Who Benefits from the Stablecoin Gold Rush?

Recent developments in regulation, including the introduction of frameworks like the STABLE Act and GENIUS Act, have provided clearer guidelines for compliant stablecoin issuance and prompted a swift increase in interest from traditional financial institutions in building their own stablecoin solutions. Several major banks have announced the development and upcoming issuance of stablecoins, underscoring them as one of the most immediate and scalable drivers of on-chain demand. In particular, we see Ethereum and its Layer 2 infrastructure stand to benefit from the growth of stablecoins in the ecosystem.

Using a public blockchain for these stablecoins brings many benefits, including fast and (cross border) 24/7 settlement times, lower fees, removing the “back office” component of the trade and integration of smart contracts, and automating transactions. Multiple big names have developed stablecoins, launching them on public blockchains. For example, Societe Generale-FORGE’s USD CoinVertible (USDCV) and EUR CoinVertible (EURCV) and PayPal's PYUSD are both deployed on Ethereum and Solana and additionally, PYUSD is available on Stellar, each layer 1 blockchains.

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Ethereum stands to benefit from institutional stablecoin roll out due to its strong record of reliability, security and stability. Standing the test of time since launch in 2015, Ethereum’s core protocol has (so far) maintained a reliable and consistent ledger of transactions, despite various exploits of third party code and smart contracts deployed on the network. This is in stark contrast to Solana, which, although it has not been hacked at the core level, has had seven full-chain network outages between 2021-24 due to issues at the protocol level. For example, on Feb 25, 2023, a software bug deployed as part of a major upgrade stalled block production for approximately 18 hours. This would likely be a major concern for the likes of TradFi institutions who are bound to contractual settlement times.

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Additionally the scale of decentralisation varies greatly between layer 1 blockchains, with Ethereum having over 1M validators, Solana at just over 1K and Tron with exactly 27 elected validators at any one time.

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Factors such as network outages and lack of decentralisation are also present on Ethereum Layer 2s. Many rollups have a single centralised sequencer, often run by the project team itself, giving the operator the power to censor specific wallet addresses and even reorder of transaction history before publishing. Additionally this creates a single point of failure causing the network to go offline. However, Layer 2s have the additional benefit of “inheriting” Ethereum's security data fallback. Since transaction history is posted on Ethereum's network, users can independently verify the state of the Layer 2, reconstruct balances and even submit a withdrawal request directly to Ethereum by proving ownership of their funds, bypassing the Layer 2's governance.

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For example, J.P. Morgan’s upcoming stablecoin-like deposit token, JPMD will be deployed on a public blockchain with an initial pilot on Base, an Ethereum Layer 2. Following the pilot, J.P. Morgan’s roadmap sees JPMD deployed across more public chains.

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Security is a key issue for JP Morgan as implied by their use of a private blockchain for the original implementation of a deposit-backed token from 2019. Base, Coinbase’s layer-2 blockchain provides a middle ground between decentralization and security. As an Optimistic Rollup Layer 2, Base inherits security from Ethereum, yet it is not fully decentralised. Base has a centralised sequencer meaning that Coinbase controls the ordering and inclusion of transactions and additionally, governance is run in house by Coinbase’s team. This is a selling point for JPM, providing them with a known entity if there are any issues.

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The launch of these tokens on public chains brings additional benefits such as easier integration with other DeFi apps built on chain and smart contracts. This use case will be especially important in future as the TradFiscene is increasingly being piloted on chain, for example through the tokenisation of Real World Assets (RWAs) on chain.

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Despite being deployed on a public blockchain, JPMD is not “public”. They have limited the token to eligible institutional customers, achieved via the explicit whitelisting of eligible (read KYC’d) token addresses. SG-FORGE’s USDCV and EURCV issuance is also similarly restricted, only for KYC’d institutional investors. Paypal’s PYUSD takes a different approach, offering their coin and services to retail and institutional users. The focus of TradFi stablecoins initial roll out to institutional investors limits the adoption and expected volumes of such stablecoins in the short term, yet institutions will likely bring the scale of high transaction volumes in the long term.

