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The Evolution of the Dapp Industry in Response to America’s Banking Turmoil

Validated Project

Last weekend, the markets were shaken by the possibility of a systemic crisis in the banking industry. Silicon Valley Bank (SVB) officially failed, leaving more than $15 billion in potential depth. SVB was the biggest bank for tech startups, including several Web3 or crypto native brands, including Circle, the digital asset firm behind the second largest stablecoin, USDC.

As the insolvency rumours around SVB were confirmed, USDC lost its peg as the fiat-based collateral was compromised. This phenomenon was eerily reminiscent of the 2022 crypto black swan events, such as the collapse of Terra Luna, FTX, and the fall of Three Arrows Capital. As financial regulators responded to cover SVB’s debt, the price of USDC came back almost to parity. Still, USDC’s volatility has caused widespread panic and uncertainty in the market.

Key Takeaways

  • USDC’s instability sent shockwaves across the industry; DeFi’s transaction volume crossed $58 billion across all protocols last weekend.
  • On 11 March, Uniswap V3 reached ATH in daily Unique Active Wallets (67,500) with an average transaction size of $170,080.
  • NFT traders went numb; 11 March was the day with the least active NFT traders (11,440) since November 2021.

1.Silicon Valley Bank: the second-largest banking failure in history

Silicon Valley Bank (SVB) is a financial institution that has been serving the tech industry for over 40 years. With a reputation for providing innovative financial solutions to fintech startups, SVB was considered a pillar of America’s banking community. 

However, last week, the news broke recently that SVB had suffered a significant loss of around $2 billion, resulting from the sale of several securities. The bank was forced to raise additional capital to cover this loss, diluting existing shareholders. But that was just the beginning of the bank’s problems.

It quickly became apparent that SVB had been taking outsized risks to cover its shortfalls, raising moral hazard concerns. This behavior not only put the bank’s future in jeopardy but also put the wider banking community on edge, with concerns over the potential for contagion.

Source: Datawrapper

The fallout from SVB’s troubles was felt across the financial industry, with the 10 largest bank stocks in the U.S. losing $76 billion in market capitalization on Monday alone. This included Charles Schwab and Truist Financial, which saw significant drops of 12% and 17%, respectively. In fact, since the news of SVB’s troubles first broke, this grouping has lost $187 billion in market value. To make matters worse, Signature Bank was also deemed as failed, while Credit Suisse is on a clear downfall.

SVB’s collapse shakes the stablecoin market

Due to their nature, the dapp and crypto industries have a high correlation with macroeconomic events. And SVB’s recent collapse was no different. US-based crypto firm Circle, the company behind the second largest stablecoin, USD Coin (USDC), was one of the most affected by SVB’s fall. The stablecoin lost its dollar peg and hit a record low on 11 March after the company revealed that nearly 8% or $3.3 of its $40 billion reserves were tied up at SVB.

As a result of USDC depegging, panic spread across the crypto community, and its price dropped to a low of $0.8789. USDC supply also recorded a net outflow of 1.90 billion by the end of the day, a decrease of 4.4% overnight from 42.74 billion on 10 March to 40.84 billion on 11 March.

US regulators stepped in on 12 March to backstop both depositors and financial institutions affected by the SVB collapse. Although this news saw USDC regaining its peg, the stablecoin still saw a 9.1% drop in supply and market capitalization. The net outflow in USDC supply reached 3.93 billion, decreasing from 43.43 billion at the start of 10 March to 39.50 billion at the end of 13 March.

Despite this, stablecoins TrueUSD (TUSD) and Dai (DAI) saw significant supply growth over the same period, with net inflows of 57.4% and 27.4%, respectively. Other stablecoins such as Tether (USDT) and Frax (FRAX) also saw slight supply growth. In absolute terms, DAI recorded the biggest gain with a 1.35 billion increase in supply despite also being affected in the process (more on that later).

Source: CoinGecko

However, supply remained relatively unchanged for BUSD, which had been hit by US regulator sanctions on issuer Paxos in February 2023. BUSD supply decreased slightly by 4.66 million (-0.1%).

Fortunately, when U.S. banks opened on Monday, the $3.3 billion USDC reserve deposit held at Silicon Valley Bank was fully available to the public, which helped stabilize the market. Nonetheless, the fall of SVB serves as a reminder of the potential risks involved in the crypto industry and the importance of risk management.

2.DeFi transactions surge amid USDC’s volatility

Decentralized Finance (DeFi) is the dapp category most susceptible to market crashes and uncertainty periods. This was already in display when FTX and Luna collapsed.

On 11 March, following the SVB crash and USDC depegging, the DeFi market experienced a significant drop in its TVL, falling by 9.6% from $79.28 billion to $71.61 billion. The news created panic among investors, leading to a considerable sell-off and a decrease in the TVL.

