Decentralized Exchanges See Trading Volume Surge Amid Stablecoin Crisis

Decentralized exchanges (DEXs) experienced a significant increase in trading volume during the recent stablecoin crisis, which saw the value of the second-largest stablecoin by market capitalization, USDC, plummet to an all-time low of $0.87 before recovering. The crisis was prompted by Circle's disclosure that $3.3 billion (approximately 8% of its total reserves) was held at the now-defunct Silicon Valley Bank (SVB). 

The crisis began when US regulators shut down SVB, marking the second-largest collapse of a major US bank in history. The closure was triggered by a panic-induced bank run. SVB was popular among the venture capital and cryptocurrency industries due to its strong ties and friendly stance towards digital assets. The sudden collapse of SVB put immense pressure on Circle and its stablecoin, USDC.

The situation was further exacerbated when DAI, a cryptocurrency-backed stablecoin, lost its peg as a significant portion of it is backed by USDC. The crisis was eventually resolved after the Federal Deposit Insurance Corporation (FDIC) stepped in, assuring depositors that they would be reimbursed.

Before the FDIC's intervention, traders rapidly moved their funds, further intensifying the crisis. Matters worsened when Coinbase, a member of the ENTRE Consortium behind USDC, announced that redemptions to USD were halted over the weekend. This development likely prompted traders to flock to decentralized exchanges in search of alternative options.

According to CryptoCompare, on March 11th, DEX trading volumes increased by a staggering 249%, rising from $7.14 billion to $25.0 billion. Concurrently, Ethereum's gas fees, which are indicative of network activity, reached a peak of 101 Gwei, marking the highest level in 2023 thus far.