For the boss of Binance, this situation could benefit stablecoins backed by currencies other than the dollar. At the same time, a return to favor of algorithmic stablecoins seems possible.
After a first storm last May, the stablecoin ecosystem is once again making headlines. Today, three stablecoins backed by the US dollar dominate the market: USDT of Tether which weighs 69 billion dollars in capitalization, USDC and its 41 billion dollars and finally BUSD of Binance (14 billion dollars). But not for very long.
If the announced end of the BUSD already benefits these two rivals, and in particular the USDT of Tether, other players could well benefit from it. As a reminder, the company issuing the BUSD stablecoin, Paxos, received an order from the US regulator to stop issuing this token as of February 21. According to data from specialist platform Nansen, Binance has seen $788 million in net BUSD outflows from its platform since Tuesday, resulting in $2.7 billion in outflows versus $1.97 billion in inflows.
As the BUSD will gradually disappear, what will the stablecoin market look like? Binance boss Changpeng Zao (CZ) tried his hand at predictions about their future.
“The amount of pressure on stablecoins is quite significant. Multiple agencies are putting pressure on them,” the latter said during a Twitter Spaces on Tuesday, reports Bloomberg. “This will shrink the dollar-backed stablecoin market, so the industry is exploring its options.”
The stablecoin ecosystem could see more stablecoins based on “euro or whatever, Japanese yen, Singapore dollar”, he added.
Return of algorithmic stablecoins?
In addition, the sanction of the American regulator with regard to Binance’s BUSD could mark the return of algorithmic stablecoins, considers CZ. Yet everyone remembers the crash of last May, with the collapse of the UST algorithmic stablecoin of the Terra Luna ecosystem, which did a lot of damage in its path.
As a reminder, a stablecoin (or stable cryptocurrency) is a crypto-asset (or digital asset) that is pegged to a fiduciary currency such as the euro or the dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying of the stablecoin.
When the price of the underlying goes up or down, the value of the stablecoin must align with it. The promise is to permanently maintain the parity, for example 1 UST = 1 dollar. This peg to a currency is also called a “peg”. When there is a gap between the value of the underlying and that of the stablecoin, it is called a “de-peg” or “loss of parity”.
There are two types of stablecoins, the classics which represent around 90% of stablecoin trading today, the main ones of which remain USDT, USCD and BUSD before its end. And next to it, the so-called “algorithmic” stablecoins, which work with reserves placed in assets other than the underlying to which it is pegged, for example digital assets. These algorithms must make it possible to maintain parity in theory… Indeed, in a context of sharp fall in cryptocurrencies last May, and in particular for the Luna cryptocurrency, the demand for sales was so strong on the latter that the UST algorithms did not withstand this volatility shock.