Stablecoins flow out of exchanges, move into DeFi protocols

Stablecoins are flowing out of centralized exchanges, possibly signaling a shift in market moods. Stablecoin minting also stalled in the past month, adding to the price pressures on Bitcoin (BTC).

Coinbase was a leader in stablecoin outflows, though Binance was also affected by withdrawals. Even Uniswap saw an outflow of stablecoins. Reserves are now down by 6.7% in a single week. 

Some of the outflows are done in single-client large transactions, possibly serving whale wallets. The outflows arrive after signs of sending Bitcoin (BTC) and Ethereum (ETH) to spot exchanges for profit-taking. 

On Monday, over $990M of stablecoin net outflows occurred across exchanges. This was the largest daily volume of outflows within the last 6 months and the most since April ($898M). Overall, this represents about 3% of all stablecoin liquidity currently on exchanges.

While much… pic.twitter.com/Ze7hDMSAyt

— David Alexander II (@Mega_Fund) June 26, 2024

As with the general market trend, stablecoin outflows started showing up after the peak price action in April. Stablecoin outflows have happened in previous market periods, though with varied effects on the price of BTC and tokens. 

Also Read: Which Stablecoins are Growing Fastest, Boosting the 2024 Bull Market?

Stablecoins are also key in bridging demand for BTC and other assets, especially after the introduction of ETFs. While the ETFs are cash-settled, USDT may be used to bridge the liquidity. 

Withdrawals happen ahead of EU regulations

Some of the stablecoin withdrawals happen ahead of the EU-based MICA regulations, which may limit the usage of some types of stablecoins. Tether (USDT) would be most affected, due to its insufficient fiat reserves. Exchanges like Binance will also discontinue some of the trading services based on USDT, leaving users to search for new markets. 

For most EU-based exchanges, the tokens will still be traded for spot markets, but they may be discontinued for derivative tradings and APR staking products.

From July 1, EU-based exchanges will reconsider the usage of DAI, Frax, GUSD, USDP, TUSD and Tether’s USDT. Some exchanges urge their users to convert all their holdings to other types of tokens that are acceptable to the new regulation. USDC covers all requirements by the EU. 

The recent token moves may be due to attempts to swap out of problematic stablecoins, while seeking sufficient liquidity in other markets. 

Stablecoins redirected to DeFi market

The DeFi market is another hub for stablecoin activity, with demand for USDT as a counterparty. The total market cap of stablecoins is at $161B, of which more than 140B are spread between USDT and USDC. 

Smaller stablecoins, especially algorithmic assets, try to secure pairs with the older, more liquid type of coin, which can also be traded for fiat if needed. For that reason, some of the flows are reaching DeFi protocols. 

In the past week toward the end of June, the profile of stablecoin transfers shifted. The DAI token started moving more actively, reaching the volumes of USDT and USDC. Additionally, DeFi saw increased growth of its native stablecoins, including GHO and Ethena’s USDe. 

Stablecoins like GHO, DAI and USDe still require pairs with USDT to ensure liquidity and stability, while also granting passive earnings. DeFi protocols like Ethena rely on finding a source of returns through trading, then redistributing the income to their stablecoin holders. This strategy is risky, but it still manages to boost the demand for dollar-denominated assets.

Also read: Stablecoins expand volumes by 10X in four years, but Euro stablecoins are still rare

USDe increased its supply by 15,748% in the past quarter, surpassing $3.6B and requiring a similar amount of USDT for trading and swapping. New assets like PYUSD also grew by more than 15,000% in the last three months. 

DAI users also expanded to more than 48K, up by a factor of thousands. Despite this, USDT remains the leader, with 1.34M users. 

Stablecoins increased their supply by 7.9% in the past quarter, but transfers slowed down, corresponding to the market slide in June. The last big transfer of stablecoins was in May, when some traders locked in profits. 

Ethereum still carries 49.5% of all stablecoin issues, with around 35% for TRON. Protocols on Solana rely on less than 2% of stablecoins through bridging or native production. Stablecoins are also the main type of ERC-20 token flowing between Ethereum and top L2 protocols. Most stablecoins are priced in US dollars, while Euro-based assets are barely used and do not flow into DeFi protocols.

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Cryptopolitan reporting by Hristina Vasileva