NYDIG is telling time about one of crypto’s most persistent myths: that stablecoins are tied to the US dollar.
In a postmortem on last week’s $500 billion crypto market selloff, Greg Cipollaro, the Bitcoin-focused financial services firm’s Global Head of Research, pointed to the volatility of purported stable assets like USDC, USDT and Athena’s USDE, which dropped to $0.65 on Binance.
The price fluctuations revealed that these tokens do not operate on fixed pegs, rather they float based on market supply and demand.
“Stablecoins are not pegged to $1.00. Period,” NYDIG’s Cipollaro wrote in a research note. “In reality, stablecoins are market-traded instruments whose prices fluctuate around $1.00 due to trading dynamics.”
He argued that words like “peg” imply a guarantee that does not exist. What appears to be stability is actually just arbitrage: traders buy when the coin drops below $1 and sell when it rises, with issuers offering mechanisms to mint or redeem tokens in response to those moves.
When there is panic, that system can collapse. USDT and USDC traded above $1 during the crash, while USDE, which uses derivative positions to remain “delta-neutral” and generate yield, collapsed. While it performed poorly on Binance – which later resulted in users being compensated – it also saw significant declines on other major exchanges.
The result, he added, is a fragmented ecosystem where even widely used assets can fail in real time, and where users misunderstand the real risks.
There was a better performing credit market during the downturn. Leading DeFi protocol Aave just liquidated $180 million worth of collateral, or 25 bps of its total locked value. NYDIG itself suffered no damage.