Key Takeaways:
- Investors exit the US stablecoin market by transitioning into Tether.
- How does the “vampire attack” work?
- What happens if Tether and USDC fall?
YEREVAN (CoinChapter.com) — Circle’s troubled stablecoin USDC lost over 40% of its market cap year-to-date, which dropped to $26 billion. Tether’s USDT, on the other hand, established a fresh high of $83.8 billion.
While market competition could explain the inverse correlation on the graph above, crypto analysts claim there’s a targeted attack on the stablecoin as a part of a larger advantage of minting USDT. Here are more details:
How does the “vampire attack” work?
The pseudonymous @DeFi_Made_Here, a crypto analyst at GoodEntry Labs and Plena Finance, noted how the Circle stablecoin drained from the largest DEX Uniswap in a few days. On Aug 3, the exchange’s total USDC tokens locked stood at 6 million against 105 million USDT.
Come Aug 5, the figures changed to merely 1 million USDC against 78 million USDT.
The analyst then comprised a step-by-step of how the “attack” turns USDC into USDT.
It begins with swapping Tether for USDC, then cashing out, injecting the cash back into crypto, and, finally, printing more Tether coins. @DeFi_Made_Here explained that Circle has no redemption fee, while USDT has a 0.1% redemption fee.
US regulatory pressure against stablecoins is another factor behind the mass exodus of US and foreign investors from the USDC market. Authorities have still not clarified if stablecoins are considered securities or how they will be regulated, leaving the US-based Circle hanging in mid-air.
What if Tether and USDC can’t stand the impact?
In the meantime, another crypto analyst, Aleksandar Djakovic, voiced the same concerns, noting that “problems will arise” when the possibilities of withdrawing dollars from Tether through USDC run out. The analyst cited a larger stablecoin circulation involving Binance, and its CEO, Changpeng “CZ” Zhao.
Djakovic described how, similarly to USDC, some entities converted BUSD to Tether through Kraken and asserted that the ride halted in late July.
Binance is cut from banks, and it is highly possible that Tether will also cut ties with CZ, suspecting that both Binance and CZ will soon come under the scrutiny of the DOJ. Now CZ and Sun might attempt to blame Tether when their users face difficulties accessing dollars.
he said.
The analyst added that Tether does not have the mechanisms to maintain the peg on the exchanges. He asserted that Kraken is too small to absorb any significant impact. That is the main reason for the “arising problems” mentioned above once the USDC channel of minting USDT runs out.
Meanwhile, Circle’s stablecoin has seen its fair share of troubles, including a de-pegging incident in March 2023. According to a Messari report, USDC is an essential part of the DeFi market so a possible crash could complicate the broader market.
It is the most liquid stablecoin on money markets like Aave and Compound and makes the majority of the collateral backing DAI. Therefore, USDC maintaining its peg and available liquidity is crucial to DeFi operations.
