Tether recently passed Ethereum in market cap. As of this writing Tether is back to being slightly smaller again. But they are within a few % of each other. What does it mean that Tether is now as large as, or larger than, everything in web3 save Bitcoin? Does it mean anything at all?
At the same time what does it mean that stablecoins have grown more or less continuously over the past decade while the non-stablecoin majors (Bitcoin, Ethereum, Solana, BNB, Ripple, Tron, etc) have done essentially nothing for years now?
It Is Not About Security
We should start with what it does not mean. Many web3 schemes rely on one asset to provide "economic security" for another. For example, a common oracle design is for correctness to be voted by some DAO and the oracle to fix prices to settle various kinds of bets and trades. This is a simplified version of things like Chainlink and the details of any particular scheme do not matter here.
This class of scheme can only work when the value of the DAO voting tokens significantly exceeds the size of the trades or bets getting settled off the oracle. We can easily see that. How? If it costs $100 to take over the DAO and you can then settle $1 million in bets the entire thing is insecure. It is not hackable in a technical sense; it is economically insecure. This is when the software works as intended but the economic mechanisms and incentives give a clean way for someone to push the system into "bad" outcomes. "Bad" pretty much always means self-serving with an element of objectively incorrect.
Ethereum does not provide economic security for Tether. Tether also circulates on Tron and any number of other blockchains. And none of them provides economic security for Tether. Yes, in theory if you managed to take over a blockchain where Tether circulates you might be able to double-spend or expropriate other user's Tether for a little while. But Tether Ltd – the company running the token – could just seize, freeze and re-issue those tokens somewhere else.
Tether the company could remove all the Tether tokens from the blockchain you compromised and put them somewhere else. This is true if the blockchain has a market cap of $1 or $1 trillion. Tether the company just has to pay gas for the admin transactions and control is absolute. Even if you manage to so completely take over a blockchain that you can block Tether's admin smart contract interactions the Tether company can just renounce that blockchain and refuse to redeem any tokens there ever again. There would presumably need to be some scheme to allow innocent third parties to get their money on a different blockchain – maybe via a strange fork or some other off-chain proof of ownership process – but the Tether team could manage that at their leisure. Taking over the blockchain will not give you access to Tether the company's USD and reserve balances.
Admittedly Tether needs blockchains to circulate on. So it depends on there being a supply of usable and safe-enough blockchains. That is about it though. Security lies primarily with Tether. So long as there are reliable blockchains out there somewhere for Tether to use the token is useful. Being reliable probably means those blockchain's native tokens are worth a meaningful amount of money. But seeing as the token value does not secure Tether in any meaningful sense there is no reason you cannot have $100 billion of stablecoins on a blockchain with a native token market cap of only a few billion USD. Maybe a few hundred million USD. A blockchain where the native token is worth $1 million is not likely to have meaningful DeFi on it. It is unlikely users want to hold many billions of USDT on such a tiny blockchain. But there is nothing that makes it unsafe if users want that.
It Is Not About Problems With Ethereum
Tether's growing market cap vs Ethereum also says nothing about Ethereum's value. Yes, an increase in Tether market cap means more (or richer) people want to use it. But this does not mean, for example, that there is more demand for Tether use than Ethereum use. Tether is a stable store of value to the extent Tether the company keeps the reserves in the assets they are supposed to. Ethereum tokens are, vaguely, a claim on future Ethereum blockchain utilization and demand for block space. If people love Ethereum and blockspace becomes cheap because it becomes plentiful that impacts the ETH price. If people love using Tether that increases the amount of Tether not the price.
Demand to store value in Tether has nothing to do with how effective, or well positioned, Ethereum is as a web3 platform. The easiest way to see this is to imagine two diametrically opposed scenarios where Tether's market cap wildly exceeds Ethereum's. The first scenario is that people roughly abandon Ethereum. If something much better comes along the token price will drop a lot. But people might still want to use Tether a lot.
The second scenario is that some breakthrough occurs such that Ethereum blockspace becomes cheap and plentiful and the community decides it is acceptable to let the nominal price of blockspace fall in the face of a massive expansion in network capacity. Maybe this is some kind of revolution in L2 design. Maybe a ZK advance makes scaling easier. Whatever.
In one case nobody wants to use Ethereum. In the other case everyone wants to and can use Ethereum. Both scenarios can lead to a massive drop in Ethereum market cap. This might occur next to an explosion in Tether market cap or a massive drop. What happens to Tether depends on user preferences for Tether. The Tether bit is not about Ethereum.
