Stablecoin Watch: Is Ethereum Still the Most Popular Blockchain for Stablecoins?

Summary

• Magic Internet Money (MIM, +14% MoM), Pax Dollar (USDP, +14% MoM), and TrueUSD (TUSD, +12% MoM) registered the largest gains in market cap over the past month.
• USD Coin (USDC, -6% MoM) and Binance USD (BUSD, -1% MoM) registered the largest drop in market cap over the past month.
• Pax Dollar (USDP) remains the most volatile stablecoin over the past month.
• US 3M treasury yields continue to outpace stablecoin yields.

Tron Now Boasts More USDT Transactions Than Ethereum

Ethereum dominates DeFi with 59% of the TVL in DeFi ($49bn). However, competition is heating up as alternative blockchains challenge Ethereum’s grip on DeFi and stablecoins. The crypto space is evolving, and Ethereum should watch out.

The total stablecoin market cap sits at around $137bn according to data from DeFi Llama. Of this, around 59% is attributable to stablecoins implemented on the Ethereum blockchain. The next most dominant chain for stablecoins by share of market cap is Tron (TRX), which claims 27% of the total. Outside Ethereum and Tron, there is the Binance Smart Chain, Polygon, Solana, Avalanche, Arbitrum, Optimism, Fantom, and Algorand blockchains, which each claim between 0.2% and 7%. So, it is safe to say that Ethereum and Tron reign supreme in the stablecoin world.

Ethereum’s stablecoin dominance has been falling (currently 59%, -273bps YTD, Chart 1) while that of Tron has been rising (currently 27%, +248bps YTD). And that is not the only area where Tron is outperforming – its TVL in DeFi ($5.11bn) recently surpassed that of Binance Smart Chain ($5.09 bn), making it the second most popular DeFi blockchain (after Ethereum) by TVL (we recently identified the evolution of TVL as one of the three trends that matter for DeFi in 2023).

Furthermore, 50% of the largest stablecoin by market cap (USDT, $68bn) is now held on the Tron blockchain (Chart 2). The trend is similar to that of the overall stablecoin dominance; the amount of USDT on Ethereum has been falling while that of Tron is rising.  

Why Are Stablecoins Moving to Tron?

Two main reasons stand out as possible explanations for why stablecoins are being increasingly implemented on Tron over Ethereum:

• Scalability: Tron has a higher transaction processing capability than Ethereum, which may make it more suitable for high-volume transactions such as those involving stablecoins. That said, ethereum is expected to roll out upgrades that will enable sharding, which is expected to significantly reduce network congestion and increase transactions per second.
  
  
• Transaction costs: Tron generally has lower transaction costs than Ethereum.

Will the trend continue? Only time will tell. Ethereum is poised for several upcoming upgrades to tackle its weaknesses in scalability and transaction costs, but Tron is hot on its heels with a booming DeFi ecosystem. Right now, it seems like stablecoin players seeking lower costs and faster blockchain solutions are flocking to Tron. We will keep an eye on Tron as the stablecoin landscape evolves.

Latest Developments

Market Cap and Peg Risk

The market caps of Magic Internet Money (MIM, +14% MoM), Pax Dollar (USDP, +14% MoM), and TrueUSD (TUSD, +12% MoM) are up the most (Chart 3). Meanwhile, Binance USD (BUSD, -1% MoM) and USD Coin (USDC, -6% MoM) are down the most by market cap.

USDD de-pegged to 97 cents on 20 January and has since risen back up to 99 cents.

Volatility

On stablecoin volatility:

• The one-month annualised volatility of Pax Dollar (USDP, 6.5%) is the highest among the stablecoins we track (Chart 4).
• Over the past three months, USDP (5.6%), USDD (4.7%), and GUSD (4.5%) are the most volatile stablecoins.
• Over the past year, GUSD (7.6%), FRAX (5.3%), USDD (5.2%), and MIM (4.7%) are the most volatile.

Yields

Turning to yields, on Compound, average (over the past seven days) lending rates are highest for USDT (c. 2.3%) and lowest for TUSD (c. 0.18%). Lending rates across the five stablecoins we track on Compound remain eclipsed by US 3M treasury yields (Chart 5).

Meanwhile, average (over the past seven days) borrowing rates are highest for USDT (c. 4%) and lowest for TUSD (c. 1.1%). The spread between US 3M treasury yields and stablecoin borrowing rates are tighter than the corresponding spread between stablecoin lending rates (Chart 6).

Appendix

USDT: Tether is a fiat-collateralised stablecoin primarily issued on the ethereum and bitcoin blockchains. It aims to be pegged 1:1 against the US dollar. Tether’s reserves are not backed 100% by US dollar deposits. Instead, they are backed by reserves that include cash, cash equivalents, short-term deposits, commercial paper, corporate bonds, funds, precious metals, secured loans, and other investments including digital tokens.

USDC: USD Coin is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is 100% backed by cash and short-dated US treasuries. USDC publishes a monthly public attestation of 100% reserves.

BUSD: Binance USD is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It is backed 100% by USD held in Paxos-owned US bank accounts and US treasury bills (including through repurchase agreements and/or money-market funds invested in US treasury bills). Paxos is a New-York-regulated financial institution and publishes a monthly public attestation of 100% reserves.

TUSD: TrueUSD is a fiat-collateralised stablecoin issued by the TrustToken platform that is issued as ERC-20 tokens on the ethereum blockchain. It aims to maintain its 1:1 peg against the US dollar by being fully collateralised by US dollars using multiple escrow accounts to reduce counterparty risk.

USDP: Pax Dollar is a fiat-collateralised stablecoin issued as ERC-20 tokens on the ethereum blockchain. It aims to be pegged 1:1 against the US dollar by holding USD reserves in Paxos owned US bank accounts.

DAI: Dai is a crypto-collateralised stablecoin that attempts to maintain a 1:1 peg against the US dollar by depositing other crypto assets into smart contracts on the ethereum blockchain every time a new DAI token is issued. DAI is maintained by a decentralised autonomous organisation (DAO) called MakerDAO. And since the mechanism is maintained by a system of smart contracts, it has higher decentralisation than the centralised entities controlling USDT, USDC, or BUSD.

MIM: Magic Internet Money is a crypto-collateralised stablecoin launched by the DeFi platform Abracadabra. MIM is backed by interest-bearing tokens (ibTKN).

UST: TerraUSD is a crypto-collateralised hybrid stablecoin native to the Terra blockchain. To mint 1 UST, $1 worth of UST’s reserve asset, LUNA, must be burned. The idea was to try and ensure LUNA’s long-term growth. More people buying into UST means more LUNA gets burned, which should make the remaining LUNA supply more valuable. However, the system collapsed recently when UST de-pegged from the US dollar.

FRAX: Frax Finance is a fractional-algorithmic stablecoin that uses both collateralisation and an algorithmic process to create its decentralised stablecoin that is pegged 1:1 to the US dollar. Only stablecoins (currently, USDC) are accepted as collateral by the protocol.

FEI: FEI is an algorithmic stablecoin that aims to be pegged 1:1 against the U.S dollar that is backed mostly by ETH.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)