Stablecoins have been integral to the crypto-industry for the past two bull cycles, with their role in injecting liquidity very understated. Stablecoins’ utility is evident in other aspects of the industry too, with DeFi sharing an interoperable relationship with stable assets. However, the role of these stablecoins changed over the past few months, especially when looked at alongside Ethereum.
How did we look at stablecoins’ position before this?
One major bullish narrative associated with stablecoins is the amount of reserve held on exchanges during a bear market. A common belief is that investors refusing to cash out during a market fallout is a sign of their patience. These investors wait for the next bullish wave and re-invest in the assets when the tides change direction.
However, there is a key change taking place with respect to USDT based on Ethereum.
Source: CryptoQuant
According to the attached chart, the amount of USDT [ETH] held in the wallets of all exchanges dropped over the past few weeks. Does this project an outright bearish move? Not yet, because these stablecoins are likely flowing into the DeFi space.
Now, during bear markets, stablecoin reserves sit on exchanges and do not incur any value. It is in this context that the emergence of lending markets makes sense.
AAVE, CURVE, Compound – Hosting liquidity pools?
According to Glassnode, the demand for risk-off capital in the market rose recently. In light of AAVE, Curve, and Compound‘s dominance in hosting stablecoin liquidity pools, the current trend of depositing stablecoins to earn yield appears to be a better option than leaving stablecoins on centralized exchanges waiting for buying opportunities.
Source: Glassnode
This is perhaps the first such instance in a bear market where investors are taking advantage of both sides of the trend. Allocators turning to DeFi during a period of downturn is a sign that DeFi will remain relevant going forward too.
How does it help Ethereum?
Ethereum will remain the base collateral for all these DeFi assets. Additionally, Ethereum is maintaining liquidity in the market too, but it is not a like-for-like trigger scenario. The one thing to be noted about the current stablecoin flow into DeFi assets is that the ball continues to roll in favor of consistent profitability during a bearish market.
Such a market dynamic allows some market investors to not be as bearish, keeping them within the market to create a bullish squeeze when the time comes. These allocators do not hesitate and usually make the first move during recovery, with the retail market following them. It is a win-win situation for Ethereum and other altcoins in the space too.
