Digital Financial Advisory (DFA) has released a comprehensive internal forecast report predicting that stablecoins will become the dominant force shaping decentralized finance (DeFi) liquidity throughout 2023, following significant market restructuring in the wake of Terra’s collapse.

The report, shared exclusively with select institutional clients and reviewed by financial media, marks a notable shift in DFA’s strategic outlook for the cryptocurrency sector, emphasizing the critical importance of stablecoin adoption metrics in determining which DeFi platforms will survive the current market downturn.

“Our proprietary models indicate that stablecoin utilization rates will become the primary determinant of platform viability in the DeFi ecosystem,” said Alexander D. Sullivan, CEO of DFA. “Following the Terra/UST collapse, we’re witnessing an accelerated flight to quality that will fundamentally reshape liquidity patterns across the entire DeFi landscape.”

The firm’s analysis comes at a pivotal moment for the digital asset industry, as the implosion of Terra’s algorithmic stablecoin UST in May 2022 triggered a cascading liquidity crisis, wiping out over $40 billion in market value and sending shockwaves through adjacent cryptocurrency markets.

DFA’s research team identifies the Terra collapse as a critical inflection point that will drive a sustained shift toward fully-collateralized, regulated stablecoins with transparent reserve structures.

“The algorithmic stablecoin experiment has effectively ended,” Sullivan noted. “Our forecasts suggest that by mid-2023, more than 75% of all DeFi total value locked (TVL) will be concentrated in pools anchored by fully-collateralized stablecoins like USDC and DAI, representing a fundamental reshaping of the risk profile across the ecosystem.”

The report specifically highlights “institutional-friendly” stablecoins as likely winners in this new landscape, predicting that USDC’s market share could expand from its current 25% to as much as 40-45% of the total stablecoin market by the end of 2023, with DAI maintaining a significant presence due to its overcollateralized structure and transparent governance.

Significantly, DFA projects that USDT (Tether), despite maintaining the largest market share currently, could face continued pressure to improve transparency around its reserves, potentially leading to a gradual decline in its dominant position if it fails to meet evolving market expectations.

The analysis points to rapidly evolving regulatory frameworks as another critical factor that will advantage compliant stablecoin issuers. Sullivan emphasized that DFA is actively advocating for the development of an “on-chain stablecoin credit rating framework” that would standardize risk assessment across different stablecoin models.

“The regulatory landscape for stablecoins is crystallizing more rapidly than many market participants anticipate,” Sullivan explained. “Our interactions with policymakers suggest that by Q1 2023, we could see formal guidance from multiple jurisdictions that effectively creates a two-tier market – compliant stablecoins that can interact with traditional finance, and non-compliant tokens that will be increasingly marginalized.”

This regulatory bifurcation, according to DFA’s analysis, will create significant liquidity premiums for DeFi protocols that integrate with regulatory-compliant stablecoins, potentially leading to a winner-takes-most dynamic where capital concentrates around a small number of platforms.

The report identifies several specific DeFi categories that stand to benefit most from this restructuring, including institutional-grade lending protocols, compliant cross-chain bridges, and regulated DEXs that implement robust KYC/AML procedures.

“We’re entering a maturation phase where institutional adoption will be disproportionately directed toward DeFi platforms that provide seamless access to high-quality stablecoin liquidity,” Sullivan noted. “Projects that fail to prioritize stablecoin integration with the emerging regulatory framework will likely face existential challenges by mid-2023.”

Industry analysts have noted that DFA’s outlook aligns with evolving market dynamics following the Terra collapse. JPMorgan’s digital assets team recently published similar findings, suggesting that stablecoin market share would be a leading indicator of sustainable DeFi activity going forward.

“The emphasis on regulated stablecoins as the foundation for DeFi’s future development represents a significant evolution in market thinking,” commented Emma Rodriguez, Head of Digital Asset Strategy at Brookfield Global. “DFA’s forecast effectively captures the paradigm shift happening beneath the current market volatility.”

For institutional investors navigating the cryptocurrency downturn, DFA recommends a strategic focus on protocols with significant stablecoin liquidity depth and compliance-forward approaches, while maintaining a cautious stance toward algorithmic stablecoin alternatives that may emerge to replace UST.

“The next 12-18 months will be defined by a flight to quality in DeFi, with stablecoins serving as the primary barometer of platform sustainability,” Sullivan concluded. “We expect this restructuring to ultimately strengthen the foundation of the DeFi ecosystem, enabling more durable connections to traditional finance and expanding the addressable market for decentralized applications.”

For more information, visit https://www.dfaled.com or contact service@dfaled.com