The era of the stablecoin duopoly is coming to an end

Written by: nic carter

Translated by: Saoirse, Foresight News

Circle's equity valuation has reached $30.5 billion. Reportedly, Tether (the issuer of USDT)'s parent company is raising funds at a valuation of $500 billion. Currently, the total supply of these two major stablecoins has reached $245 billion, accounting for about 85% of the entire stablecoin market. Since the inception of the stablecoin industry, only Tether and Circle have consistently maintained a significant market share, with other competitors struggling to keep up:

• Dai's market cap peaked at only $10 billion in early 2022;

• UST from the Terra ecosystem soared to $18 billion in May 2022, but its market share was only about 10%, and it was short-lived, ultimately collapsing;

• The most ambitious challenger was Binance-issued BUSD, which peaked at $23 billion (15% of the market) at the end of 2022, but was subsequently shut down by the New York Department of Financial Services (NYDFS).

Relative supply share of stablecoins (Data source: Artemis)

The lowest market share I could find for Tether and Circle was 77.71% in December 2021—at that time, Binance USD, DAI, FRAX, and PAX together had a considerable market share. (If we look back before Tether's creation, of course, there was no market share for it, but mainstream stablecoins before Tether, such as Bitshares and Nubits, have not survived to this day.)

In March 2024, the dominance of these two giants peaked, accounting for 91.6% of the total stablecoin supply, but has since been declining. (Note: This market share is calculated by supply, as this metric is easier to track; if calculated by trading volume, number of trading pairs, real-world payment scale, number of active addresses, etc., their share would undoubtedly be even higher.) As of now, the market share of the two giants has dropped from last year's peak to 86%, and I believe this trend will continue. The reasons behind this include: increased willingness of intermediaries to issue their own stablecoins, intensified "race to the bottom" in stablecoin yields, and new regulatory changes following the introduction of the GENIUS Act.

Intermediaries Are Issuing Their Own Stablecoins

In the past few years, issuing a "white-label stablecoin" (i.e., a stablecoin customized based on an existing technical framework) required not only bearing very high fixed costs but also relying on Paxos (a compliant fintech company). But now the situation has completely changed: current options for issuance partners include Anchorage, Brale, M0, Agora, and Bridge under Stripe, among others. In our investment portfolio, some small seed-stage startups have successfully launched their own stablecoins through Bridge—no need to be an industry giant to enter stablecoin issuance.

Zach Abrams, co-founder of Bridge, explained the rationale for self-issuing stablecoins in an article about "open issuance":

For example, if you use an off-the-shelf stablecoin to build a new type of bank, you will face three major problems: a) you cannot fully capture the yield to build a high-quality savings account; b) the reserve asset portfolio cannot be customized, making it difficult to balance liquidity improvement and yield growth; c) when withdrawing your own funds, you also have to pay a 10 basis point (0.1%) redemption fee!

His points are very pertinent. If you use Tether, you can hardly obtain any yield to pass on to customers (while customers generally expect some yield when depositing funds); if you use USDC, you may get some yield, but you need to negotiate a split with Circle, and Circle will take a cut. In addition, using third-party stablecoins comes with many restrictions: you cannot decide your own freeze/seizure policy, cannot choose which blockchain network the stablecoin is deployed on, and redemption fees may rise at any time.

I once believed that network effects would dominate the stablecoin industry, and in the end, only one or two mainstream stablecoins would remain. But now my view has changed: cross-chain swap efficiency is improving, and swapping between different stablecoins on the same blockchain is becoming more convenient. In the next year or two, many crypto intermediaries may display user deposits as generic "dollars" or "dollar tokens" (rather than explicitly labeling them as USDC or USDT), and guarantee users can redeem them for any stablecoin of their choice.

Currently, many fintech companies and new banks have adopted this model—they prioritize product experience over strictly adhering to crypto industry traditions, so they display user balances directly as "dollars" and manage reserve assets on the backend themselves.

