Author: Jon Reiter
Compiled by: Luffy, Foresight News
The market cap of USDT once exceeded that of Ethereum. As of the time of writing this article, USDT's market cap is slightly lower than Ethereum's, with only a few percentage points difference between the two. What does it mean for USDT to become the second-largest cryptocurrency after Bitcoin?
Meanwhile, a thought-provoking phenomenon is that while the stablecoin market has continued to expand over the past decade, the market caps of major non-stablecoin cryptocurrencies such as Bitcoin, Ethereum, Solana, BNB, XRP, and TRON have largely stagnated.
This Is Not About Security
First, let's clarify what this does NOT represent. Many Web3 solutions rely on one type of asset to provide an "economic security cushion" for another type of business. A typical example: the general design logic of oracles, where decentralized autonomous organizations (DAOs) vote to ensure data accuracy, and the oracle's output prices are used to settle various contract transactions. Projects like Chainlink are variations of this logic.
The premise for this mechanism is that the total market cap of the DAO's governance token must be far higher than the transaction volume settled through that oracle. The reason is simple: if it only costs $1 million to control the DAO but can manipulate the settlement of $10 million worth of contracts, this system is completely insecure from an economic perspective. This is not a technical flaw in the code but a defect in the economic incentive design, allowing motivated parties to manipulate the system at low cost for self-serving, non-objective, and unfair outcomes.
However, Ethereum provides no economic security backing for USDT whatsoever. USDT is issued and circulates on dozens of public chains like TRON, none of which can guarantee USDT either. Theoretically, even if someone breaches a public chain where USDT is issued, achieving a double-spend or seizing others' tokens, Tether, the operating company behind USDT, can directly freeze, recover the on-chain tokens, and reissue them on other chains.
Whether the total market cap of that chain is just $1 or $1 trillion, Tether can execute this operation: it only needs to pay the on-chain transfer fee to fully control the token disposition. Even if an attacker completely controls the entire public chain and blocks interactions with Tether's official contracts, the project team can simply abandon that chain and refuse to redeem all USDT on it. The team can then use solutions like hard forks or off-chain ownership certificates to protect innocent users' ability to 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.
Admittedly, USDT relies on public chains for circulation, so the market needs a set of stable, usable, and sufficiently secure underlying networks. But that's it. The core entity for asset security remains Tether. As long as reliable public chains exist in the market, USDT can circulate normally. The standard for a reliable public chain is generally that its native token has a considerable market cap. However, the native token's market cap 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 stablecoin circulation worth hundreds of billions. If a public chain's native token total market cap is only $1 million, it would be 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 are no hard security barriers from a logical perspective.
This Does Not Indicate a Flaw in Ethereum Itself
The continuous rise of USDT's market cap relative to Ethereum's does not indicate that Ethereum's own value is being undermined. Admittedly, an increase in USDT's market cap represents a greater number of users and larger capital volumes needing stablecoins, but this does not equate to USDT's usage demand surpassing that of the Ethereum ecosystem.
USDT is a store of value tool backed by issuer 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 the ETH price. Conversely, heavy user adoption of USDT only increases the total issuance of USDT, without changing its fixed $1 per token price.
Users choosing to hold funds in USDT has no direct connection to Ethereum's competitiveness and development prospects as a Web3 foundational 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 for a superior underlying public chain, the ETH price plummets, but users still frequently use USDT for transfers.
Scenario Two: Ethereum achieves major technological breakthroughs (Layer-2 architecture innovation, zero-knowledge proof technology matures), its network scaling capacity surges dramatically, block space supply becomes abundant, and transaction fees drop significantly.
Both situations would cause Ethereum's market cap to shrink. In these cases, USDT's market cap might surge or fall in tandem, entirely depending on user demand for stablecoins. Changes in USDT's scale are not inherently tied to Ethereum's quality.
The Key Lies in Real Application Demand
The most rigid demand scenario in Web3 is permissionless dollar transfers. We analyzed the unique value of this scenario four years ago, and to this day, it remains the most core practical application in the crypto industry.
