Coin Metrics' State of the Network: Issue 98
Tuesday, April 13th, 2021
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Weekly Research Focus
DAI’s Stabilizing Growth
Stablecoins are a key part of the crypto ecosystem. But despite the name, stablecoins aren’t always stable. On April 3rd Fei Labs launched FEI, a new algorithmic stablecoin. But just a week after launch price dropped as low as $0.75, after over $1B was trapped in the protocol.
FEI is far from the first stablecoin to lose its stability. Following the sudden crypto price crash on March 12th 2020, many of the major stablecoins were thrown off their $1 price peg. As investors rushed to safety, demand for stablecoins suddenly increased, sending the price of many stablecoins above $1.
DAI, the decentralized stablecoin launched by MakerDAO, was hit particularly hard during March 2020. Events leading up to the crash led to an extreme ecosystem-wide shortage of DAI which caused DAI’s price to increase to over $1.06 on March 12th. DAI stayed well above its $1 peg for a good part of 2020, especially compared to the other major stablecoins.
That said, DAI’s price has stabilized since Dec. 2020. Over the last four month’s DAI has been noticeably closer to its $1 price peg. DAI’s price stabilization has also corresponded with a steep growth in supply.
Note: Supply figures only include the ERC-20 version of DAI.
DAI’s price first began to stabilize in late September after DAI to USDC-A collateralization ratio was lowered from 110% to 101%. This meant that users could lock 101 USDC to mint 100 DAI, which helped pull DAI’s price down to under $1.01. Shortly after DAI (ERC-20) supply grew to over 600M and price began to stabilize and descend towards the $1 peg.
Then in late December 2020, MakerDAO developers introduced the Peg Stability Module (PSM) which allows users to swap other stablecoins for DAI at a fixed rate. Initially only a USDC-backed PSM was deployed, but other stablecoins may be added in the future. The USDC-backed PSM allows users to swap 100 USDC for 100 DAI (minus fees), which effectively prevents the peg from moving above $1.001. Since the introduction of the PSM DAI’s price has maintained its tightest peg ever.
These new mechanisms help facilitate arbitrage between stablecoins. Since most major stablecoins are pegged to $1, if price fluctuates too far above or below $1 an arbitrage trader can earn a profit. This ultimately helps align the price of different stablecoins and pull them all towards $1.
With the growth of DeFi an increasing amount of arbitrage is also occurring on-chain on decentralized exchange (DEXs). Uniswap’s DAI/USDC pair increased in terms of both liquidity and volume starting in September 2020. Liquidity had a huge surge in late December as the PSM was introduced and DAI supply began to take off.
Uniswap DAI/USDC trading volume also hit all-time highs in late 2020 and the beginning of 2021.
DAI’s on-chain transfer value began to grow in summer 2020, with the rise of DeFi. Although not all of this is due to the PSM and arbitrage, this is an additional sign that DAI on-chain activity has increased as price has stabilized.
Stablecoins are a crucial part of DeFi and crypto at large. DAI plays a key role in many different protocols and applications, and improved DAI stability is a good sign for the stability of the entire ecosystem. As the infrastructure continues to mature, DAI will hopefully continue to mature along with it and stay on its path of consistent stability.
Network Data Insights
Ether (ETH) market capitalization grew 6.2% week-over-week, with price topping $2K once again over the weekend. Most ETH usage and economic metrics were also up on the week with active addresses growing 3.4%. ETH adjusted transfer value saw a 35.6% jump week-over-week, a portion of which was due to the launch of the FEI protocol which accumulated over $1B worth of ETH.
Bitcoin (BTC) also had a strong week with most metrics in the green. Usage continued positive growth with active addresses up 4.8%. Adjusted transfer value also increased by 16.4% for an average of $13.7B per day, maintaining a lead over ETH.
The amount of Tether launched on Tron (USDT_TRX) is catching up to the amount of Tether launched on Ethereum (USDT_ETH). As of April 11th there’s 21B USDT_TRX, compared to 23.42B USDT_ETH. USDT_ETH currently has about 52.7% of the combined supply share of the two, as shown in the following chart.
But despite similar supplies, USDT_ETH and USDT_TRX seem to have different use cases. USDT_ETH appears to be used for relatively large transfers, while USDT_TRX is typically used for smaller transactions. For example, USDT_TRX’s median transfer size is currently $263 compared to $1,498 for USDT_ETH. This makes sense given that Tron’s fees are miniscule compared to Ethereum’s, making it more cost effective to send small transfers.
Despite having lower median transfer value, USDT_TRX has passed USDT_ETH in terms of daily active addresses. As of April 11th USDT_TRX has 262.54K active addresses compared to 89.65K for USDT_ETH.
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
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