Since early May, the overall circulation of stablecoins has decreased by approximately $38 billion, according to the latest data from DefiLlama. At the same time, yields on stablecoin borrowing and lending on decentralized protocols (DeFi), such as Aave, have fallen sharply.
The APR for Binance USD, USD Coin, and DAI loans was 3.5% in May but has since fallen to about 1.5%. Their utilization rates (the percentage taken out as loans vs the total supplied) have also dropped to 30-40%, whereas the optimal level for the protocols is 80%.
One key way that stablecoins differ from fiat deposits is that users must actively lend out or stake their funds on DeFi protocols to earn interest, rather than the money passively accruing interest as it would in a centralized bank. However, since the U.S. Federal Reserve recently raised rates, more people are opting into fiat-dollar interest accounts instead because they can yield higher returns with less risk. Consequently, this has decreased demand for borrowing and lending stablecoins.
The crashing of prominent stablecoins, like algorithmic stablecoin Terra USD and USTC in May, has caused a domino effect that crumbled the $38 billion stablecoin industry. About 50% of this can be attributed to lost confidence after these failures. In August, Acala USD (aUSD) also lost its peg following a protocol exploit that minted 3.022 billion erroneous aUSDs. The community voted to burn most of the “tainted” currency, but some still remain missing.
Algorithmic stablecoins face an uncertain future, with a draft bill in the U.S. House of Representatives proposing to ban them for two years. The community has voted to burn the vast majority of “tainted” aUSDs, but a small portion of glitched funds are still missing and was moved off the protocol.