CoinMetrics The return of market liquidity from the market value and supply of stablecoins

Revitalizing Market Liquidity CoinMetrics Analyzes the Impact of Stablecoin Market Value and Supply

Author: Tanay Ved, CoinMetrics Researcher; Translator: LianGuaixiaozou

1. Introduction

Stablecoins have become a crucial pillar in the ever-evolving digital asset ecosystem. As a stable store-of-value, stablecoins have shown resilience amidst volatile waves, providing stability and utility not only for mature markets but also for emerging economies grappling with high inflation and barriers to financial infrastructure access. The borderless and 24/7 nature of stablecoins enables seamless cross-border transactions and remittances, making them an important medium of exchange. Additionally, stablecoins serve as a vital bridge between decentralized finance (DeFi) and traditional finance, supporting trading and lending activities, and acting as a barometer for public blockchain activities.

This unique value proposition has propelled the rise of the digital dollar market, reaching a peak market capitalization of $155 billion in 2022, subsequently dropping to $112 billion, reflecting various challenges hampering growth. However, with the recent surge in digital asset valuations, stablecoin supply has shown a noticeable recovery, pointing towards a potential revival in on-chain liquidity, indicating demand for stablecoins irrespective of bear or bull markets.

In this article, we will closely examine the supply, usage, and adoption of stablecoins, as well as emerging trends shaping the landscape as we potentially transition to alternative market mechanisms.

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2. Market Capitalization and Supply Trends

Currently, the market value of stablecoin assets is predominantly composed of USDT and USDC, accounting for the majority share of the total supply. The recent upward trend has been driven by the growth of Tether (USDT) on the Ethereum ($41 billion) and Tron ($48 billion) networks, propelling Tether’s market capitalization to a historical high of $88 billion, while Circle’s USDC remains stable at $22.5 billion. Despite fiat-backed stablecoins dominating the market, the growth of crypto-collateralized stablecoins (i.e., ETH) and off-chain collateralized stablecoins (i.e., public bonds) showcases the increasing diversity and adaptability of asset classes.

This is reflected in the graph below, which illustrates the weekly changes in stablecoin supply over the past year. Following major events such as the Luna crash in June 2022 and the Silicon Valley Bank (SVB) crisis in March this year, we observed a significant decrease in the total supply of stablecoins, indicating wavering market confidence. However, since October 2023, the total supply of stablecoins has been on an upward trend, signaling a shift towards positive growth. This upward trend can be seen as a leading indicator of improved on-chain liquidity, indicating an environment with more deployable capital.

To understand the growth trend of stablecoin supply, a closer study of smart contract supply can tell us a lot. For example, a large part of the supply of the popular asset USDC in decentralized finance (DeFi) applications comes from smart contracts, reaching a peak of over $20 billion in March 2022. However, in the past year, that number has contracted, halving from its high value of $14 billion in March to $7 billion in December 2023. In contrast, Tether (ETH), primarily held by external accounts (EOA), exhibits a different trend. It has performed well in terms of smart contract supply, growing from $4 billion at the beginning of this year to over $6 billion.

3. Adoption Trends

Now let’s shift our focus from smart contract supply to the broader trend of stablecoin adoption, reflected in the number of accounts holding significant amounts. While the number of addresses holding over $100,000 of USDC has dropped to 13,000 addresses, and USDT addresses on Ethereum remain relatively stable, USDT on the Tron network exhibits a different trend. Tether’s adoption on Tron continues to grow, with nearly 40,000 addresses holding over $100,000. This can be attributed to its lower transaction fees and increasing adoption in parts of Latin America, Africa, and emerging economies in Asia. In these regions, people often face high inflation and struggle to access US-dollar-denominated financial services, making stablecoins an attractive and economical way to obtain dollars.

Stablecoins also play a crucial role in decentralized finance (DeFi). In the DeFi lending market, these assets serve as stable collateral, allowing users to earn interest from their held digital assets. The above graph shows the utilization rate of major stablecoins on Aave, revealing the proportion of deposited funds used for lending on the platform. In other words, utilization rate is an indicator of stablecoin demand and the availability of funds in the pool, and applications like Aave and Compound are important representatives of the overall activity.

The relationship between pool utilization and interest rates is also crucial: when pool funds are abundant but lending demand is low (i.e., low utilization), interest rates decrease to attract borrowers. Conversely, when pool liquidity is scarce (i.e., high utilization), interest rates increase to incentivize debt repayment and attract new deposits. Apart from the disruption seen in March 2023, the utilization rates of USDT, USDC, and Dai have climbed back to 2021 levels, indicating an increased demand for stablecoin collateralized loans and a growing interest in strategies to generate income using these assets.

The trading volume of stablecoins in the spot market has significantly increased, highlighting their utility as quoted assets in both centralized and decentralized exchanges. This is due to their ability to provide a stable reference point for evaluating other assets, making them a popular medium for entering and exiting positions.

As shown in the above figure, the trusted spot trading volume is mainly dominated by USDT, reaching $18.8 billion on November 15th. It’s worth noting that these trading volumes are only second to major market events such as the collapse of Luna, FTX, and Silicon Valley Bank. The trading volume of USDC has also recently increased, reaching $2.5 billion in November, setting a new historical high for USDC trading volume. On the other hand, the trading volume of other stablecoins has shown a downward trend, mainly due to the decrease in BUSD trading volume, as Binance announced its support for BUSD will end this month. Overall, the upward trend in trading volume reflects the increasing interest of traders and investors in crypto assets with appreciation potential, especially in the broader crypto market’s upward trend.

4. Emerging trends in the stablecoin market

Having grasped the current situation of stablecoins, we can take a broader view to understand the overall trends shaping stablecoins. Among them, the yields provided by on-chain and off-chain sources are an important challenge, as they affect capital flow and determine the avenues for attracting capital under different economic conditions.

An important theme in the past two years has been the rise in US Treasury yields during financial tightening cycles. The high returns of “risk-free rates” have brought opportunity costs to stablecoin holders and issuers, prompting capital outflows from on-chain markets. As a result, the rise of tokenized government bonds and interest-bearing stablecoins has met the demand for yield and interest rate sensitivity.

Maple Finance’s USDC cash management pool is an example of the growing trend of DeFi yield products. The pool offers yield from US Treasury bills and targets a net APY annual interest rate based on the Secured Overnight Financing Rate (SOFR), allowing eligible investors to deposit USDC. Since its establishment, the pool has been very active, accumulating $75 million of USDC and $15 million of capital.

The popularity of this trend is also reflected in the diversity of collateral for stablecoin products, such as Maker DAO’s Dai, which is collateralized by real-world assets like government bonds. However, the growth of stablecoin supply on applications like Aave may provide stablecoin holders with another option to earn yield on their stored assets, potentially driving capital towards DeFi applications and products primarily collateralized by on-chain assets.

5. Conclusion

The growth of stablecoin supply is a clear indicator of the increasing activity and usage within the digital asset ecosystem. This is particularly evident in the research on supply and adoption trends, with Tether on Tron leading the way. Despite the heavy challenges in the regulatory environment in the United States and the complexity of the political landscape, the liquidity of stablecoins has shown remarkable resilience. This growth demonstrates the widespread utility of stablecoins, whether in DeFi pools, exchanges, or various revenue-generating opportunities. In a broader market competition, these trends not only highlight the continuous growth in the usage of stablecoins but also prove their core role in the crypto economy.

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