For intermediaries (whether exchanges, fintech companies, wallet providers, or DeFi protocols), there is a strong incentive to move user funds from mainstream stablecoins to their own stablecoins. The reason is simple: if a crypto exchange holds $500 million in USDT deposits, Tether can earn about $35 million a year from the "float" (i.e., idle funds), while the exchange gets nothing. There are three ways to turn this "idle capital" into revenue:

1. Request the stablecoin issuer to share part of the yield (for example, Circle shares revenue with partners through a rewards program, but as far as I know, Tether does not share yield with intermediaries);

2. Cooperate with emerging stablecoins (such as USDG, AUSD, USDe issued by Ethena, etc.), which are designed with yield-sharing mechanisms;

3. Issue their own stablecoins and internalize all the yield.

For example, if an exchange wants to persuade users to abandon USDT and switch to its own stablecoin, the most direct strategy is to launch a "yield program"—for example, paying users a yield based on the US short-term Treasury rate, while retaining 50 basis points (0.5%) of profit for itself. For fintech products serving non-crypto-native users, there may not even be a need for a yield program: simply display user balances as generic dollars, automatically convert funds to their own stablecoin on the backend, and convert to Tether or USDC as needed upon withdrawal.

Currently, this trend is gradually emerging:

• Fintech startups generally adopt the "generic dollar display + backend reserve management" model;

• Exchanges are actively reaching revenue-sharing agreements with stablecoin issuers (for example, Ethena has successfully promoted its USDe on multiple exchanges through this strategy);

• Some exchanges have formed stablecoin alliances, such as the "Global Dollar Alliance," whose members include Paxos, Robinhood, Kraken, Anchorage, etc.;

• DeFi protocols are also exploring their own stablecoins, with the most typical case being Hyperliquid (a decentralized exchange): it selected a stablecoin issuance partner through an open bidding process, with the clear goal of reducing reliance on USDC and capturing reserve asset yield. Hyperliquid received bids from Native Markets, Paxos, Frax, and others, ultimately choosing Native Markets (a decision that sparked controversy). Currently, Hyperliquid's USDC balance is about $5.5 billion, accounting for 7.8% of USDC's total supply—although Hyperliquid's USDH cannot replace USDC in the short term, this open bidding process has damaged USDC's market image, and more DeFi protocols may follow suit in the future;

• Wallet providers have also joined the self-issuance ranks, such as Phantom (a mainstream wallet in the Solana ecosystem), which recently announced the launch of Phantom Cash—a stablecoin issued by Bridge, featuring built-in yield and debit card payment functions. Although Phantom cannot force users to use this stablecoin, it can incentivize users to migrate through various means.

In summary, as the fixed cost of stablecoin issuance decreases and revenue-sharing cooperation models become more widespread, intermediaries no longer need to give up float yield to third-party stablecoin issuers. As long as they are large enough and reputable enough to earn users' trust in their white-label stablecoins, self-issuance becomes the optimal choice.

Intensifying "Race to the Bottom" in Stablecoin Yields

If you look at the stablecoin supply chart excluding Tether and USDC, you will find that the market landscape of "other stablecoins" has changed significantly in recent months. In 2022, there was a batch of short-lived popular stablecoins (such as Binance BUSD, Terra UST), but after the collapse of Terra and the outbreak of the credit crisis, the industry underwent a reshuffle, and a new batch of stablecoins emerged from the "ruins."

Stablecoin supply excluding USDT and USDC (Data source: RWA.xyz)

Currently, the total supply of non-Tether/Circle stablecoins has reached a record high, and issuers are more dispersed. The current mainstream emerging stablecoins in the market include:

• Sky (the upgraded version of Dai launched by MakerDAO);

• USDe issued by Ethena;

• PYUSD issued by Paypal;

• USD1 issued by World Liberty.

