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Crypto-dollars have seen explosive growth in recent months. The encrypted dollar currency here refers to the representation of bank or system liabilities circulated in the form of tokenized IOUs on the public chain, which is also known as stable currency by most people. Recently, stablecoins have become popular:
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Circulating supply growth trend of various stablecoins. Image credit: Coin Metrics
Generally speaking, the goal of the encrypted dollar is to anchor the fiat currency issued by the sovereign (such as the US dollar). They do this in various ways. The easiest way to do this is to think of the token as a bearer instrument that entitles token holders to an equivalent amount of electronic dollars held by the issuer. The willingness of stablecoin issuers to increase or decrease the supply of stablecoins based on market forces, as well as the demand of arbitrageurs, ensures that stablecoins are generally traded at pegged value.
The second approach involves minting stablecoins with more volatile collateral, such as the public chain’s native token. This is a more complex and less efficient way, since more collateral is required to create a unit of stablecoin (remark: so-called over-collateralization). In practice, this anchoring is achieved through a combination of overcollateralization, programmatic risk control, and interest rates. For this stablecoin, the non-bank nature and cryptographic nature of its collateral is clearly a selling point. Additionally, there exists a model of a number of capital providers acting in a sort of "council of currency" role, who are trusted to commit funds to defend the peg in times of distress (and receive seigniorage returns in times of growth). (Note: This is exactly the model of the stablecoin DAI)
This article does not aim to explicitly explain the mechanics of a stablecoin system. We assume that these stablecoin systems work reasonably well and will continue to do so in the future. The public chains that run and circulate these stablecoins are not the focus of this article. Any standard public chain with native tokens (such as BTC and ETH, etc.) can coexist with dollar-denominated stablecoins.
To assess this question, let's briefly look at the usage of stablecoins. How big are they? Are they really replacing native tokens?
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In this article, I will limit my analysis to the Ethereum blockchain, as Ethereum is where about 75% of all crypto dollars are in circulation. Let's take a look at the market capitalization of Ethereum-based stablecoins. See below:
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Image credit: Coin Metrics
The graph above shows the market cap of Ethereum-based stablecoins (red area) compared to the market cap of ETH (blue area) and the market cap of other Ethereum tokens (green area).
Currently, stablecoins on Ethereum have a market capitalization of just over $7 billion, compared to roughly $24 billion for Ethereum’s native token, ETH. The tokens of other non-stablecoins on Ethereum add up to about $10 billion. Therefore, the market cap of ETH is still much higher than the market cap of other tokens on the chain.
What about Ethereum-based stablecoin flows? Arguably more important is the actual economic throughput (transaction count) of the stablecoins enabled by these blockchain systems. Currently, stablecoins still account for a relatively small (but growing) proportion of on-chain transaction counts. On the Ethereum blockchain, transfers of ETH are still more popular, while other tokens are marginalized. See below:
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Arguably, however, what matters most is the actual value of the on-chain transactions. As can be seen in the chart below, stablecoins already dominate transaction throughput (transaction value) in USD terms on Ethereum, despite having a smaller share of transaction counts, while other ERC20 tokens are almost insignificant. Note that there are large imprecisions in this data, I am using adjusted volume charts produced by the Coin Metrics team, which excludes self-spending and some other junk data. See below:
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Image credit: Coin Metrics
If you use market share to describe it, you can see that Tether is encroaching on the territory of ETH. Even if we don't consider Tether, other stablecoins (such as USDC, BUSD, and DAI, etc.) also account for a considerable proportion of transaction value. See below:
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Image credit: Coin Metrics
From the proportion of transaction value of various assets on Ethereum, it can be seen that the current transaction value of USDT (orange area) dominates.
By combining these charts above, it can be deduced that stablecoins satisfy a large amount of transaction value through a relatively small monetary base (market cap). This is also confirmed by the calculation of the "turnover" velocity of ETH and various stablecoins (ie, the number of times a unit of tokens are "turned over" in a year) calculated in the figure below.
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Image credit: Coin Metrics
Finally, it's important to note that stablecoin transactions are very different from ETH transactions: ETH transactions tend to be much smaller in value (often worth tens of dollars), while typical stablecoin transactions involve thousands of dollars worth of settlement. See below:
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Image credit: Coin Metrics
The user base of stablecoins is still relatively small. As of writing, there are only about 1.3 million addresses on Ethereum holding stablecoins worth more than $1; by comparison, there are more than 12 million wallet addresses holding an equivalent amount of ETH. As a result, there is a small but very active stablecoin user base within the Ethereum network who use stablecoins to make frequent large transactions. It’s worth noting that we can’t be sure if these stablecoin transactions increased transactions in ETH; but all transactions increase competition for Ethereum block space, and larger transactions should be willing to incur higher transaction fees.
So, will the growth of stablecoins harm the Ethereum system?
