It has become increasingly clear that stablecoins have become the dominant means of settling transactions on public blockchains, to the exclusion of native cryptoassets (such as Bitcoin/Ether). This was not in the plan of the architects of these blockchains or their communities.
On-chain data supports this observation: Stablecoins represent about 10% of the total crypto market cap, but they account for about 70%-80% of the transaction value settled on blockchains, according to data presented by Nic Carter at Token2049 (a crypto event where our company was a sponsor).
While most metrics show a stagnation in interest and usage for major crypto use cases, stablecoin usage is high and growing: the value provided by stablecoins has remained fairly stable over the last two years of the bear market, and the number of monthly active users continues to grow. .
According to data collected by Brevan Howard Digital, USDT and USDC continue their upward trend in weekly active addresses, with Tron and BSC being the top blockchains in use. The weekly number of transactions for large stables is approaching an ATH. Ethereum L2s such as Arbitrum, Polygon and Optimism are also gaining popularity as settlement locations for stablecoins. Ethereum L1s used to be the dominant venue for stables like USDC and USDT, but Tron has grown to compete with Ethereum in terms of settled value. It is becoming increasingly clear that Tether on Tron is the most popular digital asset in use worldwide, especially in emerging markets.
Meanwhile, use of native crypto assets like Bitcoin and ETH appears to be declining even as their prices recover. The stories surrounding Bitcoin and Ether have more to do with the rise of financial products such as ETFs, or betting in the case of ETH. They have little to do with the actual use of these blockchains.
The rise of stablecoins thus challenges narratives that cryptocurrency enthusiasts have long believed; namely that the native tokens themselves would become an important medium of exchange. There is indeed some demand for Bitcoin and Ethereum as a store of value, but enthusiasts have long believed that these assets would become a medium of exchange and a unit of account.
However, if people prefer to transact on-chain in tokenized dollars, these stories are called into question. Certainly, in places like the US there are good tax reasons to transact in USD terms – because using a volatile crypto asset can trigger a taxable event that causes the user to make capital gains. Also, users may prefer not to be exposed to unnecessary volatility when entering into a cross-border transaction.
The question arises: are stablecoins parasitic free riders, borrowing from the security of blockchains without giving anything back? Bitcoiners tend to think so, largely discouraging the use of stablecoins on Bitcoin (Tether recently dropped the Omni Protocol on Bitcoin, which was how it came to market in the first place). Bitcoiners tend to think that stablecoins cannibalize Bitcoin’s use as a medium of exchange, in an effort to discourage its use and push users to use tools like Lightning instead. However, Lightning adoption has stalled by most metrics, with a TVL of just $150 million, versus a $125 billion market cap for stablecoins.
However, there are potential changes afoot. Lightning Labs has released their Taproot Assets protocol, which efficiently enables the issuance of assets (including stablecoins) on Bitcoin. Stables could re-enter Bitcoin via such protocols, but would need to build liquidity, tooling and network effects from the start. Bitcoin’s long ideological resistance to stables has caused it to fall behind other blockchains. This is ironic considering the first major stablecoin, Tether, was first issued on Bitcoin via Omni.
The virtue of stablecoins is that they create demand for the blockchain – creating fees needed to pay for mining and therefore security. Bitcoin would be better positioned in the long run if it could capture some of the demand for transactions in stablecoins. However, the country has to walk a difficult path to get there.
In contrast, Ethereum’s leadership recognized that non-native assets would dominate transactional demand in the long term. Through EIP-1559, they created a system that ensured that transactions, even for non-owned assets, would directly result in the burning of Ether. This created an alignment of interests between Ether itself and the use of the Ethereum blockchain, even if it was tokenized USDs that were being traded.
So, higher demand for USD transactions on Ethereum means more capital is returned to Ether holders. Furthermore, Ethereum’s move to staking has created positive carry around the asset, meaning it is now possible to build stablecoins that track the dollar but are entirely based on staked Ether collateral. In these two ways, the rise of stablecoins is not necessarily bad for Ethereum, even if it marginalizes Ether as a medium of exchange.
However, Ethereum does run the risk of a ‘race to the bottom’ when it comes to where stablecoins themselves circulate. End users may not care which blockchain they use, but more about the cost. So Tron is a major recent winner in the stablecoin space, and Solana’s cheap and fast settlement has shifted stablecoin usage there as well.
Visa Crypto recently endorsed Solana as their blockchain of choice for stablecoins. These blockchains will also face the challenge of aligning the use of stablecoins with their original token values. Even if a significant number of USD transactions were to move to Solana, it is unclear how this would affect the value of SOL or the security of the blockchain itself. I suspect more blockchains will follow Ethereum’s book and find a way to turn the use of non-native assets into building value for the native token.
However, if stablecoin users remain sensitive to fees and continue to move their businesses to new, low-cost blockchains, the pressure on fees may ultimately be incidental. In that case, the best hope for these blockchains is to find a way to issue stables against their native tokens, as happens with staked Ether.
It is clear that stablecoins are important financial rails and compete with established TradFi settlement networks. They are clearly good for financial inclusion and as a hedge against inflation. But whether they themselves are good for blockchains remains an open question.
Megan Nyvold is Head of Media, North America, and runs crypto exchange BingX.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. The opinions expressed do not necessarily reflect those of Cointelegraph.
