DAI on the Market (May 13)

    Explaining the changes in $DAI market cap

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    DAI is an algorithmic stablecoin that is backed by an overcollateralized basket of crypto tokens including $wBTC, $ETH, $BAT, and $USDC among others. We want to analyze the market capitalization of DAI and try to find explanations for any observed trend.

    The market cap is the circulating supply denominated at the current $USD price of the token. Since $DAI is pegged 1:1 to $USD, market cap = circulating supply. If you look at the chart below, the circulating supply of $DAI has been reducing since February 2022 until a recent bump in May 2022. It dropped from a high of 11.3 B $USD to 7.7B $USD. This decline meant that people were redeeming their $DAI to either enter other stables or to enter other assets.

    However, since the second quarter of 2022, the crypto capital markets have been in a bear run and investors are buying stables to hedge against market volatility. This means that it is more likely that investors are rather moving to other stables instead. But what other stables are more lucrative than $DAI? At the time, $UST was quite a lucrative option with Anchor protocol providing ~20% stable yield which was unheard of. In the same period from February 2022 to May 2022, where $DAI lost most of its market cap, $UST was gaining very fast. $UST moved from $11B to $18B in the space of 3 months.

    For other top stables like $USDC and $USDT, their market capitalization didn't change pretty much within the period $DAI lost much of its market as you can see in the line charts below.

    Owing to the above facts and charts, $DAI's change (decline) in market capitalization was a result of most holders moving to $UST since during that period, $UST was most lucrative to hold due to Anchor's ~20% interest rate until $UST's eventual depeg on May 13, 2022.