Written by: Nic Carter, Partner at Castle Island Ventures
Translated by: Yangz, Techub News
At the time of writing, Circle's equity value is $30.5 billion. Reports indicate that Tether is raising funds at a valuation of $500 billion. The total supply of these two major stablecoins reaches $245 billion, accounting for approximately 85% of the stablecoin market. Since their inception, only Tether and Circle have maintained significant market shares, while other competitors have struggled to keep up. Dai peaked at $10 billion in early 2022. The UST from Terra, which ultimately collapsed, soared to $18 billion in May 2022 but only held about 10% of the market share, and it was short-lived. The most ambitious attempt to dethrone Tether/Circle was Binance's BUSD, which peaked at $23 billion at the end of 2022, capturing 15% of the market share, before being shut down by the New York State Department of Financial Services.
_Stablecoin relative supply share. Data source: _Artemis
The lowest recorded absolute market share for Tether/Circle that I could find was 77.71% in December 2021, when BUSD, DAI, FRAX, and PAX collectively held a significant market share. (I suspect that if we look back to the pre-Tether era, there was indeed a time when it had no market share, but the major stablecoins of the pre-Tether era, such as Bitshares and Nubits, failed to survive.)
The dominance of these two giants peaked in March 2024, accounting for 91.6% of the total supply of stablecoins, but has since begun to decline. (I calculate market share based on supply because it is easier to compute, but if calculated by trading value, number of trading pairs, real-world payment volume, active addresses, or real-world payment amounts, their share would undoubtedly be larger.) However, since peaking last year, their share has dropped to 86%, and I believe this trend will continue. Reasons include strong intervention from intermediaries, bottom-up competition in yields, and new regulatory dynamics following the GENIUS Act.
Intermediaries are building their own stablecoins
In the past few years, if you wanted to issue a white-label stablecoin, you had to bear extremely high fixed costs and could only turn to Paxos. Now, that has changed, and you can choose from several institutions like Anchorage, Brale, M0, Agora, or Bridge (under Stripe). Our portfolio includes early-stage startups that successfully launched their own stablecoins using Bridge. You don’t need to be an industry giant to do this. In an article about "open issuance," Bridge co-founder Zach Abrams explained why building your own stablecoin is a wise move.
For example, if you use a ready-made stablecoin to build a digital bank, then:
You cannot fully capture the yield to create the best savings account;
Your reserve asset portfolio cannot be customized to support higher liquidity or higher yields;
When withdrawing funds, you also have to pay a 10 basis point redemption fee!
He is right. If you use Tether, you may not be able to generate any yield to pass on to customers (who expect to earn some yield from their deposits). If you use USDC, you might earn some yield, but that requires negotiation, and Circle also wants a cut. You cannot control your fate regarding freezing/seizure policies. You lack configurability. You cannot decide on which blockchain to issue. And you have to pay redemption fees (which can increase at any time).
In the past, I believed that network effects would prevail, and eventually, only one or two stablecoins would remain in the market; I no longer think that way. Cross-chain exchanges and exchanges between different stablecoins on-chain are becoming increasingly efficient. I believe that within a year or two, many intermediaries in the crypto space will display your deposits as a generic "dollar" or "dollar token" (rather than USDC or USDT) and guarantee that you can exchange it for the stablecoin of your choice on demand.
We have seen many fintech companies and digital banks doing this. They prioritize user experience and prefer to provide the best experience for customers rather than follow crypto traditions. Therefore, they simply display your balance in dollars and manage reserve assets on the backend.
Intermediaries—whether exchanges, fintech companies, wallets, or DeFi protocols—have a strong incentive to strip away mainstream stablecoins and direct user funds to their own stablecoins. The reason is simple. If you are a crypto exchange with $500 million in USDT deposits, Tether is earning about $25 million a year from that float, while you earn nothing. There are three ways to turn that idle capital into a revenue source: you can plead with the issuer to share some of the underlying yield (Circle does this through reward programs, but as far as I know, Tether does not pass on yields to intermediaries); you can partner with newer stablecoins that are designed to offer yield sharing, such as USDG, AUSD, or Ethena's USDe; or you can create your own stablecoin and internalize all the yields.
In the example above, as an exchange, you must persuade users to abandon USDT and adopt your newly launched stablecoin. An obvious strategy is to launch a "earn coin" program, offering treasury rates and keeping a portion of the spread for yourself, say 50 basis points. If you are a fintech company serving non-crypto-native customers, you might not even need to launch similar incentives. You can simply display user balances in generic dollars and then convert them to your own stablecoin. If necessary, converting to Tether or USDC upon withdrawal is also straightforward.
We have seen this happening. The latter fintech company's process is becoming the default practice for startups today, and exchanges are actively negotiating revenue-sharing agreements with stablecoins. In this regard, Ethena's pitch to exchanges has been particularly successful. Additionally, it is well-known that Circle shares interest income with Coinbase, which in turn passes it on to exchange customers holding USDC balances. Other exchanges are also banding together to create their own stablecoin alliances. Notably, the "Global Dollar" alliance includes Paxos, Robinhood, Kraken, Anchorage, Galaxy, Bullish, and Nuvei, along with a dozen other well-known partners.
