Author's note: Over the past week, the crypto industry and stablecoins themselves have come under intense regulatory scrutiny. Paxos, the issuer of BUSD, has been hit by the SEC, with the regulator ordering the company to stop minting BUSD. It’s an ongoing matter that might affect the viability of BUSD in the future. However, this article still provides a good look at how the space has grown and the performance of different stablecoins in the past year. ‍

Introduction

Over the past 3 years, we’ve seen many different iterations of stablecoins, each with vastly different mechanics and varying degrees of decentralization. Popular iterations include decentralized under-collateralized algorithmic (UST), decentralized over-collateralized asset-backed (DAI) to centralized 1:1 backed versions (USDC/USDT/BUSD). 

No matter how they work behind the scenes, stablecoins are the unsung heroes of the crypto world. Their mission? To keep a 1:1 peg with an underlying asset, such as the US dollar. While many segments of crypto have seen their activity levels and general sentiment fall alongside prices, it’s become clear that stablecoins have strong product market fit and are a thriving use case of crypto. The demand and utilization of stablecoins are reflected in the growth in their market capitalizations and increase in on-chain volume over the past 2 years – a steady uptrend that has largely managed to buck the bear market, with a comparatively mild pullback in total market capitalization.

Stablecoins Market Cap on Ethereum

Stablecoins Monthly Volume on Ethereum

The safety and superiority of individual stablecoins have been the subject of constant debate, with battle lines being drawn between the top contenders. Companies are taking sides in the never-ending argument, with Binance adopting a "walled garden" strategy to gain market share for BUSD by removing USDC trading pairs, while Coinbase now allows free swaps of USDT to USDC.

However, after the events of 2022, trust in centralized entities is at an all-time low, and transparency is becoming increasingly important. Although we can't fully scrutinize the inner workings of the centralized entities behind the two largest stablecoins, USDT and USDC, we can see how users are utilizing these tokens and get insight into their largest wallets and on-chain activities. This allows us to gauge the health of these stablecoins in terms of on-chain volumes and individual address holders, providing us with insight into how traders and investors are responding to the various issuers' walled-garden tactics.

In the rest of this article, we'll use Nansen's blockchain analytics tools to do an on-chain deep dive into four of the top stablecoins in the space today: USDT, USDC, BUSD, and DAI. Please note that this analysis only covers the ERC-20 versions of the stablecoins and will not include those on other chains.

Overview of the big four

Based on overall market capitalization, USDT is the largest stablecoin, followed by USDC, BUSD, and DAI in a distant fourth place. However, when considering only ERC-20 market capitalizations, we see a different story. USDT was dominant until mid-January 2022, when trust in Tether decreased due to FUD and suspicion about its operations. USDC claimed the top market capitalization and has maintained its ranking since then. It's worth noting that over half of the USDT supply is on Tron, which isn't covered here, with most of the remaining supply on ETH.

Over the past two years, BUSD and USDC have grown significantly, expanding approximately 1409% and 912% respectively. BUSD grew alongside Binance, while USDC positioned itself as the most regulatory-compliant fiat-backed stablecoin in the market.

Looking at on-chain volume, we see that despite its relatively small size, DAI has the highest velocity among the other coins, with a velocity ratio of 246.1x. Velocity is measured as 2022’s on-chain volume against its market capitalization at the start of 2023. However, when it comes to the number of transactions, USDT and USDC have a significant lead over every other stablecoin.

USDT

The percentage of USDT supply on exchanges (24%) has decrease slightly, -2% when compared to May 22 but has dropped by 12% when compared to the peak in August 22. This is in part driven by the collapse of FTX in November 22 and we saw large continuous outflows from exchanges in general. The percentage across other categories have dropped over the last 10 months. 

The top holders of the token are largely CEXes and bridges, which isn’t surprising given that 24% of USDT’s supply is held on CEXes. There’s also a smaller percentage on bridges compared to USDC, suggesting that USDT’s adoption on chains such as Optimism and Arbitrum haven’t been as rampant as USDC. However, as mentioned earlier, a large portion of USDT exists on the Tron network and is not covered in this analysis. 

