What users need is simply on-chain dollars.

Written by: Jon Reiter

Translated by: Luffy, Foresight News

The market capitalization of USDT once surpassed that of Ethereum. As of the time of writing, USDT's market capitalization is slightly below Ethereum's, with only a few percentage points difference between the two. What does it mean that USDT has become the second-largest cryptocurrency after Bitcoin?

Meanwhile, one thought-provoking phenomenon is that in the past decade, the scale of stablecoins has continued to expand, while the market capitalizations of mainstream non-stablecoin assets like Bitcoin, Ethereum, Solana, BNB, Ripple, and Tron have remained stagnant for years.

This is not related to security

First, let's clarify what this does not represent. Many Web3 solutions rely on a certain asset to provide an "economic safety cushion" for another class of business. A typical example would be oracle generic design logic, which is guaranteed for data accuracy through voting by a decentralized autonomous organization (DAO), and oracle outputs prices used for settling various contract transactions. Projects like Chainlink are variations of this logic.

The premise for such mechanisms to be valid is that the total market value of DAO governance tokens must be significantly higher than the scale of transactions settled through the oracle. The reasoning is simple: if it only takes 1 million dollars to control the DAO but can manipulate the settlement of contracts worth 10 million dollars, the entire system is economically unsafe. This is not due to technical flaws in the code, but rather a defect in the design of economic incentives, allowing malicious actors to manipulate the system at a low cost for selfish outcomes that violate objective fairness.

However, Ethereum does not provide any economic safety backing for USDT. USDT is simultaneously issued and circulated on dozens of public chains such as Tron, which also cannot provide a safety net for USDT. In theory, even if someone breaches a public chain on which USDT is issued and engages in double-spending or seizes others' tokens, the USDT operating company, Tether, can directly freeze and reclaim the on-chain tokens and reissue them on other chains.

Whether the total market capitalization of this public chain is only 1 dollar or 1 trillion dollars, Tether can complete the operation: they can take complete control of the token disposal rights simply by paying the on-chain transfer fees. Even if an attacker completely controls the public chain and blocks Tether's official contract interactions, the project can directly abandon the chain and refuse to redeem all USDT on that chain. At that point, the team can ensure innocent users can redeem their assets on other chains through hard forks or offline ownership certificates, all arranged independently by Tether. Controlling a public chain does not allow access to the dollar reserves held by Tether.

There is no denying that USDT relies on public chains for circulation; thus, the market needs a set of stable, usable, and secure underlying networks. But that is all; the core entity responsible for asset security is always Tether. As long as there are reliable public chains in the market, USDT can circulate normally. The standard for a reliable public chain is generally that its native token has a considerable market value. However, the market value of the native token does not provide substantial security guarantees for stablecoins; thus, it is completely possible for a public chain with a native token market value of only several billion or even hundreds of millions of dollars to support the circulation of stablecoins worth hundreds of billions. If a public chain's native token has a total market value of only 1 million dollars, it would be difficult to support a mature DeFi ecosystem, and users would be unwilling to store billions of USDT on it; but as long as users are willing, there is no hard barrier from a security logic perspective.

This does not mean Ethereum itself is flawed

The continuous increase of USDT's market capitalization relative to Ethereum does not indicate a devaluation of Ethereum itself. Indeed, the rise in USDT's market capitalization represents a demand for stablecoins from more users with larger funding volumes, but this does not mean that the demand for USDT exceeds the Ethereum ecosystem.

USDT is a value storage tool backed by the reserves of the issuer; while the ETH token is essentially a revenue certificate for the future returns of Ethereum's entire network block space. Even if the market is extremely optimistic about Ethereum, a dramatic increase in block space supply from network expansion and a decrease in transaction fees will also suppress the price of ETH; conversely, a large scale of USDT use will only increase the total issuance of USDT, without changing the pricing of USDT at 1 dollar each.

Users choosing USDT to store funds is unrelated to Ethereum's competitiveness and development prospects as a Web3 underlying platform. We can intuitively understand this through two extreme hypotheses: in both scenarios, the market capitalization of USDT can far exceed that of Ethereum, but Ethereum's circumstances would be vastly different.

Scenario 1: The market essentially abandons Ethereum and presents a higher-quality underlying public chain, causing the price of ETH to plummet, but users still frequently use USDT for transfers.

Scenario 2: Ethereum achieves significant technological breakthroughs (revolution in layer two architecture, maturity of zero-knowledge proof technology), leading to a dramatic rise in overall network expansion capacity, ample block space supply, and a significant decrease in transaction fees.

In both cases, Ethereum's market capitalization would shrink, while USDT's market capitalization could soar or drop in tandem, entirely based on user demand for stablecoins. The changes in the scale of USDT are not bound to the quality of Ethereum itself.

The key lies in real application demand

The most critical need in Web3 is permissionless dollar transfers. Four years ago, we wrote an analysis of the unique value of this scenario, and today, it has become the most core application in the cryptocurrency industry.

