Stablecoins are increasingly becoming a cornerstone of the cryptocurrency ecosystem and the worldwide financial landscape. The market has already surpassed $235 billion, indicating a growing confidence in the future of these digital assets.
At present, two USD-backed stablecoins (USDT and USDC) command approximately 90% of the market share. The remaining top-10 stablecoins, including USDe and PYUSD, are likewise tied to the dollar, while Euro-denominated stablecoins hold a significantly smaller market share. What’s behind this disparity?
There are numerous conversations surrounding regulation, interoperability, and the integration with traditional finance. Yet, the most critical element is liquidity. Without robust and reliable liquidity, no stablecoin can achieve widespread acceptance, and regulatory clarity alone won’t alter that reality.
What Concerns Exist With Non-USD Stablecoins?
Consider the Euro as a case in point. EUR-backed stablecoins have been around for several years, yet they are still rarely utilized. This primarily stems from liquidity issues, which fundamentally dictate a stablecoin’s potential as a practical financial instrument.
For quite some time, USD-backed stablecoins like USDT and USDC have dominated this space, acting as the main source of liquidity for lending pools and trading pairs. These USD-backed stablecoins benefit from deep liquidity, substantial trading volumes, and vast integration across both centralized and decentralized finance platforms.
In contrast, euro-based (and other non-USD) stablecoins suffer from inadequate market mechanisms to support them. The lack of sufficient trading pairs, users, and financial products pertaining to these stablecoins hampers the creation of a liquidity ecosystem comparable to that of USD stablecoins.
A significant factor contributing to this liquidity shortfall is that centralized market makers find little financial motivation to provide liquidity for euro stablecoins. The profitability simply isn’t there, leading them to focus on more lucrative options, thus putting EUR-backed stablecoins at a disadvantage.
This situation is not merely a matter of choice; it represents a more foundational economic challenge. If market makers cannot secure an attractive return from providing liquidity to these assets, they will not invest capital into them.
So, what can be done to alter this scenario?
Can Regulation Make a Difference, or Is It Just a Minor Contributor?
It can be argued that if various jurisdictions create clear and efficient regulations, non-USD stablecoins could become significantly more appealing. For example, the implementation of MiCA regulations in the EU has opened avenues for compliant EUR-backed stablecoins, potentially positioning them as credible alternatives for integration with traditional finance.
I concur with this perspective to some extent. As different jurisdictions work towards more comprehensive regulation of digital assets, we can anticipate an increase in stablecoins pegged to local currencies, especially in regions like Asia, the Middle East, and Latin America, where such assets might enhance financial stability and lessen reliance on the U.S. dollar.
Examples such as Singapore’s XSGD and Switzerland’s XCHF illustrate this point. Moreover, Hong Kong has introduced an HKD-pegged stablecoin that became available in December 2024. The trend is evident.
However, it’s essential to note that regulation alone isn’t the pivotal factor. EUR-backed stablecoins existed prior to the MiCA implementation, and whether this framework will ultimately facilitate or obstruct their long-term adoption remains uncertain. MiCA might impose certain restrictions on USD-backed stablecoins across Europe, inadvertently giving euro stablecoins an advantage that doesn’t stem from their individual merits.
Ultimately, regulations cannot address the more fundamental issue of liquidity. Without sufficient liquidity, no regulatory framework can render a stablecoin viable for widespread use. Hence, the critical question is: how can liquidity for non-USD stablecoins be fostered?
Overcoming Liquidity Challenges
To illustrate, the market capitalization of USDT and USDC stands at $141 billion and $56 billion, respectively. In stark contrast, euro-based stablecoins like EURC or EURS struggle to exceed $100 million in market cap. The vast difference is apparent and directly affects their usability, resulting in fewer trading pairs, less DeFi integration, and ultimately, diminished motivation for traders and institutional participants to adopt them. Consequently, they fail to attain mainstream asset status.
One could advocate for the EURe, which I regularly utilize and consider the most practical euro stablecoin for real-world applications. Nevertheless, the overall market for non-USD stablecoins continues to grapple with the same hurdles: limited adoption, fewer integrations, and a significant road ahead before they can compete with their dollar-pegged counterparts.
One potential remedy could involve developing more effective liquidity algorithms for non-USD stablecoins. Having relied on professional market makers has proven unfruitful, necessitating a fresh approach characterized by mechanisms designed to generate robust liquidity without total dependence on those entities.
A more viable strategy might be to initially establish substantial liquidity pools bridging USD and non-USD stablecoins. This practical approach would ensure seamless conversions, directly tackling the core issue. However, this requires enhancing automated market maker (AMM) algorithms to bolster the efficiency and appeal of liquidity provision for suppliers.
The Route to Effective Non-USD Stablecoins
What is critical is the potential earnings for liquidity providers. When the incentives are favorable, liquidity will enhance, leading to natural adoption. This issue transcends merely attracting more capital; it’s about restructuring the way liquidity is provided to guarantee sustainable long-term profits.
Without advancements in infrastructure, euro stablecoins and their equivalents will remain behind, despite their significant potential. The strength of stablecoins is tethered to their liquidity. The goal is to develop models that make liquidity provision lucrative—because once the financial incentives align, all other factors will follow suit.
Looking forward, I envision non-USD stablecoins carving out a competitive position in specific applications, including cross-border remittances, on-chain foreign exchange trading, and decentralized lending. Enterprises with global operations that need to manage cash flows in various currencies could leverage non-USD stablecoins while maintaining their reserves in USD.
Furthermore, liquidity pools that enable stablecoin exchanges across different fiat currencies could serve as vital stores of value, potentially laying the groundwork for a more decentralized global financial framework.