Importantly, DeFi protocols are now also exploring issuing their own stablecoins. They cannot easily convert user deposits into other stablecoins, but they can gently encourage users to use one stablecoin over others. One of the most notable cases is Hyperliquid, which conducted a very public bidding process for its stablecoin, explicitly aiming to reduce reliance on USDC and generate reserve yields for the protocol. Hyperliquid collected bids from Native Markets, Paxos, Frax, Agora, Sky (Maker), Curve, and Ethena, ultimately and controversially choosing Native Markets. Today, Hyperliquid has about $5.5 billion in USDC, accounting for 7.8% of the total USDC supply. Although Hyperliquid's USDH will not replace USDC overnight, this public process represents a reputational loss for USDC, as other DeFi protocols will likely seek to follow suit. In turn, we also see stablecoins attempting to create their own DeFi ecosystems. The assumption of built-in yields creates a vast design space that has yet to be explored. It is akin to traditional fintech applications built on money market funds; or brokerages directly paying you the yields from securities lending.
We are even seeing wallets launching their own stablecoins. Phantom launched Phantom Cash, a stablecoin issued by Bridge that embeds earning and debit card features. Phantom cannot require customers to use a specific stablecoin, but they have countless levers to pull to guide users toward their own Cash product.
With the decline in fixed costs for issuing stablecoins (or directly partnering with issuers willing to enter revenue-sharing agreements), it is no longer reasonable for intermediaries to hand over the yield from their float to third-party stablecoins. If your scale is large enough and your reputation is strong enough to earn user trust in your white-label stablecoin, then you might as well do it yourself.
Yield bottoming or topping competition
If you observe the stablecoin supply chart excluding USDT and USDC, you will notice a structural change in the "other" category in recent months. In 2022, a large number of second-tier stablecoins experienced explosive growth, led by Binance's ill-fated BUSD and Terra's disastrous UST (not shown in the chart below). After the collapse of Terra, the industry underwent a reshuffle, and a new batch of stablecoins emerged from the ashes.
Stablecoin supply (excluding USDT and USDC), RWA.xyz
Today, the supply of non-Tether/Circle stablecoins is greater than ever, with a wide range of issuers. The current leaders in this landscape include Sky (the latest iteration of Maker/Dai), Ethena's USDe, Paypal's PYUSD, and World Liberty's USD1. I also believe that noteworthy stablecoins include Ondo's USDY, Paxos's USDG (issued as part of an alliance), and Agora's AUSD. Many other new stablecoins—including those issued by banks—will soon join the competition, but I think the existing data already speaks volumes. Compared to the last boom, there are now more credible stablecoins, and their total supply exceeds the figures from the previous bull market—even as Tether and Circle continue to dominate market share and liquidity.
Many of these new issuers have an interesting characteristic: many focus on passing through yields. Ethena's USDe passes through the yields from crypto basis trading and is the most successful case this year, with its supply soaring to $14.7 billion. USDY (Ondo), SUSD (Maker), USDG (Paxos/others), and AUSD (Agora) were all designed with yield sharing in mind. You might argue on this topic that "the GENIUS Act prohibits the provision of yields." This is somewhat true, but if you've recently followed the exaggerated performances of the banking lobby, you would know that this issue is not settled. The GENIUS Act does not actually prohibit third-party platforms or intermediaries from paying rewards to stablecoin holders (which are then paid by the issuers to the intermediaries). Mechanically, I believe you cannot even design wording that would close this "loophole," nor should you.
With the passage of the GENIUS Act, I have noticed a shift: stablecoins that directly pay interest to holders (which is explicitly prohibited by GENIUS) are turning to paying yields through intermediaries. Circle is practicing this strategy through Coinbase and shows no signs of stopping. Almost every new stablecoin has some built-in yield strategy; after all, if you want to persuade someone to abandon the highly liquid and mature Tether in favor of your stablecoin, you must give them a compelling reason. This is a prediction I made at the Token2049 conference in 2023; although the GENIUS Act disrupted my timeline, this is clearly happening.
Therefore, the trend of stablecoins generally moving towards providing yields will hurt existing dominant players with less flexibility. Tether pays no yields at all. Circle has a rewards program with Coinbase, but its relationships with other platforms are unclear. I believe new startups will be able to weaken the major issuers on yields and create a phenomenon of "race to the bottom" (or realistically, "race to the top"). This could actually benefit participants with economies of scale, similar to how we see ETF fees racing to zero and the emergence of a Vanguard/Blackrock duopoly. However, if banks are still waiting on the sidelines to join, will Circle and Tether emerge as the winners in this scenario?
