I was worried about the exposure my farms occasionally had to USDT. Oh boy what a couple of days! But Monday is going to be even more exciting, as banks open on Monday morning. The scenarios:
**Peg restored (Likely/Hopefully)**
As Circle starts redemptions at $1, arbitrageurs will buy below $1 everywhere they can and redeem with Circle. USDC returns from 0.9x to 1. The peg is restored, first of USDC then of DAI.
The order books in the few exchanges with stablecoin/fiat pairs have a few million at each cent (0.94 0.95..), whereas Circle claims its intact reserves are in the tens of billions.
Everything is back to normal, irrespective of what happens with SVB.
**Bank Run Scenarios**
When Circle confirmed they will redeem, it went back to near 0.98 but then… falling again.
The bank run will require people to attempt to redeem 90% of the supply, which is unlikely. Circle then will need to not have the 90% of reserves it claims to, or fail to redeem smoothly. Even rumors, FUD from influencers, or poor communication can trigger bank runs in such situations.
It is hard to estimate just how leveraged DeFi (and leveraged trading itself and margins) is in the assumption of the pegs of USDC and DAI – this explains why it fell so hard even though Circle claims some 10% of its reserves are affected. People don’t want to risk extreme scenarios on bank open Monday. CEX orderbooks are smaller than Circle reserves, but we don’t know just how big the size of stablecoin holders that want peace of mind is (plus its not just USDC anymore), they may redeem. If shorters go all in and panic spreads, Circle’s reserves could be tested.
Still more unlikely but if channels to convert to fiat close (some exchanges already have closed it ‘temporarily’) we could see the reserves tested even if the peg is restored. Panicking people may just want to get to fiat. Lot of stables will move to BTC etc – this probably already explains why BTC price did not nosedive and instead went up.
Did I get something wrong? Anything else that could happen on Monday?
2 thoughts on “Good and bad scenarios for Monday morning? (totally crucial for the future of DeFi)”
I believe the bank run already happened when it fell to 0,88. I don’t see any reason to accelerate again on Monday, as panic is not bound to bank opening times. What is bound to bank opening times is circle’s ability to retrieve liquidity to buy back USDC at 1$ so all in all I think scenario A is going to happen.
FEDs emergency meeting on monday