This article was compiled and organized by BlockWeeks
In mid-March, a series of explosions in the U.S. banking sector spread the fire to one of the most core assets in the crypto market—USDC. As the issuer of USDC, Circle holds part of its cash reserves with several U.S.-regulated banking partners, including Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, Signature Bank, Silicon Valley Bank, and Silvergate Bank. According to its latest monthly attestation report as of January, of USDC's total reserves of $43.5 billion, about 77% were short-term U.S. Treasury bonds, and the remaining approximately $9.9 billion (about 23%) was cash held at U.S.-regulated financial institutions.
Circle's reliance on these banking partners goes far beyond "depositing money." It also uses the Silvergate Exchange Network (SEN) and Signature Bank's Signet platform to enable 24/7 real-time payments, so it can quickly move funds and respond to customers' USDC minting and redemption needs. But over the past two weeks, these partners ran into trouble one after another: on March 8, Silvergate announced voluntary liquidation; Silicon Valley Bank experienced a liquidity/solvency crisis and was taken over by the FDIC on March 10; and on March 12, New York state regulators closed Signature Bank, citing systemic risk.
Because part of USDC's cash reserves was "locked" in these institutions, the market immediately began to doubt whether USDC could be redeemed for dollars. On the evening of Friday, March 10, Circle disclosed that it had $3.3 billion in cash reserves at SVB. When the mechanism on which USDC relied to maintain its peg—full collateralization plus Circle's promise of full redemption at $1—temporarily failed, the price of USDC on external markets such as Curve and Uniswap became highly volatile, falling to as low as $0.88 over the weekend, triggering violent shocks across the entire crypto market, and on-chain trading volume also hit record highs.
Although on Sunday evening the U.S. Treasury Department, the Federal Reserve, and the FDIC jointly announced that all depositors of SVB and Signature (including amounts exceeding the FDIC insurance limit) could retrieve their deposits, and after Circle resumed processing redemptions on Monday, the price of USDC largely recovered to around $1, the impact of this shock on this leading onshore stablecoin is still continuing to unfold.
A Surging Wave of Redemptions: Three Record Highs Broken in Three Days
As the panic caused by the banking explosions spread to Circle, USDC suffered massive redemptions. On March 10 alone, redemption requests totaled more than $2.3 billion. On the night of March 10, Circle temporarily suspended processing new USDC minting and redemptions, further pushing the price down. USDC holders with Circle accounts could still submit redemption requests by transferring to the on-chain Circle address (0x55f…844b8), but due to severe backlogs, many requests were not processed until after the weekend. On-chain minting resumed small-scale activity after being interrupted for more than 26 hours, but it was not until Sunday night that a large mint of 408 million USDC appeared—this was also the largest minting transaction in the previous week.
Even after USDC (largely) restored its peg under reassurance from the Fed/FDIC/Treasury, large-scale redemptions still occurred in the following days. Circle recorded its largest single redemption ever of 656 million USDC (the previous record was 555 million on May 16, 2022). This record was broken the next day by a redemption of 724 million USDC submitted on March 14, and was then surpassed the following day by an even larger redemption of 779 million—these three redemptions were the three largest in Circle's history.
On a net basis, since March 7, USDC supply has decreased by more than $7.2 billion, to about 35.5 billion coins as of March 20, a decline of about 18%. More notably, even as the price of USDC rebounded from its low, the pace of capital outflows continued to accelerate for several consecutive days: from March 11 to March 19, USDC's average daily net outflow was about $909 million.
Chain Reaction: Curve 3pool Drained, USDT Once at a 15% Premium
USDC is a foundational asset of DeFi. Compared with Tether, the largest stablecoin by market cap, which mainly serves as a trading tool on centralized exchanges, USDC is used much more heavily in DeFi—nearly 40% of USDC supply exists in smart contracts. Precisely because of this, USDC's depegging implicated a large number of stablecoins: various redemption or exchange mechanisms linked USDC to other stablecoins, and even indirectly created linkages among stablecoins through USDC.
When the market began to worry about USDC's collateral status, traders rushed to Curve seeking "exit liquidity"—that is, the 3pool composed of USDC, USDT, and DAI. Traders exchanged USDC and DAI for USDT, causing a severe imbalance between supply and demand in the pool, draining USDT and causing its price to deviate significantly, which in turn triggered further panic selling and formed a negative feedback loop.
