When summer started in earnest this year, the second biggest dollar stablecoin, USDC, started losing market share. It was a trend change from a years-long uptrend versus USDT. People were already preparing for 'the flippening': the moment where USDC would surpass the original stablecoin in market cap. What's going on?

USDC was the rising star among the US dollar stablecoins. As recent as January 2021, it had a total circulating supply of only about 4 billion dollars, compared to 21 billion for USDT. Only a year or so later, in March 2022, USDC accounted for 52 billion dollars, having grown much faster than USDT, which at the time had a total supply of 80 billion.

Market panic

Then, after the market panic of the Terra/Luna crash, people tried to get rid of their USDT. They feared that USDT wouldn't be able to keep the dollar peg (which in the end it held quite comfortably). People fled to USDC, considering it a safer bet. USDC has since its inception been more compliant with regulation, and more transparent to auditors about its collateral (mostly 'real' dollars and American government bonds).

But since July, the above-mentioned trend change took place: USDT was stabilizing around 67 billion while USDC has declined from 55 billion to 43 billion. Let's look at some reasons and draw some conclusions.

Reason 1: different approaches to OFAC sanctions

When the American government came with its controversial decree to sanction Ethereum addresses that dealt with Tornado Cash, the company behind USDC decided to go along. It froze the USDC in the accounts of the Tornado Cash related addresses. Since, USDC market share on Ethereum has declined by about 3%.

Tether, the company behind USDT, has taken a different approach. The stablecoin issuer says it won’t blacklist addresses unless law enforcement specifically asks it to do so. Which it hasn't, apparently. Apparently, traders have taken notice. Even though the move of Circle is understandable, what will be left of decentralized finance (DeFi) if can be censored by the state? And stablecoins are the backbone of DeFi. The pendulum had started swinging the other way: maybe complying with regulators wasn't necessarily desirable. Owning USDT made renewed sense.

Reason 2: Binance converting USDC to its own stablecoin

A second blow to USDC came when the world's largest crypto exchange, Binance, started to convert stablecoin USDC to its own stablecoin, BUSD. At the time, many thought this would not be bad for USDC. After all, the stablecoin market on Binance would become more liquid, meaning less friction (trading fees) for traders whose starting point is USDC. They could still deposit and withdraw USDC.

But apparently the math wasn't so simple. USDC dominance on Ethereum fell 5% since July; meanwhile, BUSD has increased by the same percentage. This perfect inverse correlation tells you what you need to know about Binance's move. Pretty smart.

Still big in DeFi

So the war is on, and that's probably a healthy thing. Because users have something to choose: the stable enough but slightly 'wildcat' USDT. The thoroughly audited but (too?) compliant USDC and the stablecoin that belongs to the world's biggest exchange (BUSD).

In the meantime, USDC is still unthreatened in the arena that matters most: DeFi. It accounts for roughly three quarters of the volume on stablecoin pools on Uniswap, to name an example.