Can Stablecoin Supply Measure Ethereum Adoption?

As innovation on top of Ethereum continues to connect DeFi with the outside world, stablecoin growth appears to be a strong measure of adoption.

Dec 1, 2021
CoinDesk Insights

Interest in the cryptocurrency markets came roaring back this fall, with bitcoin and ether both breaking their previous all-time highs just weeks ago. However, shortly after the breakout things turned south, and the market took nearly a 25% dip.

While many investors and traders were calling for an end to the bull market, the stablecoin printer continued to pump new capital into every corner of crypto. Several billion-dollar funds were announced and institutional investors were taking part, arguably for the first time in the short history of the asset class.

(CoinDesk Research)

The growth of stablecoin supply is likely correlated to decentralized finance (DeFi) total value locked (TVL) for two reasons:

  1. New capital is adding buy pressure to crypto assets, artificially boosting the dollar measure of TVL;
  2. New capital is looking to be deployed throughout DeFi to earn yield on trading fees, lending yield and on-chain derivatives.

While it could be argued that new market entrants are coming to extract value from the market and leave, it appears that this must be a fringe case. Since the beginning of 2020, stablecoin supply has been almost “up only,” hinting that users may sell into stablecoins, but they are not leaving the industry.

The largest bear-case scenario boils down to the fact that most successful DeFi applications are currently used for further speculating on the future of crypto and not solving any real-world problems. However, promising use cases continue to arise, with prediction markets, gaming, 24/7 forex trading and undercollateralized loans all coming to fruition.

Regardless of short-term price action, the adoption of stablecoins and DeFi applications by funds, institutions and individuals is a positive for the industry. Innovation on top of Ethereum will continue to connect DeFi with the outside world, and stablecoin growth should continue to be a strong measure of adoption.

Welcome to another edition of Valid Points.

Pulse check

The following is an overview of network activity on the Ethereum 2.0 Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.

(Beaconcha.in, Etherscan)

(Beaconcha.in, BeaconScan)

Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.

Validated takes

  • Rari Capital and Fei Protocol are looking to undergo a token merger if the respective DAOs can agree. BACKGROUND: The founders of both protocols believe they can create a DeFi powerhouse by combining money markets and a decentralized stablecoin. The integration of the FEI stablecoin into Rari Capital could allow for readily available borrowing liquidity that will help stabilize periods of high demand.
  • DyDx plans to offer gas-free deposits from Ethereum to users of its platform. BACKGROUND: The cost of even a single transaction on Ethereum’s base layer is prohibitively high for many potential DeFi users, and DyDx is attempting at creating an easier path to onboarding new users. The news comes days after Binance decided to add support for withdrawals to Arbitrum.
  • Ethereum privacy application and mixer, Tornado Cash, looks ready to deploy on Arbitrum. BACKGROUND: Tornado Cash allows users to deposit ETH from one address and withdraw from another account, in order to maintain further on-chain privacy. The application is often used by DeFi exploiters or hackers to hide any trail of evidence. The Arbitrum integration will allow further use of the Ethereum roll-up, so users can stay on layer 2 and avoid high transaction costs.
  • Twitter’s CEO and bitcoin enthusiast Jack Dorsey stepped down and was replaced by Parag Agrawal. BACKGROUND: While Dorsey is interested in cryptocurrency, he was mainly interested in integrating bitcoin with one of the largest social media networks. Agrawal was part of the crypto team at Twitter and could provide a link between Ethereum and social media.

Factoid of the week

Open comms

Valid Points incorporates information and data about CoinDesk’s own Eth 2.0 validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.

You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:

0xad7fef3b2350d220de3ae360c70d7f488926b6117e5f785a8995487c46d323ddad0f574fdcc50eeefec34ed9d2039ecb.

Search for it on any Eth 2.0 block explorer site.

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.

Edward is an analyst on the CoinDesk Research team focusing on Ethereum and DeFi. He holds ETH, AVAX, OHM and a small amount of other cryptocurrencies.