The Tether Depeg in Summer 2023: What Happened to USDT?
This article provides the cause of the USDT depeg on June 15, 2023, and discusses the aftermath of the event.
On June 15, the stability of Tether's USDT, a widely used stablecoin pegged to the USD, experienced a slight deviation from its usual value of US$1.00. Even though the price dropped to as low as US$0.996 at that time, USDT price recovered to US$0.999 later in the day. However, since USDT is the most popular stablecoin, its slight depeg led to widespread FUD and speculation among the crypto community. So, what exactly happened and did the USDT depeg have any implications for the crypto community as a whole?
What Caused the USDT Depeg
The cause of the fall of USDT price on June 15 was identified as an imbalance within Curve's 3pool, a decentralized stablecoin pool that holds significant liquidity in three major stablecoins: USDT, USD Coin (USDC), and Dai (DAI). The Curve 3pool is the third largest DEX pool, boasting the distinction of being the largest pool for both USDT and DAI. This notable position highlights its significance in facilitating liquidity and trading opportunities for these popular stablecoins within the DeFi ecosystem. Yet, with great power comes great responsibility. Any irregularity or anomaly within this pool can have far-reaching implications, as demonstrated by the events that unfolded on June 15.
The ideal scenario is when each stablecoin holds an equal weightage of 33.33% in the pool. However, on that day, the weightage of USDT in Curve's 3pool increased unexpectedly to over 70%, surpassing its typical weightage of 33.1%. Such a rise in a stablecoin's weightage suggests heavy selling of that particular asset within the pool. Traders, therefore, began selling USDT in favor of DAI or USDC, causing the concentration of USDT in the pool to skew even further.
This imbalance was primarily attributed to a well-known whale address named CZSamSun, which borrowed 31.5 million USDT. The borrower then utilized 17,000 ETH and 14,000 stETH as collateral to convert the borrowed USDT into USDC via the 1inch Network. Subsequently, the borrower made deposits totaling $10 million and $21 million to Aave v2 and v3, respectively. They also obtained a USDT loan of 12 million from v3 and deposited it into v2.
Around 20 minutes later, another address (0xd2...0701) mortgaged 52,200 stETH via Aave v2 to borrow 50 million USDC, taking advantage of the price difference between USDT and USDC.
The slight deviation in USDTs price led to a new yearly high of $1.0034 for the USDC/USDT trading pair on Binance.
USDT depeg led to an ironic new high for USDC/USDT trading pair on Binance (Source: Binance)
At the height of the event, USDT accounted for 73.79% of Curve's 3pool, while DAI and USDC accounted for 13.05% and 13.16%, respectively.
Due to whale’s activities, the weightage of USDT in Curve's 3pool surpassed 70%. (Source: Curve Finance)
The Aftermath of USDT Depeg
Though USDT price quickly recovered to US$0.999 later in the same day, the crypto community, especially those on Twitter, were highly concerned about the potential repercussions as the latest depeg of stablecoin, which happened just three months prior with USDC, had a profound impact on many portfolios and caused a wave of panic among traders. The concerns were especially valid since USDT has witnessed an impressive increase of approximately $14 billion in market capitalization following the incident of USDC.
While definitive conclusions are yet to be drawn, doubts regarding USDT remain.
Tether has consistently claimed that USDT is fully backed by equivalent reserve assets, including cash and bonds. However, it has never undergone a comprehensive audit, providing only attestations regarding its ability to fulfill its obligations. Hopefully, Tether will be more transparent in the future.
The instability of Tether could emerge at an inopportune moment for the broader crypto industry, which has been subjected to intensified regulatory actions from entities like the SEC. Both the CFTC and the SEC have displayed a particular interest in stablecoins. Considering USDC's depeg incident in March, any issues with Tether could potentially trigger a systemic meltdown, amplifying the concerns of regulators and legislators regarding the overall stability of the crypto industry.
Despite its relatively small scale, the incident involving USDT sent shockwaves across the entire market, highlighting the interconnected nature of the cryptocurrency ecosystem. However, the potential depeg of the USDT stablecoin in the future can pose a more significant risk to the overall cryptocurrency economy, especially considering its recent market share gains over USDC.
Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.
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