Just a few years ago, it was hard to imagine that a stablecoin would come to represent a significant portion of the cryptocurrency industry. Market players tended to base their money-making strategies on a cryptocurrency’s volatility rather than its stability. There were only 11 stablecoins on the market in 2016, and another 10 were added in 2017. Nowadays, there are 66 stablecoins, and over 134 others still in development. The overwhelming majority of these stablecoins were running on Ethereum before 2018, without any indication suggesting that this might change.
But the script has flipped, according to Blockchain.com’s “2019 State of Stablecoins” report: Only 50% of all stablecoins are now built on Ethereum, and the latest Blockdata report also highlights this decrease. The ground for the stablecoin market is shifting beneath our feet.
We have recently seen an increased number of entrants into the blockchain market that depend on a sort of asset-backing mechanism. Decentralized finance (DeFi) frameworks such as Compound, MakerDAO and Equilibrium are not only responsible for new mechanisms that generate stablecoin assets, but are also liberating developers to build advanced DeFi applications on top of them. We are witnessing the emergence of new types of blockchains — the so-called “generation 3.0” — that have begun to roll out. It includes names like Telegram’s TON, Polkadot, Hedera’s HashGraph and Dfinity, which not only promise new opportunities for stablecoins but also offer interoperability out of the box.
Against this background, Ethereum is still a viable choice for teams developing price-stable currencies, but there may be two fatal flaws worth considering: product differentiation and scalability. For widespread adoption, a stablecoin should be as intuitive and easy-to-use as possible. It would need to support a high volume of transactions, as well as maintain various on-chain mechanisms. With generation 3.0 of blockchain technology just ahead, a stablecoin should also be cross-chain compatible.
Despite the number of blockchain 3.0 projects hitting the market, Ethereum continues to take up a significant portion of the stablecoin market. There are a number of reasons for this.
On-chain logic and regulation is built-in: These capabilities are why Ethereum-based stablecoins became the standard early on and have even provided a proven business model. Ethereum is simultaneously the biggest and most accessible blockchain ecosystem with on-chain logic support. Most current assets are based on Ethereum, and the emerging DeFi industry has a strong need for stablecoins designed to work within the same chain. Furthermore, Ethereum smart contracts pass multiple audits and are kept under close observation by security watchdogs, which sometimes even affects the Ethereum price.
A total 93% of today’s stablecoin market revolves around the popular Ethereum-based stablecoin Tether (USDT), but others have quickly risen in size and scope — such as Paxos Standard (PAX), USD Coin (USDC) and Gemini Dollar (GUSD). Each one of these stablecoins are compelling proof of the stablecoin concept, and they all happen to be built on the Ethereum blockchain.
A highly secure consensus mechanism: Ethereum uses proof-of-work(PoW), which is acknowledged as strong and tamper-proof when compared against delegated proof-of-stake (DPoS) models. More importantly, this level of security comes at the expense of computation efficiency and speed.
An Ethereum-based framework is more compatible with existing infrastructure: Ethereum uses a token standard called ERC-20, allowing for easy interoperability with other Ethereum-compatible software and hardware wallets. Ethereum-based projects enjoy access to a rich and thriving ecosystem from day one.
New stablecoin models
There are 33 Ethereum-based stablecoins out there, as well as eight stablecoins based on Bitshares and six on Stellar.
But the industry is shifting in 2019, as stablecoin developers have begun looking to more diversified options. Some live and prelaunch stablecoins have even combined platforms: Carbon was initially released on Ethereum, then added EOS support a few months later — and even plans to eventually move to Hashgraph’s distributed ledger.
Others have chosen well-known forks (such as Kowala, Nos or Xank), their own blockchain platform or another proprietary one (such as Terra, Mile or Celo), or they’ve chosen to master the market’s current blockchains — with White Standard and Stronghold USD running on Stellar, Phi on Dfinity, and Cryptopeg on Bitcoin.
At the same time, 2019 has become a banner year for EOS-based stablecoins. We have seen a number of EOS stablecoin projects like EOSDT, Carbon (CUSD), EUSD and Tether go live on EOS, and more are joining their ranks on the market. The question of whether EOS is an Ethereum-killer has generated spirited discussion in ETH and EOS communities alike, but it looks like there is no clear leader for now.
