Analysis: Ethereum network growth is mainly driven by stablecoins, and the market value of stablecoins may exceed that of Ethereum

Since the Black Thursday crash in March, the cryptocurrency’s price has been moving sideways recently, despite the market’s recovery, which has little to do with Ethereum 2.0 getting closer. While the community has speculated on many reasons, researcher Joel John recently highlighted the “Fat Protocol Theory” surrounding ETH, the world’s second-largest cryptocurrency, to understand the impact of the application layer using Tether and DeFi on its price.

The fat protocol theory holds that in the Internet technology stack, protocols create huge value, but almost all of this value can be captured by web applications built on it. However, for blockchain, these protocols not only create value, but also capture most of the value, so they are called "fat". The common view of the ecosystem is that investing in layer technology will create more value than investing in applications. However, according to an excerpt from Joel Monegro's blog about fat protocols,

“Because the success of the application layer drives further growth in the protocol layer, the market capitalization of the protocol always grows faster than the combined value of the top-layer applications.”

Tether on Ethereum

In July 2019, the issuance of the stablecoin Tether (USDT) transitioned from the Bitcoin network to the Ethereum network, causing the price of Ethereum to rise instantly.

So, will Tether’s adoption affect the price of ETH?

Not really, as there are multiple factors that influence the price of Ethereum. However, there is evidence that the growth in the dominance of stablecoins has contributed more to Ethereum than its own cryptocurrency, ETH.

Source: Santiment Insights

Tether, DeFi, and Ethereum

Tether issuance has surged over the past few months, which has also helped to close the gap between the total stablecoin market cap and Ethereum. The massive use of Tether on Ethereum could drive up prices as the token issuance aligns with consumer demand, which in turn means more transactions and therefore more gas demand. Tether already has the highest gas burn on Ethereum, but this has not translated into higher prices, and the researchers suggest that ETH's price may not be able to catch up with the newfound demand.

Likewise, even though DeFI has been established as a new market segment, the price action is not exciting enough or the market has not yet realized the impact.

Secondly, since Tether was issued on the Ethereum blockchain, the monetary factor of Ethereum has changed. According to his research, users mainly hold and release a large amount of stablecoins instead of ETH, and this shift occurred after Ethereum became the main issuance platform of Tether.

Source: Santiment Insights

ETH has been used as a facilitator for stablecoin transactions and settlements, so retail users have turned to using the base layer asset ETH. However, the current appeal of applications remains strong.

If we consider the number of active addresses, stablecoins will grow from just 10% of the total active Ethereum addresses to 40%. This shows that Ethereum's growth is mainly driven by stablecoins. If other utility networks do not enter the market in the short term, DeFi applications may only increase the use of ETH, according to researchers.

Source: Santiment Insights

Other stablecoins like DAI are also reportedly being used more than Ethereum, which can be seen from the activity of the tokens in the chart. However, this is possible because users keep ETH in their wallets and do not move it frequently.

Since the protocol layer has not shown changes, the fat protocol theory is indeed questionable. The stagnant price may be a lagging reason because the industry is in the late stage of the bubble burst and the value transactions on stablecoins do not lock ETH. However, if Tether continues to move forward according to the current trend, the market value of stablecoins may exceed Ethereum.

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