Are stablecoins parasites of blockchain? Are they really beneficial to blockchain?

Examining the Relationship between Stablecoins and Blockchain Parasites or Beneficial Assets?

Author: Megan Nyvold, Cointelegraph; Translator: Song Xue, LianGuai

It is becoming increasingly evident that stablecoins have become the main means of transaction settlement on public blockchain, excluding native crypto assets such as Bitcoin/Ethereum. This was not part of the plan for the architects of these blockchains or their communities.

On-chain data supports this observation: according to data provided by Nic Carter, stablecoins account for about 10% of the total market capitalization of cryptocurrencies, but they account for approximately 70%-80% of the transaction value settled on the blockchain.

While most indicators show stagnant interest and usage for major cryptocurrency use cases, stablecoins have high usage and continue to grow: during the bear market of the past two years, the value of stablecoin settlements has remained fairly stable, with monthly active trading users continuously increasing.

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According to data compiled by Brevan Howard Digital, the number of weekly active addresses for USDT and USDC continues to rise, with Tron and BSC being the most widely used blockchains. Ethereum L2 solutions such as Arbitrum, Polygon, and Optimism are also gaining attention as settlement venues for stablecoins. Ethereum L1 used to be the main venue for stablecoins like USDC and USDT, but Tron has developed to compete with Ethereum in terms of settlement value. It is becoming increasingly clear that Tether on Tron is the most popular digital asset globally, especially in emerging markets.

At the same time, the usage of native crypto assets such as Bitcoin and Ethereum seems to be decreasing, despite their price recovery. The narrative surrounding Bitcoin and Ethereum is more related to the emergence of financial products such as ETFs or staking of ETH. They have little to do with the actual use of these blockchains.

Therefore, the rise of stablecoins is challenging the beliefs held by cryptocurrency enthusiasts for a long time. That is, the native tokens themselves will become the primary medium of exchange. In fact, there is a certain demand for Bitcoin and Ethereum as a store of value, but enthusiasts have long believed that these assets will become a means of transaction and a unit of account.

However, these statements can be questioned if people are more willing to conduct on-chain transactions with tokenized dollars. Of course, there are valid tax reasons to transact in USD in places like the United States – using volatile crypto assets can trigger taxable events and result in capital gains tax for users. Additionally, if users want to engage in cross-border transactions, they may not want to be subjected to unnecessary volatility.

A problem arises: are stablecoins parasitic, borrowing from the security of blockchain without giving anything in return? Bitcoin supporters often think so, which largely hinders the use of stablecoins on Bitcoin (Tether recently abandoned the Omni protocol on Bitcoin, which was the original way Bitcoin entered the market). Bitcoin supporters tend to believe that stablecoins erode the use of Bitcoin as a medium of exchange, attempting to prevent their use and encourage users to utilize tools like the Lightning Network. However, from most indicators, the usage of the Lightning Network has stagnated, with TVL only at $150 million, while stablecoins have a market cap of $125 billion.

However, potential changes are happening. Lightning Labs has released the Taproot Assets protocol, which allows for efficient issuance of assets (including stablecoins) on Bitcoin. Stablecoins can re-enter the Bitcoin market through such protocols, but they must start from scratch in terms of liquidity, tools, and network effects. Bitcoin’s long-standing ideological resistance to stablecoins has left it behind other blockchains. This is ironic considering that the first major stablecoin, Tether, was initially issued on Bitcoin via Omni.

The advantage of stablecoins is that they create demand for the blockchain—it drives up the fees required for mining, thus increasing security. In the long run, if Bitcoin can leverage the demand for stablecoin transactions, its position will be stronger. However, it faces a challenging road.

In contrast, Ethereum’s leadership recognizes that in the long run, non-native assets will dominate transaction demand. Through EIP-1559, they have created a system that ensures transactions (even of non-native assets) directly burn Ethereum. This ensures alignment of interests between Ethereum itself and the usage of the Ethereum blockchain, even when trading is done with tokenized dollars.

Therefore, the increased demand for dollar transactions on Ethereum means more capital being returned to Ethereum holders. Additionally, Ethereum’s staking initiatives have created positive interest rates for the asset, meaning stablecoins tracking the dollar but fully backed by Ethereum collateral can now be built. From these perspectives, the rise of stablecoins may not necessarily be a bad thing for Ethereum, even if it marginalizes Ethereum as a medium of exchange.

However, in terms of the circulation venues for stablecoins themselves, Ethereum does face the risk of “bottom competition.” End-users may not care which blockchain they use but are more concerned about fees. Therefore, Tron has recently emerged as a significant winner in the stablecoin space, and Solana’s cheap and fast settlement is also causing some stablecoin usage to shift there.

Visa Crypto recently recognized Solana as the preferred blockchain for stablecoins. These blockchains will also face the challenge of aligning the usage of stablecoins with the value of their native tokens. Even if a large amount of dollar transactions moves to Solana, it is unclear how this will affect the value of SOL or the security of the blockchain itself. I suspect more blockchains will emulate Ethereum’s approach and find a way to convert the usage of non-native assets into value appreciation for native tokens.

However, if stablecoin users remain fee-sensitive and continue to migrate their business to new, low-cost blockchains, then the fee pressure may ultimately be incidental. In this case, the biggest hope for these blockchains is to find a way to issue stablecoins backed by their native tokens, just like staking Ethereum.

Obviously, stablecoins are the main financial track and can rival the existing TradFi settlement network. They clearly contribute to financial inclusivity and act as a defense against inflation. However, whether they are beneficial to the blockchain technology itself remains a pending question.

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