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ETH - dollarized
There is a simple feedback loop that powers the cryptocurrency system: when users find that a certain type of block space satisfies their needs, they acquire their native token to transact with, and also use this native token to pay transaction fees. This holding demand (i.e. the need to hold the native token for a period of time) is the source of buying pressure. Buying pressure brings about an appreciation in the value of this native token, which in turn brings security to the system (and pools like developer funds) as security is generally a function of token issuance and unit value. With increased security and settlement assurances, block space becomes more attractive. In PoS (Proof of Stake) blockchains, this is simplified: security is considered a function of the market cap of this native token. If you can attract traders to buy, hold and use this native token for long-term contracts or settlement collateral, then this demand for the native token will be reflected in its price, which in turn will make the blockchain system more secure ( Note: this is the case for ETH).
However, stablecoins damage this feedback loop. Stablecoins may not only replace the need for native tokens as a medium of settlement, but also cause traders to transact between multiple cryptocurrencies — one for actual payments and another for transaction fees. Imagine if you send a bank wire and the bank asks you to pay the $10 wire fee with your share of the bank's stock, obviously you'd probably prefer to pay the fee directly in USD (I'll point out Yes, there have been proposals to liquidate tokens into ETH in the background, so that users can trade other tokens without holding ETH).
Of course, there are exceptions. ETH is the backend collateral for DAI, so even if DAI is used as a unit of exchange, DAI still shows demand for ETH. However, DAI has made some compromises with this no-obligation collateral: DAI has introduced USDC, BAT, and WBTC as collateral options.
Stablecoins backed by the U.S. dollar are cheaper to issue. While ETH-backed stablecoins promise a decentralized vision of stable trading units while maintaining ETH-native tokens as collateral, fiat-backed stablecoins currently have the upper hand.
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Agreement as Monetary Sovereignty
I think it's helpful to think about this in terms of nation-states managing their own currencies. Countries face a very similar problem when managing their currencies: how to enforce a monopoly on their currency and ensure that its value remains constant. Sometimes, countries fail to accomplish this task and encounter citizens using other currency substitutes, a phenomenon known as dollarization. You could probably say that, like what happened in countries like Venezuela (i.e. dollarization of currencies), the current kingdom of Ethereum is threatened by dollarization. The question is whether Ethereum has enough tools to resist this phenomenon, or at least eliminate it.
ETH is the native token of Ethereum, and Ethereum (protocol) grants certain privileges to ETH (currency unit), just like the U.S. government grants privileges to the US dollar.
Let's start with a brief consideration of what gives the dollar its strength: the dollar is a combination of explicit privileges and emergent properties created by a system guaranteed and maintained by the US government.
Explicit privileges for USD include:
The fact is that it is the only currency that the US Treasury will accept for tax purposes;
The fiat tender law effectively defines Federal Reserve currency as an efficient, legal medium by which to settle debts and make payments;
A tax liability created by the US government that forces businesses and individuals to acquire or keep dollars to pay taxes (if they make a profit/earn enough income);
Unlike foreign currencies, the U.S. dollar is exempt from capital gains tax due to currency appreciation.
There are also some emerging attributes that underpin the value of the dollar:
The U.S. government will only accept U.S. dollars for U.S. Treasuries, which are widely considered the safest form of government debt;
U.S. dollars are required to purchase securities such as stocks or bonds registered in the United States;
More generally, the U.S. was an effective guarantor of the Western international commercial system after World War II, making the U.S. dollar the medium of settlement for domestic and international trade;
The U.S. maintains longstanding agreements with countries such as Saudi Arabia, which agree to sell oil in dollars in exchange for U.S. protection and military assistance.
The dollar tends to be more reliable and stable than other currencies, so it is seen as a means of maintaining purchasing power, even outside the United States.
Contrary to popular belief, there's really nothing stopping Americans from using another currency as a medium of exchange, unless that currency is so inefficient that it creates frictions like capital gains taxes, and the transacting parties end up out of Buy dollars for tax purposes.
It would be somewhat simplistic to treat taxes as the sole driver of the dollar's value (and many would think so): while the United States does give the dollar certain definite attributes, it can be argued that what the dollar really does is create an environment where Holding dollars in this environment is generally a good idea. These factors combine to create a very strong demand for U.S. dollar reserves both at home and abroad.
At the same time, it is worth mentioning that some countries implement capital controls in order to prevent their currencies from floating in the open market. These countries rebalance the balance in demand for their own currency by effectively banning their citizens from using another currency. But with cryptocurrencies, there is no government or military to enforce similar capital controls; instead, cryptocurrencies are global, largely frictionless, and highly transferable.How does Ethereum work? It is not a nation-state and lacks the capacity for direct government intervention in the economy. Furthermore, it is inextricably linked to the cryptocurrency market and cannot prevent the free flow of capital. For Ethereum, the rise of stablecoins cannot be prevented by means of capital controls. However, Ethereum can grant certain privileges to ETH. Borrowing from "Why Ether is Valuable" by Anthony Sassano (Note: For the Chinese translation, see "Where is the value of ETH?