Banks are now allowed to enter
With the passage of the GENIUS Act and the modification of rules by the Federal Reserve and other major financial regulators, banks can now freely issue and participate in stablecoins without applying for new charters. According to the GENIUS Act, stablecoins issued by banks must still comply with rules, including 100% backing by high-quality liquid assets, on-demand 1:1 redemption, disclosure of information, and audits, while being subject to oversight by relevant regulatory agencies. Stablecoins are not considered custodial deposits, and banks cannot lend against collateral that supports stablecoins. Whether banks are willing to issue stablecoins is an interesting question. When banks ask me if they should do so, I usually tell them it’s not worth the trouble; they should incorporate existing stablecoins into their core banking infrastructure instead of issuing their own.
However, banks or banking consortiums may still consider issuing stablecoins. I believe we will start to see such cases in the coming years. Even if stablecoins are essentially a narrow form of banking, their issuance would actually reduce banks' leverage, but in a vibrant stablecoin ecosystem, revenue opportunities (custody fees, transaction fees, redemption fees, API integration fees, etc.) will still emerge. If banks see deposit outflows occurring, especially when stablecoins can provide yields through intermediaries, they may panic and determine that issuing their own stablecoins is the best way to prevent this.
Structurally, the cost of issuing stablecoins is not that high for banks; you do not need to hold regulatory capital for this. They are fully reserved, off-balance-sheet liabilities, with a lower capital intensity than ordinary deposits. Some banks may decide to join the "tokenized money market fund" game, especially if Tether's profitability remains strong. If the final landscape for stablecoins is one where interest cannot be shared at all, and all "loopholes" are closed, then issuers effectively gain a money-printing license (collecting 4% yields without having to pay customers—better than the net interest margin of "high-yield" savings). But in reality, I expect that yield "loopholes" will not be completely closed, and issuers' profit margins will decline over time. However, even if issuers only retain a spread of 50 or 100 basis points, considering that the largest banks manage trillions of dollars in deposits, if there is a trend of deposits moving to stablecoins, this is still a considerable income.
In summary, I expect banks will indeed join the competition for stablecoins as issuers, for whatever reason. Earlier this year, The Wall Street Journal reported that JPMorgan, Bank of America, Citigroup, and Wells Fargo have already had preliminary discussions about creating a stablecoin consortium. I believe forming a consortium is the most reasonable approach at this time, as no single bank has the capability to establish a distribution network sufficient to compete with Tether for its stablecoin.
Conclusion
I once firmly believed that we only needed one or two major stablecoins, at most five or six. "Network effects and liquidity are king," I used to repeat without thinking, but do stablecoins really benefit from network effects? They are different from businesses like Meta, X, or Uber. In reality, the network is constituted by the blockchain, not the tokens themselves. If users can frictionlessly exchange tokens and quickly and cheaply convert between different blockchains, the importance of network effects diminishes. If exit costs approach zero, you cannot force users to stay with you forever. The mainstream stablecoins (especially Tether) do have the advantage of having very small spreads against major fiat currencies across hundreds of exchanges worldwide. This is indeed hard to surpass, but I observe (and am investing in) a plethora of service providers emerging that connect stablecoins to local fiat currencies at wholesale rates, both inside and outside exchanges. As long as stablecoins are credible, they are not too concerned about which stablecoin is being traded. The GENIUS Act has resolved many issues in this regard. The maturity of the infrastructure has improved the experience for everyone, except for the existing industry giants.
Multiple factors are working together to erode the duopoly of Tether/Circle. Cross-chain exchanges are becoming better and cheaper. In particular, exchanges of stablecoins on the same chain are almost free. Clearinghouses are now emerging that facilitate transactions between stablecoins, regardless of the source and target stablecoin or blockchain. The GENIUS Act is homogenizing (U.S.-based) stablecoins, thus reducing the risk that infrastructure providers bear on their balance sheets. We are experiencing a process of homogenization of stablecoins, from which the existing industry giants will not benefit.
Today, a large number of white-label issuers are driving down the fixed costs of issuance. Non-zero treasury yields strongly incentivize intermediaries to monetize their float and strip away Circle and Tether's stablecoins. This is especially true for fintech-style wallets and digital banks that do not adhere to the crypto user experience model, followed by exchanges, and now including DeFi protocols. Every intermediary is greedily eyeing users' float and pondering why they haven't converted it into revenue.
The prospect of yields—though restricted by the GENIUS Act but not eliminated—also provides new freedom for emerging stablecoins to compete with the less yield-sharing USDT/USDC. If, as I expect, yield "loopholes" still exist, then there will be a race to the bottom in yield sharing, and if the existing giants do not react quickly enough, this could erode their market positions.
As for the "elephant in the room," it is those financial institutions with trillions of dollars on their balance sheets that have not yet fully participated. They are concerned about whether stablecoins will lead to deposit outflows, and if so, how to respond. The GENIUS Act and the shift in financial regulation have enabled banks to participate in the competition. If they truly enter the fray, the current market cap of about $300 billion for stablecoins will seem trivial. Stablecoins are only a decade old. The competition has just begun.
Note: The data from Artemis and RWA.xyz cited in this article exclude Terra's UST from their datasets, so I actually believe that during the Terra frenzy, their market share may have dropped to 71.7%. However, many would argue that UST was not a true stablecoin.
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