Using the digital dollar
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overview
Stablecoins are one of the most practical use cases of blockchain technology. More than $150 billion of these digital funds are held by millions of people around the world. Proponents tout their use for real-world payments, but are they actually being used that way? In this report, we explore stablecoin use cases and explore how blockchain data can be used to evaluate and discuss the implications for the future of the economy.
background
Stablecoins are tokens on a blockchain that are pegged and redeemed 1:1 with US dollars held by the issuer. Issuers typically hold reserves in cash or investment-grade securities such as 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 using blockchain. However, it does not suffer from the volatility of cryptocurrencies like Bitcoin.
The stablecoin market has grown from just $15 million in 2017 to $150 billion. To put this into context, if all stablecoins came from a single issuer, and that issuer bought U.S. Treasuries, it would be among the top 20 sovereign nations by holdings of U.S. Treasuries. Sho. . The largest stablecoin issuers are Tether (USDT: 108 billion) and Circle (USDC: 31.5 billion), with a combined market share of over 90%.
But what exactly are these stablecoins 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 ranges from paying for a coffee to sending money across borders to settling large transactions. People in developed countries like the US may be less aware of the problems with existing payment methods due to the abundance of services such as Apple Pay and Venmo, but developing countries, by contrast, use the US dollar. Cheap payment methods are often not available. Toward a less reliable currency. Stablecoins are an attractive option.
Stablecoins are often used as stores of value and as US dollar bank accounts in countries where people do not have easy access to the US dollar or US dollar banking. Possible reasons for this lack of access include capital controls as in China and South Korea, high inflation as in Venezuela, and constraints on correspondent banks as in Nigeria.
As trading assets, stablecoins serve several purposes. Within centralized exchanges like Coinbase, it is often used as a common quoted asset for all trading pairs. Within DeFi, it can be used for yield farming in new decentralized applications. They are often used for interest rate arbitrage between DeFi and the traditional financial system. For example, interest rates on decentralized lending protocols such as Compound and Aave are currently close to 20%. A smart trader can borrow from a traditional lender at around 5%, convert the borrowed USD into a stablecoin, then lend that stablecoin at Compound or Aave for 20% and pocket the difference . This can cause large inflows and outflows very quickly.
Key statistics
Data extracted from the blockchain allows for a deeper look into how stablecoins are used. Crypto-native financial advisory firm Steakhouse Financial has published a helpful dashboard on where stablecoins are stored on the Ethereum blockchain.
USDT holdings by wallet type
Steakhouse Financial, Dune.com
Where is USDC?
steak house financial
Although it is impossible to know with certainty the intentions of each holder, it is assumed that assets used to seek yield or held on exchanges are used as trading assets.
On Ethereum, 42% of stablecoins (25% of USDC and 48% of USDT) are used for centralized finance applications like Coinbase or decentralized finance applications like lending, decentralized exchanges, and yield farms. or held in the smart contract used by the MEV bot.
The majority of the rest is held in separate wallets, which are further divided into wallets that have moved stablecoins in the last month and wallets that have not. Those who have moved assets are likely using stablecoins as a medium of exchange. Companies that are not moving assets are likely using stablecoins as a store of value. Of course, there may be other reasons for the transfer or lack of transfer, but we assume this because it reflects the pattern of a traditional economy. For example, money in a savings account moves rarely, but physical cash in a wallet tends to turn over quickly. Further queries show that 44% of these stablecoins were held in inactive wallets in the past month (56% were held in active wallets in the last month).
EOA Wallet Stablecoin Activity
Steakhouse Financial (Dune.com)
As a result, we can easily break down how stablecoins are used.
Stablecoins have three different use cases
Data from Steakhouse Financial Data
Outlook and impact
This data can help approximate stablecoin use cases and shed new light on popular narratives in the cryptocurrency market.
Experts argue that stablecoins are primarily used as a medium of exchange and point to their high overall on-chain velocity (1% per day) as proof of this. But the data shows the story is more multifaceted. One cluster of users is certainly cycling fast, but there is another cluster that is cycling slowly, likely indicating different use cases. In fact, 95% of wallets holding stablecoins have not sent any stablecoins in the last month. This means that many people around the world are using stablecoins to save in USD.
Other experts claim that stablecoins are overwhelmingly used for interest rate arbitrage between DeFi and CeFi. They point to the correlation between interest rates and stablecoin balances provided by on-chain US Treasury issuer Midas Protocol as evidence.
The supply of stablecoins changes depending on interest rates.
midas
However, data shows that only 2.8% (756 million) of USDC is currently locked in DeFi applications. Although loan balances do not appear to be locked into these contracts, data shows that these applications have lent out USDC 1.3 billion, and loan balances do not significantly change the analysis. Masu. Even in March 2022, before interest rates started rising, there was only $8 billion in stablecoins locked in DeFi protocols. At the time, this represented only 5% of the total stablecoin supply. Few stablecoins are being used to seek yields enough to justify the conclusion that interest rate arbitrage caused stablecoin balances to rise and fall around the last bull market.
Rather, the increase in stablecoin balances during the bull market may be due to new users of the blockchain being drawn into the bull market. When interest rates rose, the bubble burst and some of the recently registered users left. This causes the stablecoin balance to decrease, creating the correlation mentioned above. The data seems to support this explanation, as the increase in balances through March 2022 was greater than the decrease in balances after the CeFi interest rate hike. This coincided with a significant increase in new users, some of whom were later canceled. The data could show that interest rates push up cryptocurrency market caps as a whole, which drives active users, which in turn drives up stablecoin balances. Of course, within this macro trend, there can be a strong correlation between interest rates and stablecoin balances simply because interest rate arbitrage is highly reactive and frequently causes small fluctuations. In any case, the evidence does not indicate that most stablecoins are used for interest rate arbitrage.
Overall, the data shows that there are three strong independent use cases for stablecoins. Only one is related to the speculative sector of the crypto economy. The other two use cases are “real world”. This diverse use case bodes well for the future of stablecoins in the economy.
decision point
Market participants need to take stablecoins seriously and not lock them into just one thing. They serve as trading assets, payment methods, and stores of value. Ignoring any of these roles can lead to a misunderstanding of the nature of stablecoins. For financial institutions, this can result in them ignoring potentially disruptive forces and missing out on potentially lucrative opportunities to compete in the crypto economy. Most importantly, policymakers need to regulate stablecoins with these multiple use cases in mind. Regulating stablecoin issuers as if they only do one thing can hinder other use cases.
