In the wake of a significant security breach at Solana’s Drift Protocol, which led to $285 million being stolen this month, Tether has seen its dominance over Circle’s USDC strengthen. This shift is evidenced by an increase in USDT’s market cap reaching an all-time high on Tuesday following another major hack.
USDT’s market capitalization grew 2.1% to nearly $188 billion since the attack linked to North Korea, as per CoinGecko data. In contrast, USDC’s total value saw a slower rise of 1.4%, reaching $78.25 billion.
Compass Point analysts suggested in their Tuesday report that outflows from decentralized finance could exert pressure on USDC’s circulation, potentially diminishing the profits gained from its U.S. Treasury backing for Circle and Coinbase.
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“DeFi users might offramp USDC or opt to hold it on exchanges with yield-sharing plans,” they noted. “Both scenarios could negatively impact the gross profits of CRCL and COIN by reducing interest revenue or margins.”
This viewpoint is supported by the quick withdrawal of $1.5 billion in stablecoins from Aave following an attack that exploited Kelp DAO’s restaking protocol to siphon funds, which were then used to borrow on Aave’s platform.
Jake Kennis, a senior research analyst at Nansen, indicated to Decrypt that Tether may have gained during the crisis due to its superior liquidity in centralized venues. “This suggests USDT provides a more immediate ‘flight to safety’ for users looking to exit rapidly from on-chain positions,” he explained.
“Although both stablecoins are well-collateralized, USDT’s extensive exchange integration and larger market share amplify network effects during times of heightened protocol risk,” he added.
Following Drift’s exploit, Circle faces increased scrutiny over its handling procedures. After attackers used Circle’s infrastructure to transfer millions across networks, the company was hit with a class-action lawsuit for allegedly failing to freeze the funds.
Circle CEO Jeremy Allaire defended their actions, pointing out that unilaterally freezing users’ funds presents a significant ethical dilemma. Meanwhile, Drift announced it would cease supporting USDC after Tether committed to fund recovery efforts.
Compass Point analysts have set a price target for Circle shares at $77 with a “Sell” rating. On Tuesday, the shares traded below $98, marking an 8% drop over the past day as reported by Yahoo Finance.
Decrypt has contacted both Circle and Tether for their comments.