USDT has the largest number of unique addresses holding the token, currently sitting at almost 4M addresses. There were ~4.5M unique addresses before FTX/Alameda began to unravel, and the number of unique addresses saw an especially aggressive 10% drop on 8 - 15 December, likely due to contagion fears. The relatively low on-chain volume, high number of transactions and high number of unique addresses for USDT suggest that most transactions were of low value and it was likely the preferred stablecoin for retail users throughout 2022. However, given the sharp drop in unique addresses, it remains to be seen if USDT manages to maintain its lead amongst users.

USDC

The balances of USDC across all categories of wallets as a percentage of total supply have been dropping over time. CEXes still remain the dominant category, holding over 11% of the supply. 

Diving deeper into the 10 wallets with the largest holdings, half of them are exchange related wallets. MakerDAO’s PSM-USDC-A contract is the single largest holder with over 2B USDC.  Stablecoins are essential components in every ecosystem and seeing large quantities of stablecoins being bridged to Polygon and Arbitrum is a reflection of the health of their respective chains. 

The number of unique addresses holding USDC has continued to rise despite the stablecoin’s market capitalization seeing a slight decrease over the last couple of months, which suggests that there’s continued adoption but the average wallet holding smaller balances. 

BUSD

Despite being one of the largest stablecoins, BUSD is rarely utilized outside of Binance. Approximately 92% of BUSD’s supply is on CEXes and over 97% of that is on Binance itself. 

It’s no surprise that most of the top wallets are Binance owned, in addition to Paxos which is the issuer of BUSD.

The token has the lowest number of unique addresses holding it, which is to be expected since the large bulk of the supply is on Binance. The low on-chain volume, number of unique addresses and the distribution of token holders reflect a lack of widespread adoption outside of the Binance ecosystem despite its large market capitalization. 

On 13 Feb, it was announced that the SEC is intending to sue Paxos and that minting of new BUSD tokens have been halted as a result. Since then, we’ve seen it’s market capitalization drop from $16.1B to $14.2B as existing holders start to redeem it for USD, burning the tokens. 

DAI

DAI is the only decentralized stablecoin that we’ll be analyzing in this piece. Although having the smallest market capitalization by a margin, DAI punches well above its weight when it comes to on-chain volume. Unlike the other stablecoins mentioned, DAI primarily lives on DEXes. 17% of DAI’s supply is on DEXes, over 3x higher than its closest competitor, USDC, which has 5%. 

DAI’s top holders list is the most diversified of the bunch, having a strong presence in multiple liquidity pools, bridges and even in a treasury. 

DAI had 3.6M transactions in 2022 facilitated over $1.2T in volume which is an extremely high amount of volume per transaction. The token is likely the preferred stablecoin amongst crypto native individuals and protocols. Overall adoption for DAI has grown over time, despite a decline in its market capitalization, unique addresses for the token are at an all time high (486k).

Conclusion

Despite a slowdown and in some cases a decline in market capitalization of the largest stablecoins, general adoption has been on the rise. The increase in the number of unique addresses for most of the stables discussed in the article is a reflection of the increase in adoption. There’s a clear relationship between the degree of decentralization of a stablecoin and its on-chain velocity, showing a clear preference for decentralized solutions by crypto native users. For users that are venturing out to more experimental mechanisms, it’ll be useful to leverage on-chain analytics tools such as Nansen to keep an eye on key points of failure. 

While there’s an ongoing war between the top stables that seems to be intensifying as time goes on, there’s likely room for multiple stablecoins of varying mechanisms to co-exist and cater to different users. However, outstanding questions for the sector remain. Will non-USD stablecoins ever see significant uptake? And will an algorithmic stablecoin ever break through to achieve sustained market share? These are just a few factors poised to shape the market in the coming years.

Disclaimer

The authors of this content and members of Nansen may be participating or invested in some of the protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Nansen does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Nansen at any time without notice. Nansen accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.