As previously discussed, Bitcoin revolutionized digital payments as the first decentralized tool for peer-to-peer transactions. And yet USD-backed assets, issued (mostly) by highly centralized entities, have arguably found stronger product-market fit. Since the 2014 launch of Tether (USDT), stablecoin supply has surged to over $120Bn, and has occasionally exceeded $180Bn. Stablecoins currently account for the majority of on-chain activity, suggesting robust demand for USD-based transactions, and their issuance remains among the most resilient crypto businesses. Circle, for example, reported $779M in revenue for H1‘23 (FY22 revenue was $772M).

Stablecoins have come to serve three core use cases:

• On-Ramping: The experience of buying and trading cryptocurrency has drastically improved since its inception. Initially, exchanges established banking relationships to convert fiat to specific crypto assets; however, they increasingly struggled to manage compliance and meet demand across multiple jurisdictions. Conveniently, Tether emerged as a crypto-native USD issuance and redemption service provider—introducing an asset that could easily and efficiently be transferred into exchanges and other crypto-specific applications. Many exchanges have since launched their own USD-backed stablecoins; BUSD and USDC currently serve as the primary on-ramping vehicles for two of the largest exchanges.
• Base Pair Stability: In advance of a global “Bitcoin Standard” adoption, profits, taxes, and real-world businesses will be denominated in US dollars. Speculation is an early use case for crypto, and fundamentally requires stablecoins for market participants to book gains and hedge volatility. Today, stablecoin-based trading pairs, such as USDT/BTC, represent a significant percentage of overall trading volume (particularly in a “risk-off” macro environment).
• Payments: The Lightning Network has potential to supplant the current payments supply chain (especially if Jack Dorsey has his way). However, the crypto-native payments system today is dominated by stablecoins, as evinced by the almost daily launch of new stablecoin-based, peer-to-peer apps (e.g., Sling) to serve demand. When users transact on-chain, they predominantly rely on USD-backed assets. And as brick-and-mortar-focused crypto payment systems (e.g., Solana Pay) emerge, we will increasingly be offered an accessible, gateway-fee-free alternative to traditional payment rails.

While on-chain dollar hegemony is an unsurprising outcome of crypto's last decade, it’s far from guaranteed going forward. In the US, stablecoins have become divisive across party lines; Democrats favor strict regulation of issuance, while Republicans advocate a self-regulated stablecoin industry. In light of a sustained inflationary environment and global shift away from the US dollar, the stablecoin status quo could easily be challenged by either a non-US alternative or Bitcoin’s “internet money.”

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