When the 3pool imbalance was at its worst, the total amount of USDT in the pool fell to $5.6 million, accounting for only 1.39% of the entire pool, the lowest level in history; at that time, the price of USDT was close to 1.15 USDC. The violent fluctuations in stablecoin prices drove Curve to set a single-day all-time trading record of more than $6.04 billion on March 11, more than double the previous record of $2.87 billion set on October 26, 2020.
DAI Suffers a Backlash: MakerDAO Urgently Pulls the Brake
Maker's DAI relies heavily on USDC as collateral. Before the depeg, USDC accounted for about 40% of DAI's collateral assets, and more than 63% of DAI was generated directly using USDC (the proportion is even higher if indirect support through various LPs is included).
With the support of Maker's Price Stability Module (PSM), DAI can be exchanged 1:1 with other stablecoins, so when the price of USDC fell below $0.90, it also dragged down DAI (and to a lesser extent GUSD). The original purpose of the PSM was to let DAI benefit from USDC's price stability, but this time, this tool at least at the price level caused a backlash against DAI (FRAX is also highly dependent on USDC collateral, and its price fell accordingly). However, during the three days from March 10 to 13, because USDC holders used the PSM in large numbers and DAI's price was higher than USDC, Maker's reliance on USDC instead drove DAI supply to expand significantly by 1.44 billion coins (+29%), from 4.91 billion to 6.35 billion.
The daily minting limits of the USDC PSM (950 million DAI) and GUSD PSM (50 million DAI) were quickly reached, and Maker governance immediately submitted an emergency proposal to introduce a "circuit breaker" to disable the PSM and take other measures to consolidate DAI's peg. But the share of USDC collateral in DAI quickly rebounded from 38% to more than 60%, erasing the results of MakerDAO's five months of efforts to diversify its collateral assets.
On March 11 (Saturday), an emergency executive vote approved a package of adjustments: raising the USDC→DAI exchange fee (tin) for the USDC PSM from 0% to 1%; lowering the USDP→DAI exchange fee for the USDP PSM from 0.2% to 0%; raising the DAI→USDP exchange fee (tout) for the USDP PSM from 0% to 1%; lowering the daily minting limit of the USDC PSM; restricting new DAI issuance by LPs using USDC; and adjusting parameters to make new DAI issuance backed by USDP more attractive.
The Stablecoin Landscape Changes: TUSD Becomes the Biggest Winner
Significant changes occurred among leading stablecoins. Since USDC supply contracted sharply on March 8, the supply of stablecoins such as USDT, DAI, TUSD, and LUSD has increased. In terms of relative growth, TUSD benefited the most—as Binance listed multiple TUSD spot trading pairs and implemented zero maker/taker fees, its supply expanded by 61%. At the public chain level, Tron and Arbitrum were among the few networks with growth in stablecoin supply, while stablecoin supply on Solana and Avalanche saw double-digit declines.
At the same time, some protocols are also reallocating: after Paxos was required to gradually phase out BUSD (previously the related assets were collateralized by BUSD and USDC), some projects turned to eUSD—a more risk-resistant stablecoin collateralized by a basket of stablecoins lent on Compound and Aave.
The Price of Transparency: The Structural Weakness of Centralized Stablecoins
Overall, the USDC depegging incident both highlighted USDC's influence on the crypto market and exposed the structural fragility of the DeFi market—excessive reliance on a single centralized stablecoin.
Although Circle has taken extraordinary measures to improve USDC transparency (such as monthly attestation reports, breakdown of Treasury holdings, and more frequent balance updates), there is still room for improvement. Even with monthly attestations, as of March 20, its latest submitted report was still data as of January 31, 2023, making the information outdated and unhelpful for assessing USDC's risk profile at that time. Disclosing the CUSIPs of U.S. Treasury bonds is a useful practice for improving transparency, but in this incident, the cash portion, which accounted for 25% of USDC reserves, lacked visibility, including the specific amounts held with each banking partner. Crypto-collateralized stablecoins such as DAI and LUSD have an advantage in reserve transparency—anyone can view all information in real time through on-chain data, though of course they each have their own risks.
In the DeFi market, teams such as Aave, Compound, and Maker quickly took action through governance, playing a key role in mitigating some risks. Ideally, these events should serve as a wake-up call for DeFi protocols: they should not place all trust in a single asset like USDC (for example, limiting PSM size, increasing collateral diversification, and no longer hardcoding USDC as $1). As with every failure in the crypto industry, risk management is expected to improve along with better security practices. Hard times forge hard money, and stablecoins that withstand the most severe tests are more likely to win share and ultimately prevail.