It Is About Use Cases
The biggest use case in web3 is permissionless USD transfer. We wrote about the novelty of this use case four years ago . By now it is clear this is the main use case for web3 products. There is a longstanding joke about people that say they are "in it for the tech" really only caring about the money. And there is a lot of money in permisssionless USD transfers! But there really is not a lot of technology. You do not need fancy protocols or complicated math to run a permissionless stablecoin. Tether in fact started off on a Bitcoin-linked blockchain called Omni that you can think of as an issuer selling Bitcoin ordinals for USD and then redeeming those ordinals for USD. That is not exactly right but it is close enough. You can build a working stablecoin off Bitcoin with very little software. Just designate a bunch of individual satoshis as redeemable for USD and you have a rough-but-functional stablecoin to the extent you keep the backing USD safe.
This use case is easy so long as you have a trusted issuer. The trustless version has all kinds of problems. But if you add a simple trust assumption on top of simple old Bitcoin you can meet this use case. Technology is not essential. Tether is a simple smart contract with simple technology. Nobody claims technology is the secret sauce.
That tells you something about demand for other platforms in general. Ethereum may or may not the most popular platform now. But it is manifestly adequate to handle stablecoins. Any working blockchain is sufficient to handle stablecoins. Which smart contract platform gets the inflows does not have anything to do with how far Tether can grow. Stablecoins demand so little of the blockchains they run on that the basic technological structure of reserve-backed stablecoins has not changed for years.
Now if we were talking about Tether market cap on Ethereum vs on Tron vs on Arbitrum or whatever other blockchain: that might say something about those blockchain's relative values. If permissionless USD transfer is the dominant use case then blockchains that host ecosystems which are good at permissionless USD transfer are likely to accrue a lot of value and Tether market cap. This is not hard to understand. But those blockchains can fight it out. So long as Tether is useful, Tether can grow and grow in market cap overall.
More Data Points
Ethereum is by far the largest smart contract blockchain by market cap. So long as that remains true Ethereum's market cap is a good proxy for the whole sector. This is not deep analysis. As of this writing Bitcoin makes up about 60% of total web3 market cap and Ethereum makes up about half of what is left ex the stablecoins. That means all the other platforms share the remaining 50%.
So we can say the total value of smart contract blockchains is 2x Ethereum or something like that. As a rule of thumb this is fine. The value of these blockchains, and this sector, has gone nowhere for years now. But stablecoin market cap, led by Tether, has grown a lot.
Stablecoin market cap blockchain-by-blockchain may grow relative value among blockchains. Or not. But in aggregate we have compelling multi-year evidence one does not drive the other. And there are more data points. Products like Blackrock's BUIDL and other tokenized money-market funds offer a product adjacent to Tether. Circle's USDC is a product adjacent to Tether. None of these products passes much value to the blockchains they run on. Again the most compelling argument we can make is just to tap the sign: these products have grown in aggregate while the underlying native token market caps have not gone up.
Interpreting Meaning
There is a consistent story here. Users want permissionless USD products. And they are happy to trust the issuers of those products. In fact users do not seem to care very much about the details of the issuers. Tether, objectively, looks less trustworthy than Blackrock or PayPal. And yet Tether's product is wildly larger. Over and over a traditional player arrives on the stablecoin scene and talks a lot about leveraging a their stellar reputation to build a popular product. And nobody takes a meaningful slice of utilization away from Tether. Circle is the only other large product out there and it has consistently lagged essentially forever. Circle has also had some close calls which , as the company is supposed to offer a stable value, will keep it out of the top tier of reputations for a long time.
Users do not really care who the issuer is so long as the token is widely accepted. Users also do not really care about the blockchain they are using. One person owns most of the tokens and controls governance (Tron)? Fine. The entire thing has been just a multisig for years (Polygon)? Fine. The blockchain promises self custody but then it turns out a Security Council can seize your money (Arbitrum)? All good. Somehow the blockchain is both complicated and run by a single company that admits control in public but not to regulators (Base)? Sure whatever. Users do not care.
Users want permissionless USD. Tether is available on 14 blockchains as of this writing. Circle's USDC is available on more than 30 blockchains as of this writing. The issuers will use whatever blockchains users want. Empirically it is clear the issuers do not really care. And the users do not really care.
The only two things with any real brand value are Tether and Bitcoin. Circle's USDC also has some. And users will use these products on seemingly any platform. What does it mean that a stablecoin issued by an obscure offshore company with a spotty history on the honesty front can become the second largest digital asset by market cap? Is it important that for much of the time that stablecoin has existed it was primarily issued on a single smart contract blockchain seemingly controlled by a single individual (Tron)? That all means users care about the permissionless USD use case more than any of the details underneath how it works.
If governments are giving licenses to some permissionless USD products – for example the entire Genius Act thing around permisisonless USD stablecoins in the United States – it means the permissionless must be acceptable. So long as permissionless USD products get official seals of approval we should expect the entire space, licensed and unlicensed, onshore and offshore, to grow and grow. Possibly well beyond the values of the smart contract platforms on which they run.