On-Chain Insights #1: Stablecoin Volume Dominance on DEXs & L1s & L2s

Link to Stablecoin Volume Dominance on DEXs & L1s & L2s Dashboard: https://dune.com/21co/stablecoin-dex-volume

Link to all of our On-Chain Dashboards:https://dune.com/21co

TL;DR:

Stablecoin trading pairs dominate the volume on Decentralized Exchanges (DEXs) with 79% compared to Altcoin pairs.
USDC is the most traded stablecoin on DEXs, with 60% dominance.
Stablecoin MIM and UST once combined for 63% trading volume on Curve but have now been wiped out since the collapse of Terra.
Uniswap has caught up with Curve on stablecoin-to-stablecoin trading volume. The former amounts to 41% dominance, and the latter accounts for 46%.
Ethereum is the most predominant network processing 79% of the stablecoin trading volume. The second largest network is BNB Chain, processing 8% of the stablecoin trading volume. Ethereum’s scaling solutions like Optimism and Arbitrum are seeing an increasing dominance with 3% and 5% respectively.

Background:

US dollar stablecoins are arguably digital assets’ killer use case driving mainstream adoption. In 2022, Tether processed $18.2 trillion in settlement volume. This is 136% greater than Mastercard’s volume ($7.7 trillion) and accounts for more than 30% of Visa’s volume ($14.1 trillion). USD stablecoins also have played an essential role in decentralized finance for investors as primary means of exchange on DEXs and across several smart-contract platforms like Ethereum and Solana. Last year, 70% to 80% of the volume came from stablecoin trading pairs

Analyzing the trading volume of each stablecoin is of the utmost importance for investors to understand:

The characteristics of each stablecoin.
The dominance of each stablecoin in DEXs and smart-contract platforms (chains).
The source of volume of each DEX by trading pair type.

Coverage:

Stablecoins: USDT, USDC, BUSD, GUSD, USDP, TUSD, DAI, sUSD, MIM, LUSD, USDD, UST, FRAX
Chains: Ethereum, BNB Chain, Avalanche, Polygon, Optimism, Arbitrum
DEXs: Uniswap, Curve, Sushiswap, GMX, Trader Joe, Pancakeswap, Apeswap, DODO, Biswap, Velodrome, Shibaswap, Hashflow, Platypus Finance

Key Takeaways:

1. USDC is the go-to stablecoin for trading on DEXs

Figure 1: Stablecoin Total Trading Volume Dominance

Source: 21Shares on Dune Analytics

On Centralized Exchanges’ (CEXs), USDT and BUSD are the leading stablecoins in trading volume, with 64% and 36% dominance, while USDC only contributes to roughly 0.3% as of Jan 2023. However, USDC is the go-to stablecoin with 60% stablecoin trading volume dominance on DEXs instead of USDT and BUSD. Additionally, USDC is the leading stablecoin on Ethereum, Avalanche, Polygon, Arbitrum, and Optimism.

Despite centralization concerns over USDC, BUSD, and USDT, these three stablecoins own the lion share on DEXs. For decentralized stablecoins such as DAI, MIM, and FRAX, their market share in trading volume was shrinking over time in 2022. In 2023, AAVE and Curve will likely launch their own decentralized stablecoin, GHO, and crvUSD, which are over-collateralized with cryptoassets. These new stablecoins with different mechanisms could also be potential challengers to USDC, BUSD, and USDT.

2. The trading volume of UST and MIM on Curve has been completely wiped out since the collapse of Terra

Figure 2: Stablecoin Trading Volume Breakdown on Curve

Source: 21Shares on Dune Analytics

Curve has been the primary venue for stablecoin trading. Most of its volume comes from the constituents of the largest stablecoin liquidity pool, called 3Pool — composed of USDT, USDC, and DAI. However, starting in 2021, the algorithmic stablecoin UST has come to the spotlight. It is most known for its yield opportunity, where users can deposit UST on Anchor Protocol for 19% APY. Abracadabra, the protocol behind stablecoin MIM, saw this opportunity and launched a “degenbox” strategy surrounding UST. This strategy allows users to earn an additional yield on UST by leveraging and looping strategies using MIM. With the high yield these two stablecoins can provide, UST and MIM have successfully entered the top 8 stablecoins with a $15B market cap in total during Jan 2022. In the same month, they also flipped USDT and USDC on the total trading volume on Curve with a combination of 46% dominance.