") point of view in the article, let's start with the explicit privileges of ETH:
ETH is the default transaction fee payment method of the Ethereum network, and in order to send a transaction, a transaction fee must be paid;
The cost of sending ETH is “discounted” relative to sending other tokens: 21,000 gas to send ETH vs. 40,000+ gas to send other tokens;
A portion of the ETH used as transaction fees will likely be burned (if the EIP-1559 proposal is accepted).
The emerging features of ETH are as follows:
ETH is the collateral for Ethereum-based contracts and the settlement medium for applications within the protocol (such as Maker, etc.);
When the Eth2.0 Staking mechanism starts, a large amount of ETH will be pledged;
ETH is the reserve currency for token offerings (such as ICOs) on the Ethereum platform, and more broadly, ETH (and BTC) is the base currency for the entire crypto market;
ETH is also a speculative object; some people hold positions for speculative purposes only.
A quick note on some of the less convincing arguments above: ICOs (Initial Coin Offerings) seem to be a thing of the past and don’t appear to be coming back anytime soon; while many altcoins trade against ETH, these altcoins Much more traded with BTC and increasingly with USDT; speculation by itself is not a sufficient source of demand for ETH, and its existence does not yield any useful analysis; locking ETH through a PoS mechanism and There is no guarantee of increasing the value of ETH - supernode coins such as Dash, for example, have not been immune to price reductions, despite locking a large portion of the supply in supernodes.
Ethereum's mission is to create an environment where holding and using ETH is generally a good idea. More specifically, ETH must avoid the problems of fee abstraction and settlement medium abstraction.
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cost abstraction
As far as transaction fees are concerned, the Ethereum community seems to be firmly opposed to using cryptocurrencies other than ETH to pay transaction fees. It is worth noting that there is actually no rule stating that users must pay miners in ETH to have their transactions included in blocks.
But having said that, the Ethereum protocol itself places obvious barriers to using non-ETH methods to pay transaction fees. Not only is Ethereum paying high attention to the problem of fee abstraction; but if the fee abstraction problem occurs, Ethereum's more malleable social contract will likely make changes to the protocol. For example, it seems that a proposal such as EIP-1559, which makes major changes to Ethereum's fee logic, will likely pass.
Although the designers of the Ethereum protocol are free to modify the protocol (via Ethereum Improvement Proposals), there is always the risk that the modification makes the Ethereum chain less attractive. The efficient enforcement of paying transaction fees in ETH and burning transaction fees paid to validators (thus benefitting ETH holders) may prevent potential traders from using the Ethereum network, and another allows traders to use tokens. Blockchain networks that monetize U.S. dollars (i.e., stablecoins) to pay transaction fees may use this opportunity to grab market share.
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Settlement media separation
Like the U.S. dollar, there is no requirement in the Ethereum system to use ETH as a medium of settlement. But it's really a threatened system feature. In the Ethereum network, it seems that the transaction fee is always denominated in ETH, but the transaction fee only accounts for a relatively small part of the demand for holding ETH. The current daily transaction fee in the Ethereum network is only about 800 ETH; and it is used for ETH as a transaction fee can be purchased quickly, minimizing the impact of transaction fees on ETH demand. What's more important is to maintain ETH's status as the main transaction medium on the chain.
However, Ethereum users need not despair. Despite their current popularity and eclipsing ETH's transaction volume, stablecoins are not a perfect ETH replacement. Fiat stablecoins carry laws and regulations that are binding and can be detrimental to users at any time; they are not debt free: fiat stablecoins rely on a group of acquiescent banks and a benevolent token issuer, and counterparty risk always exists. Some on-chain use cases will always require truly native, debt-free collateral.
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The good news is that stablecoins appear to be showing transaction fee pressure for Ethereum. Although the opinions of the outside world are different, I think that in the long run, in order to maintain the sustainability of the Ethereum network, the validators should be compensated as much as possible with transaction fees (instead of issuing additional ETH), and a robust A block space marketplace is highly desirable. Transaction fees are a form of blockchain revenue, and with revenue streams, you have a lot of options. If you look at USDT transactions on Ethereum, you will see that the rise in USDT transaction value coincides with the rise in network transaction fees. See below:
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Image credit: Coin Metrics
The orange line represents the USDT transaction value in the Ethereum network, and the blue line represents the transaction fee of the entire Ethereum network. Please note that the sharp surge in handling fees in September 2019 is reflected in the lagging pressure on handling fees; in January 2020, the transaction fee fell into a trough due to the decrease in USDT transactions; in April 2020, as the USDT transaction volume rebounded again, the transaction fee climbed . Of course, other confusing variables remain, but high demand for high-value transactions usually means people are willing to pay fees, which isn't a bad thing either.