Fortunately, on Monday 13th, USDC reserve deposit held at Silicon Valley Bank was fully available to the public, which helped stabilize the market. This announcement led to a 13% spike in DeFi TVL, reaching $81.15 billion.

Moreover, the number of unique active wallets (UAW) interacting with DeFi contracts increased by 13%, from 421,026 to 477,094, between March 8 and March 11.

The transaction count also increased by 23%, from 1,356,483 to 1,668,992, during the same period. 

So which DeFi dapps were responsible for DeFi’s on-chain spike? Uniswap V3, one of the most popular decentralized exchanges (DEX), experienced a significant increase in UAW, surpassing 67,000 on Saturday March 11, with a volume of $14.4 billion, the highest figure ever registered for V3. The 67,000 UAW were the highest registered on a Uniswap dapp since summer of 2021.

Moreover, Uniswap V3 avg. transaction size on Saturday was $170,080, almost double than the mean, signaling that Ethereum DeFi whales were highly active during last weekend.

Similarly, the popular DeFi aggregator 1inch Network registered a dapp record of $3.4 billion transaction volume on Saturday, second among DeFi dapps on that metric. 1inch registered over 24,000 UAW on the same day, indicating its growing popularity in the DeFi space.

Additionally, MetaMask Swap, a popular token exchange built into the leading wallet software, also experienced a surge in UAW and volume on 11 March, with 9,100 UAW and $11.9 million in volume, figures we saw at the beginning of January 2023, when the rumours of a MASK token were going strong.

Other DeFi dapps such as 0x, Aave, and GMX also recorded outlier transactional volume.

While banks were closed over the weekend, and traditional investors needed to wait until Monday to act on the news surrounding SVB, DeFi on the blockchain worked 24/7. Because DeFi is open to everybody, and at any time, investors can act rapidly if needed. This highlights the need for open systems and transparency.

3. Blue-Chip NFTs remain a steady investment in a disrupted market

The NFT industry has been on an upwards trajectory for most of 2023,, with sales reaching record highs and mainstream adoption on the rise. However, the collapse of SVB and its impact on USDC was also felt in the market.

The NFT trading volume has decreased by 51% from the beginning of the month, with sales count declining by 15.88%. With all the situation revolving around the volatile stablecoins, NFT traders became less active, with Saturday seeing the least traders (12,000) since November 2021 and the lowest single-day trade count in 2023 (33,112)

It is also interesting to note that despite the low NFT trader activity, the volume was not affected in the same ratio, most probably as Ethereum NFT whales continue farming Blur Season 2.

Despite the overall decrease in NFT trading, the floor prices of blue-chip NFTs like BAYC and CryptoPunks were hardly affected, with only a slight dip below $100,000 on 11 March. The recovery was quick, showing the resilience of these top-tier NFTs.

Other blue-chip collections like the BAYC ecosystem, Azuki, and Art Blocks were hardly affected. On the other hand, Moonbirds and the PROOF ecosystem were hit hard due to their exposure to SVB.

Moonbirds lost 18% of its value since the news hit. However, the floor price has recovered a bit, reaching $6,207 (4 ETH). On 11 March, an Ethereum address sold almost 500 Moonbirds NFTs for losses between 9% and 33%. Selling in batches, the address realized losses between 9% and 33% — with 200 Moonbirds sold for a loss greater than 32%. The transactions all took place on NFT marketplace Blur and amounted to a total loss of more than 700 ETH.

It’s worth noting that Yuga Labs has “super limited exposure” to the failed bank, meaning that the company’s finances will not be significantly impacted by the fallout.

4. Games prove resilience amid turbulent financial times

The video game industry has consistently shown remarkable resilience during economic downturns, leading many analysts to consider it recession-proof. The latest testament was in the most recent recession in 2008, when video game sales increased by 12% while major gaming studios like Blizzard and Nintendo were closing deals and selling consoles with record numbers.

Could we say the same for Web3 gaming? The truth is that it is too early to tell, but different from other dapp categories, activity in the gaming segment registered the least volatility over the weekend.

On-chain gaming activity decreased by only 5% during the weekend, but it was 10% higher than the previous weekend. So while the DeFi traders were highly active amid USDC potential crumbling, web3 gamers kept playing as usual.

At the time of writing, there is no indication of any major game dapp or gaming ecosystem impacted by the American banks’ fallout. Once again proving, that web3 gaming should behave similarly to traditional video games, sidetepping harsh economic periods.

