Stablecoins Overthrow Bitcoin and Ether as Dominant Transaction Medium on Public Blockchains
Summary:
On-chain data reveals a surprising shift in public blockchain transactions, with stablecoins now taking precedence over native cryptoassets like Bitcoin and Ether. Despite only making up 10% of the overall crypto market cap, stablecoins account for 70%-80% of value settled on blockchains. This growing trend of stablecoin usage, due to factors such as tax benefits and avoiding unnecessary volatility, is leading to a reevaluation of the belief that native tokens would become a primary transaction medium. Meanwhile, while Bitcoin's adherence to its ideology has restricted stablecoin growth, Ethereum has embraced the stablecoin trend, ensuring transactions of non-native assets result in the burning of Ether and thus benefiting Ether holders. However, as users prioritize low fees, a 'race to the bottom' may be underway for where stablecoins themselves circulate.
In a surprising development, on-chain data reveals that stablecoins have become the primary transactional tool on public blockchains, overshadowing native cryptoassets such as Bitcoin and Ether. Contrary to the intended use by blockchain designers and their communities, stablecoins make up about 10% of the overall crypto market cap but account for 70%-80% of value regulated on blockchains, as showcased by Nic Carter at the Token2049 event, sponsored by our firm. Whereas general crypto usage appears stagnant in recent data reports, stablecoin usage is soaring with an increasing number of active monthly users. Provided data from Brevan Howard Digital indicates a weekly growth trend for USDT and USDC active addresses, especially on Tron and BSC blockchains. Major stablecoins are nearing their all-time high in weekly transaction numbers. Ethereum L2s, like Arbitrum, Polygon, and Optimism, also have seen surging popularity as stablecoin settlement platforms. Originally, Ethereum L1s were favored for stablecoin transactions like USDC and USDT, but Tron's rapid growth matched Ethereum’s settled value. Tether on Tron is globally the most popular digital asset, particularly in upcoming markets. The use of native cryptoassets like Bitcoin and Ether, however, seems on the decline regardless of price recovery. The focus around Bitcoin and Ether is more associated with the rise of financial products like ETFs or staking in the case of ETH than their actual usage. This increasing stablecoin trend is triggering a shift in the long-held belief that native tokens would become a major transaction medium. Although there's a demand for Bitcoin and Ethereum as a value storage method, people were expected to utilize these assets as exchange mediums and account units. However, if tokenized dollars are preferred for on-chain transactions, this belief is arguably misguided. In the U.S, for instance, tax benefits may encourage people to transact in USD — using a volatile crypto asset could lead to a taxable capital gain event. Also, users might not want to risk unnecessary volatility for cross-border transactions. Talking about stablecoins and their security borrowing from blockchains, the question arises whether they are parasitic free riders. The Bitcoin community seems to believe so, meaning stablecoins are discouraging Bitcoin usage, pushing users towards other tools like Lightning. But Lightning’s usage has flatlined compared to a $125 billion stablecoin market cap, reaching only $150 million in TVL. However, changes might occur as Lightning Labs introduced their Taproot Assets protocol, which allows the issuance of assets, including stablecoins, effectively on Bitcoin. To enter Bitcoin through such protocols, stablecoins must establish liquidity, tooling, and network effects. Bitcoin’s resistance to stablecoins has caused it to lag behind other blockchains. Ironically, the first significant stablecoin, Tether, was initially issued on Bitcoin via Omni. Stablecoins greatly contribute to blockchain demand, generating necessary mining fees, hence improving security. If Bitcoin could harness some of the demand for stablecoin transactions, it would be stronger in the long run, but the journey there might be challenging. Meanwhile, Ethereum leadership has accepted that non-native assets will likely dominate transactional demand in the foreseeable future, ensuring that non-native asset transactions would result in Ether being burnt directly through EIP-1559. Therefore, more demand for USD transactions on Ethereum signifies more capital for Ether holders. Ethereum's shift towards staking has enabled stablecoins to mimic the dollar while being fully reliant on staked-Ether collateral. Hence, stablecoins' rise does not necessarily mean bad news for Ethereum, even if it marginalizes Ether as a transaction medium. Nevertheless, Ethereum could see a 'race to the bottom' as users focus more on low fees than the blockchain they use to transact stablecoins. Consequently, Tron has grown significantly in the stablecoin sphere, and Solana's quick, cheap settlement has attracted some stablecoin usage, with Visa Crypto selecting Solana as their preferred blockchain for stablecoins. These blockchains will also need to find a way to align their stablecoin usage with their native token values. As more blockchains learn from Ethereum's example, the trend will likely be to convert non-native asset usage into native token value. If stablecoin users continue to shift their business to low-fee blockchains due to their sensitivity to fees, these blockchains' best chances will be to issue stables against their native tokens, as is happening with staked Ether. It's evident that stablecoins have become significant financial tools, competing with established traditional finance settlement systems. They are clearly beneficial for financial inclusion and protection against inflation. However, their impact on blockchains themselves still remains to be seen. North America's Megan Nyvold, BingX's head of media, is leading this leading crypto exchange. This article was released through the Cointelegraph Innovation Circle. Senior executives and experts shaping the future of the blockchain technology industry make up this vetted organization. This esteemed circle's goal is to establish connections, promote collaboration, and provide thought leadership. The views expressed do not necessarily represent those of Cointelegraph.
Published At
11/16/2023 1:00:00 PM
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