An old saying in the industry holds true: many people claim to be bullish on blockchain technology, but in reality, they only care about capital flow. The permissionless dollar transfer sector holds massive amounts of capital, but this scenario has extremely low technical requirements and doesn't need complex protocols or advanced cryptography to function. USDT was initially issued on the Bitcoin sidechain Omni, simply understood as the issuer selling Bitcoin token receipts for dollars, with users redeeming dollars against those receipts. While not exactly equivalent, the core logic is similar. Relying only on Bitcoin's base layer, very little code was needed to build a usable stablecoin: define a batch of satoshis corresponding to dollar redemption value, custody sufficient reserve funds, and a basic stablecoin function could be achieved.
The core of implementing this scenario is having a credible issuer; permissionless, decentralized stablecoins generally have various defects. But overlaying issuer credit on top of Bitcoin's simple base layer can meet transfer needs; high-end technology is not a rigid requirement. USDT is just a logically simple smart contract; the technology itself holds no barriers.
This also helps explain the value differentiation among major public chains. Ethereum is currently the most mainstream smart contract public chain, but any normally functioning public chain is sufficient to host stablecoin issuance. Which chain stablecoin funds flow to is unrelated to USDT's overall scale ceiling. Stablecoins have extremely low performance demands on public chains, and the underlying architecture of reserve-backed stablecoins hasn't seen substantial iteration for years.
If we were discussing the market cap of Tether on Ethereum, TRON, Arbitrum, or other specific blockchains, that might reflect the relative value of those blockchains. If permissionless dollar transfers are the industry's core demand, public chains that excel at hosting this scenario are more likely to attract capital and accumulate large amounts of USDT. Major public chains can compete with each other, but as long as the stablecoin itself holds usage value, USDT's overall total market cap can continue to expand.
Ethereum is currently the highest-market-cap smart contract public chain, serving as a benchmark to roughly measure the size of the entire contract public chain sector. Currently, Bitcoin accounts for about 60% of the total crypto market cap. Excluding stablecoins, Ethereum occupies about half of the remaining market, with all other public chains splitting the other 50%. A rough estimate puts the total value of all smart contract public chains at about twice Ethereum's market cap. For years, the overall market cap of this sector has largely stagnated; meanwhile, the stablecoin sector, led by USDT, has continued to surge in size.
Looking at individual blockchains, stablecoin market cap might grow or not. But from a macro total perspective, years of data have proven: there is no positive correlation between a public chain's native token market cap and the overall scale of stablecoins.
More data and products support this. BlackRock's BUIDL tokenized money market fund, Circle's USDC, are all similar competitors to USDT, but such products almost never add value to the public chains they are issued on. The most direct fact is that stablecoin-related product sizes expand year after year, while the underlying public chains' native token market caps remain flat long-term.
Summary
There is one consistent narrative. Users' core need is permissionless dollar-denominated assets, and they are willing to trust stablecoin issuers, even indifferent to the detailed background of the issuing entity. Objectively, USDT's offshore entity background and reserve transparency have been controversial, its credit backing far inferior to BlackRock or PayPal, yet USDT's size leads by a wide margin.
Traditional financial giants have entered the stablecoin arena, promoting their strong brand advantages, yet they consistently fail to capture mainstream market share from USDT. Only USDC has achieved a certain scale, but its size has long trailed USDT significantly, and it has faced multiple redemption crisis-related issues in the past, struggling to break into the top tier.
For average users, as long as the token is widely circulated and transfers are convenient, the issuer's identity is irrelevant; the underlying public chain's governance model doesn't influence user choice either. Even if a public chain's token is highly concentrated and controlled by a single entity (TRON); managed for years by a multi-sig wallet (Polygon); claims self-custody but has an asset-freezing 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.
Users' sole core demand is permissionless dollar transfers. Currently, USDT is live on 14 public chains, USDC covers over 30. Issuers will proactively deploy on any public chain where users gather. Issuers don't care about the underlying network, and neither do users.
The only assets in the entire crypto industry with true brand recognition are Bitcoin, USDT, with USDC a distant second. Users will use these stablecoins on any public chain. The fact that a stablecoin issued by an offshore entity with questionable credit has grown into the second-largest digital asset by market cap, and circulates primarily on TRON, a chain largely controlled by a single individual, all indicates that users care more about the utility of permissionless dollars than the operational mechanisms behind them.
If regulatory agencies worldwide issue 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 backing, the entire sector's scale will continue to inflate, potentially even far exceeding the market cap of the smart contract public chains that host them.
