The Reshaping of the Stablecoin Market: USDC Strives to Become a Bridge Between Encryption and TradFi

The competitive landscape of stablecoins has undergone significant changes in 2021. While a well-known stablecoin still dominates in exchanges, USDC has surpassed it in the DeFi market. Data shows that USDC is favored by DeFi users. Meanwhile, stablecoins are no longer just a tool for crypto users to avoid risks, but are becoming an important and compliant channel for traditional financial funds to enter the crypto and DeFi markets.

Stablecoins have always been the focal point of the encryption market, playing a key role in the decentralized cryptocurrency field with a relatively centralized mechanism, especially in trading and transfer scenarios on centralized exchanges, helping users reduce the volatility risk of crypto assets and lock in profits.

The status of stablecoins has been recognized by US regulatory authorities. In January 2021, the Office of the Comptroller of the Currency allowed US banks to use USD stablecoins for payments and settlements, including the issuance of stablecoins and their conversion to fiat currency.

In this year's strong encryption market, the demand for stablecoins as the main settlement asset has surged. Major issuers have frequently increased issuance, and the total market value of stablecoins has grown from 28 billion USD at the beginning of the year to 108.1 billion USD today.

Despite the market's anticipation for a new stablecoin to replace the leading position of a certain well-known stablecoin to mitigate potential risks, this stablecoin still maintains an absolute advantage on centralized exchanges due to user habits. In May of this year, the issuer of this stablecoin disclosed reserve data for the first time, showing that nearly 76% is in cash or cash equivalents.

However, the status of this stablecoin in the overall encryption market has changed. Currently, its total issuance is $64.3 billion, nearly tripling since the beginning of the year, but its share of the total stablecoin issuance has dropped from 75% at the beginning of the year to about 58%. This is largely attributed to the explosive growth of the DeFi market.

In the DeFi market, most projects tend to use ETH and USDC to establish trading pair liquidity pools due to compliance and security considerations. USDC has become the preferred stablecoin for most DeFi users and project parties.

Data shows that in the liquidity pool of a well-known DEX, the locked amount and trading volume of USDC are significantly higher than other stablecoins. Similarly, on the lending platform with the highest TVL, the deposit and borrowing amounts of USDC also far exceed those of other stablecoins. These data reflect that USDC has become the most favored stablecoin asset among DeFi users, playing a key role in trading and lending activities.

USDC is not satisfied with its current role as a medium in the DeFi ecosystem and hopes to become the main channel for funds entering the encryption and DeFi markets in the traditional financial market. USDC has always prided itself on compliance, with its issuer obtaining regulatory licenses in multiple countries and regions.

In March of this year, a well-known payment company announced that it would allow transactions on its payment network to be settled using USDC. In May, the issuer of USDC secured $440 million in funding, marking the highest single financing amount in the history of the encryption industry. Subsequently, the company accelerated the market promotion of USDC aimed at financial institutions.

In June, several institutions launched USDC savings yield products with an annualized return of about 4%. The sources of income for these products vary, with some coming from institutional lending and others from DeFi protocol yields. At the same time, the issuer of USDC also launched a DeFi API to facilitate institutional users' quick access to various DeFi protocols.

In contrast, the interest rates for traditional bank savings accounts in the United States have long been at low levels, with annual yields on small deposits typically not exceeding 0.60%. Users of TradFi entering the DeFi market often face higher barriers, such as private key management and on-chain interactions. These new products simplify the operation process, allowing users to enjoy higher returns simply by transferring USD into their accounts.

It is expected that this will attract a large influx of funds from the TradFi market into the encryption market, injecting more USD liquidity into the DeFi market. Industry insiders believe that this marks the beginning of institutionalization of DeFi, similar to the initiation of the previous liquidity mining craze.

Driven by multiple demands, the supply of USDC has increased nearly 20 times since the beginning of this year, rising from 1.3 billion USD to 25.1 billion USD. In the coming months, USDC will also be issued on multiple blockchain networks, further expanding its advantages in the on-chain DeFi market.

Currently, the pattern of stablecoins in the encryption market has become clear. The two major stablecoins drive market development with a dual-core approach, one primarily serving the trading and transfer scenarios of centralized exchanges, while USDC aims to become the main medium connecting TradFi and the encryption world, enhancing the adoption rate of cryptocurrencies by financial institutions and helping traditional funds enjoy DeFi services in a compliant and convenient manner.

Other stablecoins such as DAI and BUSD also have specific application scenarios and positioning. DAI mainly serves the various needs of DeFi native users, while BUSD acts as the primary stablecoin settlement asset on specific exchanges and public chains. Other stablecoins exist more as market supplements.

With the continuous maturation of the encryption market, the role of stablecoins is becoming increasingly important. USDC has now become the benchmark in this field and is driving development, similar to a well-known exchange that, although not the highest in trading volume, has become the most influential exchange in the market due to its compliance.