Overview
Stablecoins are one of the most practical use cases for blockchain technology. Over $150 billion of these digital dollars are held by millions of people across the globe. Proponents tout their use for real-world payments, but is that actually how they are used? This report examines the use cases for stablecoins, evaluates them using blockchain data, and discusses implications for the future of the economy.
Background
Stablecoins are tokens on the blockchain that are 1:1 pegged and redeemable for United States Dollars held by an issuer. The issuer typically holds its reserves in cash or investment grade securities like U.S. Treasuries. In other words, stablecoins are fully collateralized. Stablecoins are useful because they offer instant transfers, self-custody, and peer-to-peer payments all powered by the blockchain. However, they don’t suffer the volatility of cryptocurrencies like bitcoin.
The stablecoin market has grown to $150 billion from just $15 million in 2017. To put this in context, if all stablecoins were from a sole issuer and that issuer purchased U.S. Treasuries, it would be among the top 20 sovereign nations by holdings of U.S. Treasuries. The largest stablecoin issuers are Tether (USDT: 108 billion) and Circle (USDC: 31.5 billion), who combined have over 90% market share.
But what are all these stablecoins being used for? The three most frequently cited use cases for stablecoins are as a medium of exchange, as a store of value, and as a trading asset.
As a medium of exchange, stablecoins are used for payments. This can range from paying for coffee to cross-border remittances to settling large trades. People in developed countries like the U.S. may find it hard to see the problems with existing payment methods given the abundance of services like Apple Pay and Venmo, but in developing countries, people often lack access to inexpensive payment methods that utilize the U.S. dollar as opposed to less trustworthy currencies. Stablecoins are an attractive option.
As a store of value, stablecoins are often used as a USD bank account in countries where people lack easy access to U.S. Dollars and USD banking. Reasons for this lack of access could be capital controls, like in China or South Korea, high inflation like in Venezuela, or correspondent banking constraints like in Nigeria.
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As a trading asset, stablecoins have several purposes. Within centralized exchanges like Coinbase, they are often used as quote assets common across all trading pairs. Within DeFi, they can be used for yield farming in new decentralized applications. Often, they are used for interest rate arbitrage between DeFi and the traditional financial system. For example, interest rates on decentralized lending protocols like Compound and Aave are currently near 20%. Savvy traders can borrow at roughly 5% from traditional lenders, convert their borrowed USD to Stablecoins, and then lend the stablecoins on Compound or Aave for 20%, pocketing the difference. This can drive large inflows and outflows very quickly.
Key Statistics
Data extracted from the blockchain enables us to dive deeper into how stablecoins are used. Crypto-native financial advisory firm Steakhouse Financial publishes a helpful dashboard on where stablecoins are held on the ethereum blockchain.
While it is impossible to know for certain the intent of each holder, we assume any asset used for seeking yield or held in an exchange is being used as a trading asset.
On ethereum, 42% of stablecoins (25% of USDC and 48% of USDT) are held in centralized financial applications like Coinbase or in smart contracts used for decentralized financial applications like lending, decentralized exchanges, yield farms, or used for MEV bots.
Most of the rest is held in individual wallets, which we further divide into wallets that have and have not moved any stablecoins in the last month. Those that have moved assets we assume use stablecoins as a Medium of Exchange. Those that have not moved assets we assume use stablecoins as a Store of Value. There could of course be other reasons for transfers or the lack thereof, but we assume this because it reflects patterns from the traditional economy. For example, money in savings accounts rarely moves while physical cash in wallets tends to turnover rapidly. Further queries reveal that 44% of these stablecoins are in wallets inactive for the past month (and 56% are held in wallets active in the last month.
The result is a simple breakdown of how stablecoins are used:
Outlook and Implications
This data helps approximate stablecoin use cases and sheds new light on popular narratives in the cryptocurrency market.
Pundits often argue that stablecoins are mostly used as a medium of exchange, pointing to their high overall onchain velocity (1% per day) as evidence. But the data shows the story is more multifaceted. One cluster of users indeed circulates fast, but there is another cluster that circulates at a slower rate, likely indicating varied use cases. In fact, 95% of wallets holding stablecoins haven't sent any stablecoins in the last month. This implies many people around the world use stablecoins to save in USD.
Other Pundits argue that stablecoins are overwhelmingly used for interest rate arbitrage between DeFi and CeFi. They point to the correlation between interest rates and stablecoin balances, as provided by onchain US Treasuries issuer Midas Protocol, as evidence.
However, data shows that only 2.8% (756 million) of USDC are currently locked in DeFi applications. While outstanding loans would not appear locked in these contracts, data shows 1.3 billion USDC has been lent out from these applications, indicating that outstanding loans do not meaningfully change the analysis. Even in March 2022, before interest rates started rising, only $8 billion in stablecoins were locked in DeFi protocols. At the time, this represented just 5% of the total stablecoin supply. There are not nearly enough stablecoins being used to seek yield to justify the conclusion that interest rate arbitrage drove the growth and decline of stablecoin balances around the last bull market.
Instead, it could be that the rise in stablecoin balances during the bull market was due to new users of the blockchain that were pulled in by the bull market. When interest rates rose, it popped the bubble, which in turn drove some recently onboarded users away. This in turn would drive down stablecoin balances and create the aforementioned correlation. The data seems to support this explanation, because balances increased more leading up to March 2022 than they decreased after CeFi interest rates rose. This is consistent with large growth in new users, some but not all of which later churned. The data may indicate that interest rates drive the crypto market cap as a whole, which in turn drives active users, which in turn drive stablecoin balances. Of course, within this macrotrend there might be a strong correlation between interest rates and stablecoin balances simply because interest rate arbitrage is so reactive that it drives frequent small fluctuations. Regardless, the evidence certainly does not show that most stablecoins are used for interest rate arbitrage.
Taken as a whole, the data indicates that there exist three strong, independent use cases for stablecoins. Only one is linked to the speculative sector of the crypto economy. The other two use-cases are “real world.” This diversified set of use cases bodes well for the future of stablecoins in the economy.
Decision Points
Market participants need to take stablecoins seriously without pigeonholing them into just one thing. They have a role as a trading asset, as a payment method, and as a store of value. Ignoring any one of these roles would lead to misunderstanding the nature of stablecoins. For financial institutions, this could result in ignoring a potentially disruptive force and missing potentially lucrative opportunities to compete in the crypto economy. Most importantly, policymakers should regulate stablecoins with these multiple use-cases in mind. Regulating stablecoin issuers as if they only did one thing would potentially impede the other use-cases.
Disclosure: The author isa board member of stablecoin issuer GMO-Z Trust Company (the NYDFS-regulated issuer of ZUSD and GYEN, the first Yen-backed stablecoin)
