What's going on with stablecoins

There has been a rise of popularity of decentralized stablecoins amid the recent Tether and USDC scares.

What's going on in stablecoin land?

Who are the top players?

Where are things headed?

It seems like every other week we hear about a new stablecoin project launching. So many different implementations of them. Before diving into all these different projects, let's take a step back and understand the current landscape.

The total stablecoin market cap has decreased to $128B from its $187B all time high in May 2022 (32% decline).

Currently, the most dominant stablecoin, with 65% dominance, is USDT.

It's interesting to see the fluctuations in stablecoin dominance over time.

USDC was gaining market share against Tether throughout 2021 and 2022, but that trend reversed in 2023. The USDC depeg in March has contributed greatly to large USDC redemptions.

The lion's share of stablecoins reside on Ethereum Mainnet (54%), with a surprisingly large amount living on Tron (34%). Followed by BNB Chain (4.4%) and Arbitrum (1.35%).

Ethereum's stablecoin dominance can be attributed to multiple reasons, especially: (1) the rich DeFi ecosystem. (Ethereum currently holds 57% of DeFi TVL), (2) it is seen by most as the safest chain to mint assets, and (3) it has a growing rollup ecosystem.

Many people ask why Tron is second on the list of stablecoin MCap dominance. You may have heard about Justin Sun's USDD experiment, but that's not the main reason why there is so much stablecoin liquidity on the chain.

There is more USDT issued on the Tron network than on Ethereum ($40.4B on Tron and $35.8B on Ethereum). The second largest stablecoin on Tron is TUSD (TrueUSD), with almost $2.4B, followed by USDD ($545M) and USDC ($360M).

So why would Tether mint so much on Tron?

Tron's low transaction fees makes it very attractive for exchanges and users to exchange USDT in an affordable way. Transaction fees to transfer a TRC20 token can be a fraction of a cent.

Tron has also been partnering up with smaller governments to offer the infrastructure for their stablecoin transfers. Exchanges also contribute to this volume, as users send USDT between their exchange accounts on the Tron network to save fees.

It'll be interesting to see the shift of where stablecoins will reside in the future with modern cross-chain communications like Circle's CCTP. Allowing for native USDC to be minted/burned when being bridged will definitely shift the numbers of stablecoin volume on rollups.

Here's a timeline of stablecoin's dominance over the total crypto market cap over 2022 (and beginning 2023).

The market cap of stablecoins increased as traders rush to stable assets in a falling market. As the bear market continued throughout 2022, many catastrophic events occurred such as the 3AC, Terra and FTX collapses.

Increased fear and the wavering trust in crypto assets by many traders lead to the redemption of centralized stablecoins as people rather hold USD in their own bank accounts than a crypto-asset backed by USD in someone else's account.

This sidelined capital started to work its way back into the market as people onboarded their USD back into crypto throughout 2023 as prices started to increase again. The major outflow in March 2023 was due to the SVB event with USDC's abrupt depeg.

As crypto works its way back from its market cycle lows, investors are easing their way into stablecoins again. There are more and more proven use cases for stablecoins emerging, and builders are taking notice.

This has lead to a large market opportunity for stablecoin providers and has sparked a stablecoin renaissance, with many innovative projects leading the way with creative economics. Notable mentions are Frax Finance, Curve, Aave and Vesta Finance.

Stablecoin projects will be competing on the following metrics: liquidity, safety (peg stability), and yield opportunities.

Interestingly enough, I remain mostly bullish on decentralized stablecoins that do not peg to any currency. While I'm no fan of an algorithmic approach, I'm no fan of stablecoins pegged to any single currency, either.