Real Yield USD — USDC Depeg Retrospective

Seven Seas Capital
3 min readMar 28, 2023

The recent USDC depeg event, which occurred over the weekend of 3/10/2023, posed a genuine test of the Sommelier protocol and RYUSD’s ability to navigate novel market conditions. A banking crisis affecting stablecoin-banking interface translated into a significant deviation from the 1 USD for 1 USDC price target. Amidst the ensuing destabilization across DeFi, Real Yield USD demonstrated the benefits of stablecoin diversification and achieved significantly higher-than-average yields temporarily.

Throughout the event, the Seven Seas team diligently monitored market conditions, analyzing both on-chain indicators such as 3pool composition and off-chain factors like CEX prices and news updates.

The Curve 3pool continues to be an important indicator in reflecting stablecoin market sentiment. The composition imbalance first began gradually and then rapidly took off. One interesting feature of 3pool behavior during this particular event was the initial indifference between USDC and DAI. Both asset compositions initially increased in parallel while USDT decreased (as swappers drained the pool of USDT). However, after a certain point, swappers began fleeing from USDC to DAI once on-chain USDT liquidity dried up.

Curve 3pool asset composition from 3/8/2023 to 3/27/2023. The red shaded region represents the time period between when news of Circle’s exposure to SVB broke and when it became clear depositors would be made 100% whole.

To mitigate risk, the Seven Seas team maintained a diversified portfolio throughout the crisis, allocating 25% to USDC, 25% to DAI, and 50% to USDT. Once it became clear that SVB depositors would be made whole, Real Yield USD began converting both DAI and USDT to USDC to capture the available arbitrage opportunity. A history of every action taken by Real Yield USD can be found on the DeBank view.

Real Yield USD asset composition from 3/8/2023 to 3/27/2023. The red region is the same period as in the above 3pool chart.

Real Yield USD did not quote on Uniswap V3 prior to the news of Circle’s exposure to SVB becoming public (due to reasons unrelated to the event) and continued to refrain from quoting throughout the event. As a general rule, during extreme market events, Real Yield USD ceases quoting on Uniswap V3 to mitigate the risk of significant impermanent loss and ensure the funds remain withdrawable, given that Uniswap V3 represents an illiquid position in Real Yield USD.

Uniswap V3 price on the USDC/USDT 1bp pool exhibited extreme volatility throughout the depeg event.

Over the course of the weekend, Real Yield USD capitalized on lending opportunities by providing USDT on Compound. Many traders employed a levered-short USDT (levered-long USDC) strategy on both Aave and Compound, which resulted in astronomical lending rates. Real Yield USD effectively captured these elevated rates, netting an APY of approximately ~25% over that period.

One surprising development during the event was the extreme short-interest in USDT on both Aave and Compound, resulting in temporary freezes on withdrawals for the USDT markets on both platforms. This situation further underscores the importance of diversification in weathering highly volatile events.

USDT supply rates skyrocketed due to traders going levered-short USDT (levered-long USDC) on both Compound and Aave.

Since the depeg event, USDC prices have almost entirely returned to peg, but the premium on USDT is only slowly decaying. At the time of writing (two weeks after the news of depositors being made whole) USDT is still trading at a premium of roughly 20 basis points. This is likely due to the cost of minting and redeeming USDT resulting in a lack of arbitrage interest. As a result, Real Yield USD is allocating a smaller amount of the portfolio (roughly 25%) to Uniswap V3 as a risk control. We expect that more funds will be allocated to Uniswap V3 as market conditions continue to stabilize.

Overall, the USDC depeg event served as a valuable learning experience, showcasing the robust performance of Real Yield USD during periods of market distress. The event also highlighted the importance of diligent monitoring, strategic portfolio diversification, and adaptability in successfully navigating volatile market conditions. The Sommelier thesis holds stronger than ever.