In addition, new stablecoins such as USDY from Ondo, USDG issued by Paxos (as an alliance member), and AUSD from Agora are also worth watching. In the future, there will also be stablecoins issued by banks entering the market. Existing data already indicate the trend: compared to the previous stablecoin boom, there are now more credible stablecoins in the market, and the total supply has exceeded that of the last bull market—even though Tether and Circle still dominate market share and liquidity.

These new stablecoins have one thing in common: they generally focus on "yield transfer." For example, Ethena's USDe obtains yield through crypto basis trading and passes part of the yield to users. Its supply has now soared to $14.7 billion, making it the most successful emerging stablecoin this year. In addition, USDY from Ondo, SUSD from Maker, USDG from Paxos, and AUSD from Agora all included yield-sharing mechanisms in their initial design.

Some may question: "The GENIUS Act prohibits stablecoins from offering yield." To some extent, this is true, but if you pay attention to the recent exaggerated statements from banking lobby groups, you will see that this issue is far from settled. In fact, the GENIUS Act does not prohibit third-party platforms or intermediaries from paying rewards to stablecoin holders—and the source of these rewards is the yield paid by issuers to intermediaries. Mechanically, it is even impossible to close this "loophole" through policy provisions, nor should it be closed.

With the advancement and implementation of the GENIUS Act, I have noticed a trend: the stablecoin industry is shifting from "directly paying yield to holders" to "transferring yield through intermediaries." For example, the cooperation between Circle and Coinbase is a typical case—Circle pays yield to Coinbase, which then passes part of the yield to users holding USDC, and this model shows no sign of stopping. Almost all new stablecoins have built-in yield strategies, and the logic is not hard to understand: if you want to persuade users to abandon highly liquid and widely recognized Tether and switch to new stablecoins, you must provide a sufficiently attractive reason (yield is the core attraction).

I predicted this trend at the 2023 TOKEN2049 Global Crypto Summit, and although the introduction of the GENIUS Act delayed the timeline, it is now clearly emerging.

For less flexible existing giants (Tether and Circle), this "yield-oriented" competitive landscape is undoubtedly unfavorable: Tether offers no yield at all, and Circle only shares yield with a few institutions such as Coinbase, with unclear cooperation with other institutions. In the future, emerging startups may squeeze the market space of mainstream stablecoins by offering higher yield splits, forming a "race to the bottom" in yields (in fact, a "race to the top" in yield caps). This pattern may benefit institutions with scale advantages—just as the ETF industry once experienced a "race to zero fees," ultimately forming a duopoly of Vanguard and BlackRock. But the question is: if banks eventually enter the game, can Tether and Circle still be the winners in this competition?

Banks Can Now Officially Participate in Stablecoin Business

After the GENIUS Act was implemented, the Federal Reserve and other major financial regulators adjusted relevant rules—now banks can issue stablecoins and conduct related business without applying for new licenses. However, according to the GENIUS Act, stablecoins issued by banks must comply with the following rules:

• 100% collateralized by high-quality liquid assets (HQLA);

• Support 1:1 on-demand redemption for fiat currency;

• Fulfill disclosure and audit obligations;

• Accept supervision by relevant regulatory agencies.

At the same time, stablecoins issued by banks are not considered "deposits protected by federal deposit insurance," and banks are not allowed to use the collateral assets of stablecoins for lending.

When banks ask me "should we issue stablecoins," my advice is usually "don't bother"—just integrate existing stablecoins into core banking infrastructure, no need to issue directly. But even so, some banks or bank alliances may consider issuing stablecoins, and I believe such cases will emerge in the next few years. The reasons are as follows:

• Although stablecoins are essentially "narrow banking" (only accepting deposits, not lending), which may reduce bank leverage, the stablecoin ecosystem can bring various revenue opportunities, such as custody fees, transaction fees, redemption fees, API integration service fees, etc.;

• If banks find that deposits are being lost to stablecoins (especially those that can provide yield through intermediaries), they may issue their own stablecoins to stop this trend;

• For banks, the cost of issuing stablecoins is not high: there is no need to hold regulatory capital for stablecoins, and stablecoins are "fully reserved, off-balance-sheet liabilities," with lower capital intensity than ordinary deposits. Some banks may consider entering the "tokenized money market fund" field, especially in the context of Tether's continued profitability.

