Stablecoins continue to grow into a pillar of both the cryptocurrency world and the global financial system. The market has already surpassed $235 billion, showcasing that people have faith in the future of these assets.
Currently, two USD-backed stablecoins (USDT and USDC) hold about 90% of the market. The rest of the top-10, including USDe and PYUSD, are all dollar-denominated. Euro-based stablecoins have little market share by comparison. Why is that?
Though there are ongoing discussions around regulation, interoperability, and integration with traditional finance (TradFi), the single most critical factor remains liquidity. Without deep and sustainable liquidity, no stablecoin can gain mass traction, and no amount of regulatory clarity will change that.
What’s the Issue With Non-USD Stablecoins?
Let’s take the Euro as an example. EUR-backed stablecoins have existed for years, yet they remain barely used. This is primarily due to liquidity challenges, which ultimately determine whether a stablecoin can become a widely used financial tool.
For years now, USD-backed stablecoins like USDT and USDC have dominated this landscape, serving as the primary sources of liquidity in lending pools and trading pairs. These assets boast deep liquidity, high trading volumes, and extensive integration across both centralized finance (CeFi) and decentralized finance (DeFi) platforms.
In contrast, euro (and other non-USD) stablecoins struggle with a lack of market mechanisms to sustain them. There simply aren’t enough trading pairs, users, or financial instruments built around them to create an effective liquidity ecosystem like that enjoyed by USD stablecoins.
One of the key reasons for this liquidity gap is that centralized market makers do not see adequate financial incentives to provide liquidity for euro stablecoins; it simply isn’t profitable enough for them. As such, they prioritize other assets, leaving EUR-backed stablecoins at a disadvantage.
This situation extends beyond preferences—it’s an economic issue. If market makers cannot earn a reasonable return on lending liquidity for these assets, they will not allocate capital towards them.
Is Regulation the Key or Just a Side Factor?
One argument is that if different jurisdictions establish clear-cut regulations, non-USD stablecoins will become more appealing. The introduction of MiCA regulations in the EU, for instance, has opened pathways for compliant EUR-backed stablecoins like EURC, potentially making them a more viable alternative in TradFi integration.
While I agree that advancing regulations could spearhead the growth of local currency stablecoins, it is critical to remember that EUR-backed stablecoins existed prior to MiCA. Additionally, the long-term impact of this framework on their adoption remains unclear and could create imbalances favoring euro stablecoins without fostering genuine competition.
More fundamentally, regulation will not resolve the core issue of liquidity. Without sufficient liquidity, no regulatory framework can make a stablecoin viable for widespread use. Hence, the pertinent question becomes: how can we foster liquidity for non-USD stablecoins?
Addressing Liquidity Constraints
To illustrate the stark contrast, the market capitalization of USDT and USDC stands at $141 billion and $56 billion, respectively, whereas euro-based stablecoins like EURC or EURS barely exceed $100 million. This significant gap directly impacts usability, leading to fewer trading pairs, limited DeFi integrations, and reduced incentives for traders and institutional players to adopt them. This creates barriers to becoming mainstream assets.
A case could be made for the EURe, which I personally find convenient for real-world applications. Nevertheless, the broader market for non-USD stablecoins continues to confront challenges: limited adoption, fewer integrations, and a long trajectory ahead before they can compete with dollar-backed counterparts.
One potential solution lies in the development of more effective liquidity algorithms for non-USD stablecoins. Reliance on professional market makers has proven ineffective; thus, introducing new strategies to ensure strong liquidity without entirely depending on these parties is essential.
In my view, establishing deep liquidity pools between USD and non-USD stablecoins is the most practical method. This would directly address the core issue by promoting smooth conversions while requiring refinement of automated market maker (AMM) algorithms to enhance the efficiency and attractiveness of liquidity provision.
The Path to Viable Non-USD Stablecoins
Ultimately, the success of non-USD stablecoins hinges on how much liquidity providers can earn. If the incentives align, liquidity will improve and adoption will follow suit. This effort isn’t merely about attracting more capital; it’s about restructuring liquidity provision to ensure sustainable profitability.
Without advancements in infrastructure, euro stablecoins and their counterparts will continue to lag despite their potential. Stronger liquidity will bolster stablecoins; the key lies in building models that make liquidity provision financially appealing. Once financial incentives align, other facets of stablecoin adoption will naturally fall into place.
Looking forward, I anticipate that non-USD stablecoins will carve out competitive niches in specific use cases such as cross-border remittances, on-chain forex trading, and decentralized lending. Businesses that operate globally but need to manage cash flows across different currencies could significantly benefit from utilizing non-USD stablecoins while retaining their treasuries in USD.
Moreover, liquidity pools that facilitate stablecoin swaps between different fiat currencies can serve as vital stores of value, potentially setting the stage for a more decentralized global financial system.