There is an old saying in the industry: many people verbally express confidence in blockchain technology but actually only care about the flow of funds. The permissionless dollar transfer track accumulates massive capital, but this scenario requires very low technological thresholds, with no need for complex protocols or advanced cryptography. USDT was initially issued on the Bitcoin sidechain Omni; simply put, the issuer sold Bitcoin token certificates in exchange for dollars, and users could redeem dollars with those certificates. While the logic is not entirely equivalent, the core is similar. Relying solely on the Bitcoin infrastructure, minimal code can build a usable stablecoin: defining a certain amount of dollars for redemption against corresponding BTC reserves is enough to achieve basic stablecoin functionality.

The core of implementing this scenario is having a trustworthy issuer; permissionless decentralized stablecoins commonly have various defects. However, by overlaying issuer credit on top of the simple Bitcoin infrastructure, it meets the transfer needs, making high-end technology unnecessary. USDT is merely a straightforward smart contract with no inherent technological barriers.

This also explains the value differentiation among major public chains. Ethereum is currently the most mainstream smart contract public chain, but any public chain that can operate normally is sufficient to support stablecoin issuance. The direction of stablecoin fund flows to which public chain is unrelated to the overall scale ceiling of USDT. Stablecoins have extremely low performance requirements for public chains, and the underlying architecture of reserve-based stablecoins has not seen substantial iteration in many years.

If we were to discuss the market capitalization of Tether on Ethereum, Tron, Arbitrum, or other blockchains, it might reflect the relative value of those blockchains. If permissionless dollar transfers are the core demand of the industry, public chains adept at supporting this scenario will more easily attract funds and accumulate large amounts of USDT. Various public chains can compete with each other, but as long as stablecoins have intrinsic value, the overall market capitalization of USDT can continue to expand.

Ethereum is currently the highest market-valued smart contract public chain, providing a benchmark to assess the overall scale of the entire contract public chain track. Currently, Bitcoin occupies about 60% of the total market capitalization of cryptocurrencies; excluding stablecoins, Ethereum accounts for half of the remaining market, with all other public chains sharing the remaining 50%. Rough estimates suggest the total value of all smart contract public chains is about twice that of Ethereum's market capitalization. For years, the overall market value of this track has stagnated; however, the scale of the stablecoin sector led by USDT has continued to surge.

Viewing each blockchain individually, the market capitalization of stablecoins may grow or may not grow. But from a macro perspective, years of data have proven that there is no positive correlation between the market capitalization of native tokens of public chains and the overall scale of stablecoins.

There is more data and products to prove this. BlackRock's BUIDL tokenized currency fund and Circle USDC are both in the same category as USDT, but such products rarely contribute to a value increase for the issuing public chain. The most straightforward fact is that the scale of stablecoin-related products has been expanding for years, while the market capitalization of native tokens of underlying public chains has remained stagnant.

Conclusion

There is a consistent narrative here. The core demand of users is permissionless dollar assets, and they are willing to trust the stablecoin issuer, often indifferent to the issuer’s detailed background. Objectively speaking, USDT’s offshore entity background and reserve transparency have been questioned, and its credit backing is far from that of BlackRock or PayPal, yet USDT’s scale is vastly ahead.

Traditional financial giants have consecutively entered the stablecoin sector, promoting their strong brand advantages but have been unable to take market share from USDT. Only USDC holds a certain volume, but has long lagged significantly behind USDT, and has faced multiple redemption crises, making it difficult to ascend to the top tier.

For ordinary users, as long as the token circulates widely and transfers are convenient, it does not matter who the issuer is; the governance model of the underlying public chain also does not affect user choice. Even if a public chain's token is highly concentrated and controlled by a single entity (Tron); managed for years by multi-signature wallets (Polygon); claims self-custody but has a security committee with asset freeze authority (Arbitrum); has a complex structure with single enterprise operation and lacks complete transparency to regulators (Base), users still continue to use it.

The only core demand of users is permissionless dollar transfers. Currently, USDT has been launched on 14 public chains, while USDC covers over 30. Issuers will actively develop any public chain where users congregate; the issuer does not care about the underlying network, and neither do users.

The only subjects in the entire cryptocurrency industry with real brand recognition are Bitcoin and USDT, with USDC ranked next. Users will use such stablecoins on any public chain. A stablecoin launched by an offshore entity with questionable credit can become the second-largest digital asset by market capitalization, yet it primarily circulates on the Tron public chain, controlled by a single person. All of this indicates that users care more about the use case of permissionless dollars than the operational mechanisms behind them.

If regulatory authorities in various countries grant compliance licenses for permissionless dollar stablecoins, it would imply that permissionless transfer models receive official recognition. As long as compliant, offshore stablecoins obtain regulatory backing, the entire sector's scale will continue to expand, potentially far surpassing the smart contract public chains that support them.