Stablecoins and the New Dollar Economy

Stablecoins are experiencing rapid growth, with analysts at Electric Capital suggesting that one cryptocurrency could become a cornerstone of a dollar-based economy.

Despite discussions around “de-dollarization,” the demand for U.S. dollars is increasing. A significant shift is underway as billions of people and businesses find ways to access dollars through stablecoins instead of traditional banking systems.

A report from Electric Capital highlights this transformation as the largest expansion of the dollar’s network in decades, with a focus on one particular cryptocurrency that stands to gain the most.

Since 2020, the stablecoin market has soared nearly 60 times to over $200 billion, largely driven by demand from emerging markets where conventional banking is often inadequate or unstable.

According to Electric Capital, over 4 billion people face substantial currency risks due to political turmoil, poor monetary policies, and rampant inflation, making dollar holdings preferable for financial security.

Businesses require dollars for operations; the U.S. dollar is involved in about 88% of all global foreign exchange transactions. Digital dollars enable small and medium enterprises, as well as freelancers in emerging economies, to avoid currency mismatches and streamline international payments.

Most crucially, stablecoins grant anyone with internet access the ability to hold dollars without needing a bank account or government approval, providing unprecedented global accessibility.

Challenges with Traditional Finance

This wave of new dollar holders presents challenges. Many users desire to utilize stablecoins for earning yields, investing, and accessing financial services, but traditional finance struggles to meet these needs. Electric Capital notes that strict regulatory compliance in the U.S. banking system excludes many potential users, while cross-border financial services often remain costly and sluggish, targeted at institutions rather than everyday people.

This gap signifies a demand for new, global, secure financial infrastructure that is resistant to government intervention.

Ethereum’s Unique Position

Electric Capital identifies Ethereum (ETH) as uniquely suited to support the emerging digital dollar economy. It fulfills three key requirements:

1. Global Accessibility: Available 24/7 to anyone with internet access, from New York to rural Nepal.
2. Institutional Security: Offers the necessary safety and regulatory clarity for institutions to develop large-scale financial products.
3. Resistance to Interference: Operates in a decentralized manner, making it challenging for governments to censor.

With a history of community support and decentralization, Ethereum has garnered broad asset ownership that is hard for other blockchains to compete against.

Ethereum’s network supports over $140 billion in stablecoins, more than $60 billion in decentralized finance protocols, and substantial tokenized real-world assets. The report outlines that as stablecoin use on Ethereum increases, the demand for ETH as a secure and productive asset will rise accordingly.

The Role of Layer 2 Solutions

Ethereum’s Layer 2 scaling solutions further enhance its capabilities by facilitating faster, cheaper transactions, which could expand ETH’s appeal as collateral in the digital dollar ecosystem.

ETH’s attributes make it a compelling store of value, offering yield potential that distinguishes it from gold. The report posits that Ethereum and Bitcoin may jointly capture market share from traditional value stores like gold and treasury bonds in the near future.

[Read more: Ethereum crypto could be the next big treasury asset amid $5B tokenization boom]