The supply of algorithmic stablecoins plunged after UST de-pegging in May 2022

If there was one silver lining that came out of 2022, it was the revival of stablecoins — in an otherwise extremely painful year for digital assets. I covered the details of the cryptos' yearly performance in my earlier piece. Even in stablecoins, the market dominance wasn’t across the board. Most of the dollar-pegged stablecoins flourished as the investors fled to the safety of the Greenback (USD). 2021 was the year where fiat-pegged, Algo-based, and CDP stablecoins all flourished across the board.

This year, however, algorithmic stablecoin fell off in favor after the TerraUSD stellar collapse in May 2022. Earlier in December, Vader Protocol announced it would shutter its algorithmic stablecoin project — owing to design similarities with Terra’s UST. This came in the wake of the already collapsing algorithmic stablecoin supply. As you can see in the top chart above, the subcategory that once made up 12.2% of the stablecoin market has now dwindled to 1.6% of the supply.

At its peak, in May 2022, just before the UST contagion event, there was nearly $22.5 billion worth of algorithmic stablecoins in circulation. The Terra de-pegging was the biggest catalyst for the fall of 10% down to 2% of the stablecoin market share within a week. Currently, FRAX and USDD are the top algorithmic stablecoins remaining.

In addition to the market share, the use of algorithmic stablecoins has also dropped dramatically (bottom chart above). In December 2022, the daily average number of transactions decreased by 92% compared to December 2021, and 95% compared to May 2022, with a total of 151 transactions per day. Additionally, the daily amount transacted dropped significantly from $21.9 billion in December 2021 to only $175,525 in December 2022.

Lower algorithmic stablecoin activity has translated into other sub-categories taking their place — Fiat-backed stablecoins have experienced the greatest benefit and now represent more than 92% of the Ethereum stablecoin market, up from 85% at the beginning of 2022. The struggle for an experimental design like the algorithmic stablecoin remains an elusive dream, as weary investors choose stability over unproven designs.

 Originally Published on Medium

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