Decentralized exchanges (DEXs) have experienced a significant trading volume surge during the stablecoin crisis seen earlier in the week, which saw the value of the second-largest stablecoin by market capitalization, USDC, plunge to a low of $0.87 before recovering,
According to CryptoCompare’s latest Market Analysis blog post, this market USDC’s all-time low, and came after Circle disclosed that $3.3 billion (approximately 8% of its total reserves) was held at the now-defunct Silicon Valley Bank.
Last week, US regulators closed Silicon Valley Bank (SVB), the second-largest collapse of a major US bank in history, due to a panic-induced bank run. DAI subsequently lost its peg as well as a significant portion of the cryptocurrency-backed stablecoin is backed by USDC.
SVB had strong ties to the venture capital industry and was known for being friendly to cryptocurrencies, making it a popular choice among those in the digital asset sector. The sudden collapse of SVB caused significant pressure on Circle and its stablecoin, USDC.
The situation was rapidly resolved after regulators stepped in, with the Federal Deposit Insurance Corporation (FDIC) assuring depositors would be reimbursed. Before the FDIC stepped in, however, traders were quickly moving their funds.
The situation worsened when Coinbase, a member of the ENTRE Consortium that’s behind USDC, noted that redemptions to USD were halted during the weekend. The announcement likely saw various traders move to decentralized exchanges in search of other alternatives.
Per CryptoCompare, on March 11th, DEX volumes increased by 249%, rising from $7.14 billion to $25.0 billion. Additionally, Ethereum’s gas fees, which reflect network activity, reached a peak of 101 Gwei, marking the highest level in 2023 so far.
CryptoCompare’s report details that recent events have highlighted the heavy dependence of crypto on the traditional financial system and exposed issues with centralized stablecoins, raising questions about the fragility of crypto, as the largest stablecoins are vulnerable to problems in traditional finance.
Circle, it adds, has shown effective management of its collateral reserves, with 77% held in short-dated Treasury Bills at BNY Mellon and the remaining cash now secured. This demonstrates a sensible and efficient reserve system that inspires confidence in Circle’s ability to navigate future issues with traditional banking.