Stablecoins Have Taken Over the Ethereum Network

It’s 2021 and the Ethereum blockchain has become a platform that is most commonly used to store, exchange and trade digital US Dollars. Although it is true that this is not all Ethereum is capable of, and it may be a transient state of affairs, the data paints an unequivocal picture: USD stablecoins have taken over Ethereum.

To see this, let’s rewind the clocks to jolly old X-mas 2018 🎄. What was the value of the transfers carried out on the Ethereum blockchain at this time? Let’s look at stablecoins and a couple of tokens, including Binance Coin (BNB) and Chainlink (LINK).

Making the area of each asset on the below illustration proportional to the value transferred, we see the following:

As you likely noticed, ETH dominates the picture by a large margin. At slightly less than 1% of the total, USDT is barely visible.

But what does it look like today?

ETH has been cornered. USDT, which was previously invisible, now accounts for 35% of all value transferred. Furthermore, USD-pegged tokens represent 60% of the value transferred by all the tokens in the image above. The protocol powered by LINK is used to track the price of assets outside of Ethereum. Interestingly, half of all Chainlink oracles are used to track USD prices to help price stablecoins.

How did we get here?

Let us compare the evolution of ETH to that of this year’s main stablecoin players: USDT, USD Coin (USDC), and DAI. Several turning points can be immediately recognized:

There is no single factor driving this dramatic shift, but these events likely had a material impact:

• June 2019: After 6 months of hovering below $7k, the price of Bitcoin was finally headed for $10k. Many investors cashed out using Tether (USDT) and began transacting in and out of exchanges — in particular, a large number of Asian investors using Binance [1].
• Mid-2019: Tether moves en masse to Ethereum, partly spurred by Binance shutting down USDT on Omni (The Bitcoin network) in favor of USDT on Ethereum. This growth temporarily clogs Ethereum.
• March 2020: MakerDAO accepts USDC as collateral, adding more stablecoins in the following months.
• Summer 2020: The Total Value Locked (TVL) on DeFi protocols increases exponentially.
• Late 2020: The rising ETH price draws investors and transfers related to trading increase in value.

Who is using stablecoins and what for?

The total value of USD stablecoins circulating on Ethereum last year is shown below:

In 2020, the market cap of stablecoins issued has grown fivefold, from $4B up to $20B. 96% of these are fiat-collateralized (like USDC, PAX, or USDT), 99% are US dollar based, and the remaining 1% is represented by South Korean won, euro, and Singapore dollar-based stablecoins [3]. Most other stablecoins (3.5%) are crypto-collateralized (like DAI or sUSD). Finally, the nascent category of algorithmic stablecoins occupies 0.5% of the volume (examples include AMPL, ESD, or BAC).

For now, let’s focus on the main players: The top 3 US dollar based Ethereum stablecoins are: USDT, USDC, and DAI.

Today:

• They facilitate transfers of $4.5B/day (Paypal only averages $2B/day).
• They carry out 280,000 transactions/day (Paypal averages 34 million transactions/day)

This makes it clear that payments are not a primary use of stablecoins. Instead, their main use is trading. Indeed, taking the transaction values above, the average transaction is $16,000. But what are these coins being used for?

About $10B is currently being used in CeFi and DeFi. This number probably underestimates the true value, as many of the wallets containing the remaining $14B may be secondary exchange wallets that have not been identified by Nansen’s algorithms. One major player stands out: Binance. Their wallets hold 56% of all stablecoins in circulation. An obvious interpretation is that traders are using stablecoins as on/off ramps into Binance and as a way to lock gains. The other large users are exchanges themselves. In 2020, the average transaction size in BUSD and HUSD was $219k and $153k respectively [3].

These are exchanges moving liquidity in and out of their markets or doing arbitrage. By comparison, the average transaction size for USDT and USDC was $7.7k and $23k respectively. This suggests a more diverse set of small, medium and large traders. However, Tether still dominates in value transacted, since it facilitated 92M transactions in 2020 (28M on Tron and 64M on Ethereum).

The ETH — USDT showdown

Stablecoins are being used for spot trading, futures trading, to lock profits, and for inter-exchange arbitrage. In addition, simple wallets where users can earn interest on their digital dollars have arrived on Ethereum.

Being permissionless and global, they may spur demand from those previously underserved by traditional banking. For a vast number of consumers around the world, inflation in their currencies may be riskier than a stablecoin wallet. Companies have also started to use crypto-first banking services using stablecoins for payments, salaries, and accounting.

In addition, Circle, the issuer of USDC, has established a partnership with Visa to provide stablecoin-backed business cards and payments. While Paxos, the issuer of PAX has a partnership with Paypal.

All in all, this paints a picture of high growth for stablecoins. But is this positive for Ethereum and its native currency ETH? There is no question that stablecoins have helped bring new users and traders to Ethereum.

This sudden influx, however, is also testing the limits of the blockchain. Transaction fees are high and players are scrambling to find cheaper and faster solutions (be it layer-2 solutions on Ethereum, or alternative blockchains like Tron for USDT). Finally, if USDT and its close followers become the de facto currency on Ethereum, what is the role of ETH other than for paying transaction fees?

A valuable ETH is paramount to the security of Ethereum. The miners (or stakers in ETH 2.0) who keep the blockchain secure are incentivized by ETH payments, so a healthy balance must be achieved between the demand and use of stablecoins and that of the native currency.

Written for Stablehouse by Alvaro Feito Boirac, PhD.

Sources:

Data Sources: coinmetrics.io | theblock | nansen.ai | duneanalytics

[1] The rise of stablecoins video — The Block

[2] Tether 2019 migration from Omni to Ethereum

[3] Rise of stablecoins PPT — The Block

Credit (main visual): © 2018 QuoteInspector.com