Author: Jon Reiter
Translation: Luffy, Foresight News
USDT's market cap once surpassed that of Ethereum. At the time of writing, USDT's market cap is slightly below Ethereum's, with only a few percentage points separating the two. USDT has become the second-largest cryptocurrency after Bitcoin. What does this signify?
Simultaneously, a noteworthy phenomenon is that over the past decade, the stablecoin market has continued to expand, while the market caps of major non-stablecoin cryptocurrencies like Bitcoin, Ethereum, Solana, BNB, XRP, and Tron have remained stagnant for years.
This Is Not About Security
First, let's clarify what this event does not represent. Many Web3 solutions rely on one asset to provide an 'economic security blanket' for another type of business. A typical example: the general design logic of oracles, where data accuracy is ensured through votes by a Decentralized Autonomous Organization (DAO), and the price output by the oracle is used to settle various contract transactions. Projects like Chainlink are variations of this logic.
The premise for such mechanisms to work is that the total market cap of the DAO's governance token must be far greater than the transaction volume settled through that oracle. The reasoning is simple: if it only takes $1 million to control the DAO but allows manipulation of $10 million worth of contract settlements, the entire system is economically insecure. This is not about technical code vulnerabilities but flaws in economic incentive design, enabling malicious actors to manipulate the system at low cost for self-serving, non-objective outcomes.
However, Ethereum does not provide any economic security backing for USDT. USDT is issued and circulates on dozens of public blockchains like Tron, none of which can underwrite USDT either. In theory, even if someone compromises a blockchain where USDT is issued, achieving a double-spend or seizing others' tokens, Tether, the operating company behind USDT, could directly freeze and recover the on-chain tokens, reissuing them on other chains.
Whether the total market cap of that chain is $1 or $1 trillion, Tether could perform this operation: it only needs to pay the on-chain transfer fee to fully control token disposal. Even if attackers completely take over the entire blockchain and block interactions with Tether's official contracts, the project could simply abandon that chain and refuse to redeem all USDT on it. The team could then use solutions like hard forks or off-chain proof of ownership to ensure innocent users redeem assets on other chains, with the entire process arranged autonomously by Tether. Controlling the public chain does not grant access to the dollar reserves held by Tether.
Undeniably, USDT relies on public blockchains for circulation, so the market needs a batch of stable, usable underlying networks with adequate security. But that's it; the core entity for asset security remains Tether the company. As long as reliable public chains exist in the market, USDT can circulate normally. The standard for a chain being reliable is generally that its native token has a significant market cap. However, the market cap of the native token does not provide substantial security for the stablecoin. Therefore, it's entirely possible for a public chain with a native token market cap of only a few billion, or even a few hundred million dollars, to carry trillions in stablecoin circulation. If a public chain's native token total market cap is only $1 million, it's difficult to support a mature DeFi ecosystem, and users wouldn't be willing to store tens of billions of USDT on it; but if users are willing, there is no hard barrier from a security logic perspective.
This Does Not Indicate a Flaw in Ethereum Itself
The continued rise of USDT's market cap relative to Ethereum's does not indicate that Ethereum's own value is impaired. Admittedly, an increase in USDT's market cap represents a greater demand for stablecoin usage from more users with larger capital, but this does not equate to USDT's usage demand exceeding that of the Ethereum ecosystem.
USDT is a store of value tool backed by the issuer's reserves; the ETH token, in essence, is a claim on the future revenue of Ethereum's entire network block space. Even if the market is extremely bullish on Ethereum, network scaling leading to a surge in block space supply and lower transaction fees would suppress ETH's price; conversely, heavy user adoption of USDT would only increase USDT's total supply, not change its $1 per token price.
Users choosing to hold funds in USDT is completely unrelated to Ethereum's competitiveness or development prospects as a foundational Web3 platform. We can understand this intuitively through two extreme hypothetical scenarios: in both, USDT's market cap could far exceed Ethereum's, but Ethereum's situation would be vastly different.
Scenario One: The market largely abandons Ethereum, a superior underlying public chain emerges, ETH's price plummets, but users still frequently use USDT for transfers.
Scenario Two: Ethereum achieves major technological breakthroughs (Layer-2 architecture innovation, maturation of zero-knowledge proof technology), leading to explosive growth in the network's scaling capacity, ample block space supply, and significantly lower transaction fees.
Both situations would cause Ethereum's market cap to shrink. At that point, USDT's market cap might soar in tandem or decline simultaneously, entirely depending on user demand for stablecoins. Changes in USDT's scale are not tied to Ethereum's own quality.
The Key Lies in Real Application Demand
The most essential use case for Web3 is permissionless US dollar transfers. We analyzed the unique value of this use case four years ago in an article, and to this day, it remains the most core, realized application in the crypto industry.
