduced recent turmoil into the stablecoin markets, we are encouraged by TradFi adoption and proposed legislation. 
  • Given Paypal’s announcement, we believe the company will leverage Venmo to issue a stablecoin on Ethereum blockchain, which will serve as a tailwind for the space by both further legitimizing the asset class and driving adoption. 
  • Over the intermediate term, we expect that continued competition from new entrants and further regulatory clarity will help drive stablecoin adoption, and ultimately boost blockchain network activity.

During recent periods of low volatility in Bitcoin and other major tokens, we’ve seen significant developments in crypto stablecoins. Legacy stablecoin Tether (USDT) gained market share over the year, but it now appears to be under renewed pressure, trading below $1 since the beginning of August 2023 (Exhibit 1). As the industry’s largest stablecoin, Tether’s instability introduces risks to certain segments of the marketplace. In parallel, TradFi payments giant PayPal recently announced a new stablecoin on the Ethereum blockchain, and stablecoin legislation continues to make progress in the US Congress. 

Although Tether’s volatility bears watching, we expect that competition from new entrants and further regulatory clarity will help drive stablecoin adoption, and ultimately boost blockchain network activity.

Exhibit 1: Tether (USDT) moved off its $1 peg this month


Tether: From Tailwinds to Headwinds

Until very recently, Tether was benefiting from a variety of industry developments. First, in February 2023, the SEC reportedly alleged in a Wells Notice to Binance USD (BUSD) issuer Paxos that BUSD was a security1, and Paxos subsequently stopped issuing new tokens. Tether and Circle USD (USDC) both gained in market share, while BUSD lost market share as a result (Exhibit 2). Later, in March 2023, the Federal Deposit Insurance Corporation (FDIC) accepted Silicon Valley Bank (SVB) into receivership. Because SVB held 8% of USDC reserves2 investors appeared to worry about the stablecoin’s soundness and fled from USDC to USDT and other stablecoins. In the following days, USDC traded below par, while USDT traded at a premium3 (Exhibit 3). As a result, Tether gained significant market share from USDC over the subsequent weeks. 

Exhibit 2: Tether gained market share over BUSD and USDC

Exhibit 3: Bank stress in March 2023 appears to have resulted in USDC’s depeg

More recently, however, USDT has been under pressure4. According to Glassnode, Bitfinex balances of USDT have dropped over the course of the year, falling from $10.1bn Feb 27th to $1.1bn by June 8th5. Starting in early July, Huobi USDT balances also dropped from ~$700mm to under ~$100mm6. The net selling–which may be related to outflows from these Tether-centric exchanges–resulted in a surplus of the stablecoin in the market. As users continued to swap USDT for USDC throughout July 2023, significant imbalances emerged. One such example can be seen in Curve’s 3pool, a major hub of stablecoin liquidity in DeFi (Exhibit 4). 

Exhibit 4: An apparent surplus of Tether in the marketplace

Source:, data as of Aug 10, 2023. Past performance not indicative of future results.

USDT imbalances in the 3pool correspond with a brief depeg in mid-June, as well as a more prolonged depeg7 starting August 3rd8. Tether is the industry’s largest stablecoin by market cap and is heavily used by both investors and exchanges outside the US. As a result, instability in its value could have spillovers to other crypto market segments. 

PayPal Enters Stablecoins

While legacy stablecoins like Tether are critical to the crypto market today, new entrants, technological innovations, and regulatory clarity may be more important for stablecoin adoption and blockchain network use over time. 

This week, TradFi payments giant PayPal announced the launch of its own stablecoin, PYUSD9. Issued by Paxos, PYUSD will be integrated into Paypal’s Venmo app, redeemable 1:1 for US Dollars, and will be 100% backed by US dollar deposits, treasuries and cash10. PayPal announced that customers will be able to use PYUSD to transfer money to various wallets, send peer to peer, fund purchases, and convert to any supported cryptocurrencies11

PYUSD will launch as a stablecoin on Ethereum, meaning it will be able to be sent to an Ethereum address at any hour on any day12.This move could prove a particular boon to Ethereum in the near term before PYUSD may eventually expand to other chains as well. More broadly, in this move, PayPal offers enormous potential to onboard users into crypto, giving the industry exposure to Paypal’s 435 million active users.

In addition to the PayPal news, several protocol innovations may help support stablecoin use. For example, Ondo Finance recently announced plans for OMMF, a yield-generating stablecoin backed by money market funds for accredited investors13. Separately, MakerDAO, an incumbent in the stablecoin space, started a sister project in Spark Protocol that serves as a DAI lending protocol which can enable users to access yields as high as 8%14.

Congress also continues to make progress on comprehensive stablecoin legislation. The bill was voted out of committee in late July 2023 with several Democrats voting in favor along with committee Republicans. The legislation would provide oversight to non-bank stablecoin issuers and specify the roles of other regulators. While we are unsure whether the bill will become law, its progress so far suggests we may be closer to US regulatory clarity for this critical segment of the crypto industry. 

Not a Stable Marketplace

The combination of legislation, innovation, and market forces should mean an ongoing evolution for the stablecoin market segment. Several traditional financial institutions have already “expressed interest” in launching stablecoins and we expect more to follow, especially if new legislation brings regulatory clarity. Recent events show that this is far from a static industry, and incumbents could see the balance of power shift as the space matures.

Unlike the traditional financial system, public blockchains offer “always open” payment channels, which can in some cases be cheaper and faster. While payments were always part of crypto’s potential, PayPal and PYUSD provide a clear avenue for this use case on a mainstream, non-crypto native level. As a result, payments as a use case may be an important driver of crypto adoption in the future.

 1. CoinDesk

 2. PR Newswire

 3. Coinmarketcap

 4. Tether was not the only stablecoin to come under pressure recently: crvUSD also briefly lost its peg following the Curve back in late July.

 5. Glassnode

 6. DeFi Llama

 7. Coinmarketcap

 8. Despite the tumult, on July 31 Tether reported $3.3bn in excess reserves and over $1bn in quarterly operational profits.


 10. Paypal


 12. Blockworks

 13. CoinDesk

 14. Yahoo Finance as of August 7, 2023


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Stablecoins are digital assets that are pegged to the value of a fiat currency or commodity, such as the US dollar or gold. Total Value Locked (TVL)  is a metric used to measure the total value of digital assets that are locked or staked in a particular decentralized finance (DeFi) platform or distributed application (dApp).

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