However, the algorithmic model built by Terra is proven not sustainable. As a result, UST fell significantly below the $1 peg and never recovered. MIM, being closely related to UST, also suffered a considerable decrease in market cap, showing holders are exiting their MIM holdings. One month after the collapse of UST, the trading volume of UST and MIM on Curve dropped to 2.2% only.

3. Uniswap is catching up with Curve on stablecoin-stablecoin trading volume

Figure 3: DEXs Dominance in Stable-Stable Trading Volume

Source: 21Shares on Dune Analytics

From 2020 to early 2021, Curve V1 dominated the “Stable-to-Stable” volume at 70%-90%, thanks to their low fees and low slippage provided with the stableswap mechanism. Compared to Uniswap V2’s constant product formula, where the liquidity is uniformly distributed across the price curve, Curve’s stableswap can better utilize the liquidity. Therefore, traders tend to use Curve to swap stablecoins.

By launching Uniswap V3 in May 2021, the inefficiency of liquidity provision has been tackled by the introduction of concentrated liquidity. Liquidity providers can now allocate capital within a specific price range. For the case of stablecoin, where their price usually stays between $0.99-$1.01, concentrating liquidity could help traders access deeper liquidity and trade with a lower spreads. Thanks to the improvement of Uniswap V3, their dominance in “Stable-to-Stable” volume has risen from 6.2% to 34% in a month.

Another critical catalyst of Uniswap’s current market share in “Stable-Stable” volume is the introduction of 1 basis point fee tier for stablecoin pools in November 2021. Initially, the cheapest fee tier in Uniswap V3 was 5 basis points, whereas other competitors like Curve were only charging 3 basis points for 3Pool (USDT-USDC-DAI), and DODO was charging 1 basis point for USDT-USDC pool. After the launch of the new fee tier for stablecoin pools, Uniswap V3's volume for stablecoin-to-stablecoin pairs has increased by 88%, and their volume dominance also increased from 32.7% to 52.4%. On the other hand, the dominance of Curve and DODO dropped by 11% and 10% respectively in November 2021.

In response to Uniswap V3’s aggressive pricing, Curve also reduced the fee for 3Pool from 3 basis points to 1 basis point in May 2022. As a result, their dominance in “Stable-Stable” volume bounced back from 11.8% to 46.5%.

4. Utility Ratio on DEX Trading for Stablecoins

Fig 4: USDC & USDD Trading Volume by Trading Pair Type

Source: 21Shares on Dune Analytics

This metric compares stablecoin-to-stablecoin and stablecoin-to-altcoin volume. A stablecoin with a higher percentage in “Stable-Alt” volume means a more organic utility in DEX trading as it provides a medium of exchange for traders on DEXs. On the other hand, “Stable-to-Stable” volume mainly stems from traders entering or exiting the stablecoin position. Thus, having a high “Stable-to-Stable” volume does not show an organic utility for trading on DEXs.

A stablecoin could also have other utilities such as global remittances, derivatives trading, CEXs trading, payments etc. However, one should be aware that “artificial utilities” such as providing high-interest rate, is not organic utility. Thus, this metric can serve as part of the risk assessment when analyzing whether a stablecoin has actual utility in DEXs trading.

Closing Thought:

Stablecoin will continue to be an integral part of DeFi. Although most of the volume is dominated by USDC, the winner is yet to be determined. The coming decentralized stablecoins like GHO and crvUSD could shake up the stablecoin landscape on DEXs.

More insights in our dashboard are awaiting your exploration. Users can analyze each stablecoin with a custom timeframe, chain, and DEX. To learn more about the on-chain analysis we do at 21Shares, feel free to check out our previous article!

Link to Stablecoin Volume Dominance on DEXs & L1s & L2s: https://dune.com/21co/stablecoin-dex-volume

Link to all of our On-Chain Dashboards:https://dune.com/21co

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