There's an often-repeated saying in the industry: many people claim to believe in blockchain technology, but in reality, they only care about capital flow. The permissionless dollar transfer sector holds vast amounts of capital, but this scenario has extremely low technical barriers, requiring no complex protocols or advanced cryptography. USDT was initially issued on the Bitcoin sidechain Omni, which can be simply understood as the issuer selling Bitcoin token vouchers in exchange for dollars, and users redeeming dollars with those vouchers—the logic isn't entirely equivalent, but the core is similar. Relying solely on the Bitcoin base layer, very little code is needed to build a usable stablecoin: define a batch of satoshis corresponding to a dollar redemption value, custody sufficient reserve funds, and you can achieve basic stablecoin functionality.
The core to realizing this use case is having a trusted issuer; trustless, decentralized stablecoins generally have various flaws. But overlaying issuer credit on top of Bitcoin's simple base layer can meet transfer needs; high-end technology is not a hard requirement. USDT is just a logically simple smart contract; the technology itself presents no barrier.
This also helps explain the value differentiation among major public chains. Ethereum is currently the most mainstream smart contract platform, but any functional public chain is sufficient to host stablecoin issuance. Which chain stablecoin capital flows to is unrelated to the overall ceiling for USDT's scale. Stablecoins have extremely low performance requirements for public chains, and the underlying architecture of reserve-backed stablecoins has seen no substantial iteration for years.
If we were discussing the market cap of Tether specifically on Ethereum, Tron, Arbitrum, or other blockchains, that might reflect the relative value of these blockchains. If permissionless dollar transfers are the industry's core demand, public chains adept at hosting this scenario are more likely to attract capital and accumulate large amounts of USDT. Public chains can compete with each other, but as long as the stablecoin itself has utility, USDT's overall total market cap can continue to expand.
Ethereum is currently the highest-valued smart contract platform. Using it as a baseline allows us to roughly gauge the size of the entire smart contract platform sector. Currently, Bitcoin accounts for about 60% of the total crypto market cap. Excluding stablecoins, Ethereum occupies half of the remaining market, with all other public chains splitting the other 50%. Roughly estimated, the total value of all smart contract platforms is about twice Ethereum's market cap. For years, the overall market cap of this sector has stagnated; meanwhile, the stablecoin sector led by USDT has seen its scale skyrocket.
Looking at individual blockchains, stablecoin market cap may grow or not. But from a macro, aggregate perspective, years of data have proven that the market cap of a public chain's native token and the overall scale of stablecoins do not have a positive correlation.
More data and products support this. BlackRock's BUIDL tokenized money fund, Circle's USDC, are competitors in the same category as USDT, but such products almost never add value to the public chain they are issued on. The most direct fact is that the scale of stablecoin-related products expands year after year, while the market caps of the underlying public chain native tokens remain flat long-term.
Summary
There is a consistent narrative here. Users' core demand is for permissionless US dollar assets, and they are willing to trust stablecoin issuers, even being largely indifferent to the background details of the issuing entity. Objectively, USDT's offshore entity background and reserve transparency controversies are significant, and its credit backing is far inferior to that of BlackRock or PayPal, yet USDT's volume leads by a wide margin.
Traditional financial giants have entered the stablecoin arena one after another, touting their strong brand advantages, yet they have consistently failed to capture mainstream market share from USDT. Only USDC has a certain scale, but its long-term volume significantly trails USDT, and it has experienced multiple crises related to redemption issues, struggling to join the top tier long-term.
For ordinary users, as long as the token is widely circulated and transfers are convenient, who the issuer is doesn't matter; the governance model of the underlying public chain also doesn't influence user choice. Even if a public chain's token is highly concentrated and controlled by a single entity (Tron); managed for years via multi-signature wallets (Polygon); claims self-custody but has asset-freezing authority via a security council (Arbitrum); has a complex architecture, operated by a single company, and is not fully transparent to regulators (Base), users continue to use them normally.
The users' sole core demand is permissionless US dollar transfers. Currently, USDT is live on 14 public chains, USDC on over 30. Issuers proactively deploy on any public chain where users gather; issuers don't care about the underlying network, and neither do users.
The only assets with true brand recognition in the entire crypto industry are Bitcoin, USDT, with USDC being a distant third; users will use such stablecoins on any public chain. A stablecoin issued by an offshore entity with questionable credit has grown to become the second-largest digital asset by market cap; and it primarily circulates on Tron, a chain largely controlled by a single individual. All of this indicates that users care more about the use case of permissionless dollars than the mechanics behind them.
If regulatory agencies in various countries grant compliant licenses for permissionless dollar stablecoins, it would mean official recognition of the permissionless transfer model. As long as both compliant and offshore stablecoins receive regulatory approval, the entire sector's scale will continue to inflate, potentially far exceeding the market cap of the smart contract platforms that host them.