5. Which dapp ecosystems are affected?

The fall of Silicon Valley Bank (SVB) has sent ripples across the cryptocurrency community, affecting several dapp ecosystems. Circle, Paxos, Coinbase, BlockFi, and the Avalanche Foundation have publicly confirmed their exposure positions. Meanwhile, Dapper Labs, Ripple, Yuga Labs, Pantera, Proof Collective, Nova Labs, and Techteryx have only shared that they are exposed, albeit on limited terms.

One of the most significant impacts of SVB’s fall was on the USDC stablecoin. Panic spread across the crypto community, causing the price of USDC to drop to a low of $0.8789. The supply of USDC recorded a net outflow of 1.90 billion, a decrease of 4.4% overnight from 42.74 billion on March 10 to 40.84 billion on March 11. This depegging of USDC has affected several dapp ecosystems, including MakerDAO.

MakerDAO is the issuer of the fourth largest stablecoin DAI, and it currently has over $3.1 billion worth of USDC in collateral backing DAI. To reduce the protocol’s exposure to USDC, MakerDAO executed emergency governance measures on Tuesday. MakerDAO has slashed the debt ceiling on USDC liquidity pools to 0, meaning liquidity providers won’t be able to borrow DAI against those pools.

The move highlights the risk of backing stablecoins with assets that need to be in custody with banks. In this case, USDC slipped below its peg over the weekend after its issuer, Circle, said it held about 8% of assets backing it in Silicon Valley Bank. USDC makes up 40% of DAI’s collateral, making it vulnerable to this type of centralized risk.

Maker reduced the debt ceiling for four Uniswap vaults supporting USDC to 0 as “these collaterals are exposed to potential USDC tail risk”. The protocol expanded support for Paxos’ USDP stablecoin, increasing the debt ceiling for its USDP vault to $1 billion from $450 million, while also reducing fees involved in USDP swaps from 0.2% to 0%.

The opposite is true for Gemini’s stablecoin GUSD, according to the proposal, which argued Gemini has “large uninsured bank deposit exposure, which potentially could be associated with at-risk institutions”. To limit potential losses, Maker is reducing the daily mint limit for GUSD from 50 million DAI to 10 million DAI.

The proposal also aimed to limit the potential for DAI to trade above its peg by reducing the daily mint limit for the stablecoin from 950 million to 250 million DAI tokens. Furthermore, the proposal increases fees for swapping USDC from 0% to 1%, making it more expensive for investors to offload their USDC for DAI. Finally, the proposal argued for temporarily pulling all funds from Aave and Compound to reduce overall risk.

In conclusion, the fall of Silicon Valley Bank has affected several dapp ecosystems, including MakerDAO. The depegging of USDC has caused panic across the crypto community, highlighting the risk of backing stablecoins with assets that need to be in custody of banks. MakerDAO’s emergency governance measures aimed to reduce its exposure to USDC and limit potential losses. While the long-term effects of SVB’s fall are still unknown, it’s clear that it has created a significant impact on the cryptocurrency market.

6. What’s next?

The recent collapse of Silvergate Bank (SVB) has sent shockwaves throughout the cryptocurrency industry, particularly the dapp ecosystem.

USDC, the stablecoin primarily used in the DeFi ecosystem, is relatively illiquid on centralized exchanges (CEXs). However, traders’ uncertainty amid the collapse of SVB caused them to rush to liquidate their USDC holdings. This influx of sell volume overwhelmed order books, causing USDC’s exchange rate to de-peg.

The closure of SVB and Signature Bank has had a significant impact on market liquidity. Market makers in the U.S have been pulling liquidity off exchanges, creating a lack of liquidity across the board. This lack of liquidity has resulted in wild price swings in both directions, further fueled by the recent news of depositors in SVB being made whole.

While the full fallout of the banks’ failure is still unclear, the impact on market liquidity will likely be broad. With the banks’ closure, the crypto industry has taken a step back as it becomes more cut off from the traditional banking system. This could lead to deteriorating fiat on-ramps, creating perfect conditions for volatile price moves.

Despite the market chaos, the crypto industry has made it through a momentous event. Market stability is returning, and as of Monday morning, markets appear to be on steadier ground.

However, the events of the past few weeks have highlighted the need for the crypto industry to become more self-sufficient and less reliant on traditional banking infrastructure. Real-time payments networks, such as Silvergate’s Exchange Network and SigNet, were crucial for managing liquidity and facilitating OTC deals, arbitrage between exchanges, and stablecoin redemptions outside regular opening hours. Without these solutions, the industry must find alternative ways to manage liquidity and fiat on-ramps.

In conclusion, the collapse of SVB and Signature Bank has had a significant impact on the crypto industry, particularly the dapp ecosystem. The events of the past few weeks have highlighted the need for the industry to become more self-sufficient and less reliant on traditional banking infrastructure.

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