Why didn’t they choose Ethereum? A variety of choice indicates a maturing market. This doesn’t signal the end of Ethereum’s stablecoin dominance, but rather that Ethereum’s days of being a monopoly are over. With other blockchain platforms offering more options for stablecoin projects, there is no reason for these projects to suffer from Ethereum’s well-understood shortcomings.
An Ethereum-based stablecoin framework comes with limited transaction bandwidth: Ethereum can handle around 25 transactions per second at maximum, and users pay higher fees to see their transactions processed with urgency. Any platform aspiring to make a difference in how people use cryptocurrency will require a far greater transaction bandwidth. Credit card companies like Visa and MasterCard handle several thousand transactions per second (Visa claims to have clocked 47,000 per second in 2013), so a new mass-market product would require similar performance.
Indeed, Ethereum co-founder Vitalik Buterin demonstrated some changes to Ethereum that could significantly increase its transaction processing capability through first-layer optimizations like “sharding” or secondary processes like Plasma. These tweaks would make it possible for the Ethereum blockchain to handle some 100,000 transactions per second. But there is no timeline for when users will see this functionality released. We will probably have to wait quite a while for its implementation, as the team still hasn’t assembled a working prototype after trying many different versions.
An underlying part of Ethereum has fundamental scalability issues:Ethereum’s main selling point is its smart contract functionality, which is written in a programming language called Solidity. Developers can use Solidity to turn agreements between a buyer and seller into self-executing computer code, but when it tries to serve too many users at once, things start to slow down.
Solidity is radically different from the popular mainstream languages in many aspects, which makes it difficult for people in the space to learn it and work with it. The language requires so many legacy and internal specifics to know that it leads to an overkill in system architecture. Its optimizer is weak and it generates slow code, so even simple operations can be dependent on a large number of inefficient instructions.
Moreover, Solidity doesn’t support an integrated development environment — a niche software that helps programmers write quality code in a shorter period of time. You can’t even manipulate a string with built-in functionality.
A lack of interoperability on Ethereum blockchains: This wasn’t such an issue three years ago, when there was only one blockchain for everyone’s smart contracts and decentralized application (DApp) development. Nowadays, several Ethereum blockchains exist: Tron, Waves, Tezos, Quarkchain — and yes, even EOSIO. There are even more to come, so it’s important that a cross-chain solution appears sooner rather than later for the sake of exchanging of data and value.
Related: Blockchain Interoperability, Explained
So what’s next? The next stage of the stablecoin market’s evolution is about competition between Ethereum, EOS and other blockchain platforms and stablecoin projects within one network. The crypto market is recognizing the value that stablecoins have, as the global stablecoin trading volume grew from $12.5 billion in 2017 to $82 billion in 2018. Tether is the second-most actively traded cryptocurrency (about 60% of Bitcoin daily trading volume), entering the top-10 crypto asset rankings by market value earlier this year. According to coin360, USDT’s 24-hour trading volume exceeds Bitcoin’s with unfailing regularity.
Even higher demand is expected in 2020 as stablecoin adoption increases, driven by its multiple use cases in DApps, DeFi-platforms, traders and other user audiences. Both platforms and projects will have to fight for these customers, offering opportunities that larger players lack. One of these advantages is surely cross-chain functionality, compared to Ethereum’s proposed on-chain solution.
As the stablecoin market begins to see some maturation within a cryptocurrency industry just 10 years old or so, it’s clear that there are options beyond Ethereum. This blockchain was a de facto choice for offering a wide range of functionalities right out of the box, but needs to change as time advances and improved solutions present new ways of solving old problems.
While the stablecoin market charges forward at large, Ethereum is standing still by comparison. There is not only a trend toward building on EOSIO, but toward picking alternative blockchains beyond Ethereum as well.
We only need to understand it as a new reality of a dynamic market. Stablecoin-thinking has evolved significantly over the last year or two — it will be interesting to see what changes next.