I’ve seen some confusion about USDM supply, which is dropping on many dashboards. TLDR; this is healthy for a new ecosystem right now. But the explanation is long (although not complex):

We always talk about “money” as if that’s a simple definition but economists have multiple definitions, each measuring a different set of assets considered part of the money supply.
You may have heard terms like M1 money supply or M3 money supply if you read financial news a lot or took economics in school.
At the bottom of the stack, the narrowest definition is M0 (which stablecoin issuer @m0 takes its name from). This is physical currency + your banks’ balance at the central bank.
⬆️ This is what most dashboards will show you for a stablecoin’s supply, because it’s relatively easy to count.
Just add up the tokens, and of course central banks aren’t generally holding untokenized balances at Circle or Tether or Paxos.
While this is a useful number, it excludes most of what we would in everyday usage call “money”.
M1 is the next layer in the money stack, and includes M0 + demand deposits. When you say you have $500 in your checking account, you’re including M1 in your definition of money.
⬆️ This is where a deposit into @aave, @Morpho, or other short-term markets sits in the money stack.
Quickly going through the other layers for your own curiosity:
M2 = M1 + savings accounts + money market funds
M3 = M2 + time deposits + repo agreements + short-term debt (usually up to 2 years)
As of today, the M1 supply of USDM > M0 supply. Generally this is always the case with any currency, since it is what happens when fractional reserve lending, like on Aave, Morpho, Euler, Compound, or a traditional bank occurs.
In the case of USDM, the M0 supply has shrunk while M1 has continued to grow. And remember that M1 cannot unwind without M0 (but can persist without it as long as the debt is healthy).
This is due to a cross-chain carry trade. USDM has become a more attractive funding currency than USDC, and debt is being refinanced.
This should be good news to those worried about USDM demand being purely for looping on the MegaETH Aave - it’s a second use case.
Because Aave rates rise as utilization increases, at some point USDM will cease to be a good funding currency, and we’ll be at an equilibrium.
This is growing pain of a healthy path for a new stablecoin (what’s the alternative, that no one wants to even borrow it?) - and is mostly a function of concentration on the Aave market.
As USDM is accepted into other apps and another lender or three steps in for a piece of the market, I would anticipate less volatility in M0 supply of USDM, while M1 continues to grow at a more sustainable pace.