In extreme cases, if the stablecoin industry completely bans yield sharing and all "loopholes" are closed, issuers will obtain "seigniorage-like rights"—for example, collecting 4% asset yield without paying any return to users, which is even more lucrative than the net interest margin of "high-yield savings accounts." But in reality, I believe the yield "loophole" will not be closed, and issuers' profit margins will gradually decline over time. Even so, for large banks, as long as they can convert part of their deposits into stablecoins, even retaining only 50-100 basis points (0.5%-1%) of profit can bring considerable income—after all, large banks' deposit scales can reach trillions of dollars.

In summary, I believe banks will eventually join the stablecoin industry as issuers. Earlier this year, The Wall Street Journal reported that JPMorgan, Bank of America (BoFA), Citi, and Wells Fargo have begun preliminary discussions on forming a stablecoin alliance. For banks, the alliance model is undoubtedly the optimal choice—a single bank is unlikely to build a distribution network large enough to compete with Tether, while an alliance can pool resources and enhance market competitiveness.

Conclusion

I once firmly believed that the stablecoin industry would eventually be left with only one or two mainstream products, at most no more than six, and repeatedly emphasized that "network effects and liquidity are king." But now I am beginning to reflect: can stablecoins really benefit from network effects? It is different from businesses like Meta, X (formerly Twitter), and Uber that rely on user scale—the real "network" is the blockchain, not the stablecoin itself. If users can move in and out of stablecoins frictionlessly, and cross-chain swaps are convenient and low-cost, the importance of network effects will drop significantly. When exit costs approach zero, users will not be forced to stick to a particular stablecoin.

It is undeniable that mainstream stablecoins (especially Tether) still have a core advantage: among hundreds of exchanges worldwide, their trading spreads (bid-ask spreads) with major forex pairs are extremely small, which is hard to surpass. But now, more and more service providers are starting to use "wholesale FX rates" (i.e., interbank rates) to exchange stablecoins with local fiat currencies both inside and outside exchanges—as long as the stablecoin is credible, these providers do not care which one is used. The GENIUS Act has played an important role in regulating stablecoin compliance, and the maturity of infrastructure has benefited the entire industry—except for the existing giants (Tether and Circle).

Multiple factors are gradually breaking the duopoly of Tether and Circle: cross-chain swaps are more convenient, intra-chain stablecoin swaps are nearly free, clearinghouses support cross-stablecoin/cross-blockchain transactions, and the GENIUS Act is promoting the homogenization of US stablecoins—all these changes reduce the risk for infrastructure providers to hold non-mainstream stablecoins, promote the "fungibility" of stablecoins, and this is of no benefit to the existing giants.

Now, the emergence of a large number of white-label issuers has reduced the cost of stablecoin issuance; non-zero Treasury yields are incentivizing intermediaries to internalize float yield, squeezing out Tether and Circle; fintech wallets and new banks are taking the lead in this trend, with exchanges and DeFi protocols following closely—every intermediary is eyeing user funds, thinking about how to turn them into their own revenue.

Although the GENIUS Act restricts stablecoins from directly providing yield, it has not completely blocked the path for yield transfer, giving emerging stablecoins room to compete. If the yield "loophole" continues to exist, a "race to the bottom" in yield sharing will be inevitable, and if Tether and Circle are slow to react, their market position may be weakened.

In addition, we must not ignore those "off-market giants"—financial institutions with balance sheets in the trillions of dollars. They are closely watching whether stablecoins will cause deposit outflows and how to respond. The GENIUS Act and regulatory adjustments have opened the door for banks to enter the market. Once banks officially participate, the current stablecoin market cap of about $300 billion will seem insignificant. The stablecoin industry is only 10 years old; the real competition is just beginning.