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The Stablecoin Breakdown

The current stablecoin supply is centered on Ethereum and Tron, both Layer 1 blockchains. Ethereum has been the leading platform for stablecoins over the past five years. Tron is now the second-largest platform due to its native USDT support. As the overall stablecoin market cap grows, the market share of all chains increases, yet the “other” chains are growing at a proportionally larger rate. As a result, the combined market share of Tron and Ethereum is declining.

Ethereum’s dominance is characterised by being the first to blockchain to support smart contracts and the early adoption by major issuers such as USDT, USDC, and DAI. Ethereum’s mainnet launched on 30 July 2015, with Tether’s USDT ERC-20 issuance began November 2017, MakerDAO’s DAI, the first native stablecoin, debuted in December 2017 and USD Coin (USDC) was launched on Ethereum in October 2018, when Circle and Coinbase partnered to issue it as an ERC-20 token.

However, the major growth of Ethereum’s stablecoin supply surged in 2021, driven by the growth of DeFi. Many of the leading DEXs, lending platforms, and yield aggregators are built on Ethereum, making it easier for Ethereum-based stablecoins to integrate seamlessly into the ecosystem.

For other organizations, such as JPMorgan, Ethereum’s DeFi use case is not aligned with their intended applications. The primary use cases for TradFi-focused stablecoins are to streamline settlement times and reduce fees in traditional financial transactions. As such, these institutions are not constrained to building on Ethereum to access DeFi applications. For example, XRP and RLUSD, which cater more to TradFi-oriented use cases like international remittances, are built on the XRPL (XRP Ledger).

Regardless, Ethereum has built a reputation for its security, reliability and liquidity, with all major players deployed on the chain. Ethereum overall is also a more well-known chain, TradFi individuals are most familiar with BTC and ETH, especially with the advent of ETFs for both. Another core component of Ethereum's offering is their development roadmap which has delivered lower fees and higher transaction throughput.

All chains' stablecoin market caps are growing, but the proportion of the total stablecoin supply on Layer-2s and other chains is growing at a fast pace. BNB Chain gained from Binance’s token model and BUSD issuance, Polygon benefited from Ethereum compatibility and USDC integration, and Avalanche attracted USDT and USDC with grant incentives. We can expect the market share of stablecoins on these other chains to keep increasing with the advent of new stablecoins – in particular, JPM has chosen to pilot on Base, an Ethereum Layer 2. Base currently holds just over $4B in stablecoins (with nearly 90% being USDC),just a fraction of the total stablecoin supply.

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With an almost exponential increase in interest from Trad-Fi institutions, how does Ethereum stand to benefit?

Stablecoins currently have a total market capitalization of $250B. Of that $250B, around 51% of the total circulating supply is within the Ethereum ecosystem. Treasury Secretary Scott Bessent recently told the US Senate that “stablecoin legislation backed by US treasuries or T-bills will create a market… I think that $2 trillion is a very reasonable number”. Given that half of the stablecoin supply already exists on Ethereum, that could potentially mean an 8x increase in stablecoin market-cap to $1T on Ethereum alone.

So how important are stablecoins for the Ethereum ecosystem? Stablecoin transactions currently account for 30-40% of total daily transactions on the Ethereum mainnet – that was equivalent to approximately 665,000 out of 1.4M total transactions on July 1, 2025. However, the average cost of a stablecoin transaction amounted to $0.14, relative to a total average transaction fee on the mainnet of $0.71. While stablecoins make up 30-40% of the total transactions in absolute number, they contribute a smaller (in the case of July 1, 2025, 9.2%) amount to the total daily gas fees paid on the mainnet.

We do observe a linear relationship between the total number of transactions on the network and the log of the burned gas fees, but this figure assumes that the gas used by a stablecoin transaction is similar to other types of network activity. In reality, stablecoins consume far fewer gas units (54,128 gas units for a USDT transfer, compared to 184,523 gas units for a Uniswap DEX transaction), and so contribute far less to the increase in base fees.

That relationship has also been changed following the Dencun and Pectra upgrades to the gas market dynamics. This estimate is further confounded by the unknown ratio of new stablecoin activity on the mainnet to new stablecoin activity on L2s, which would result in significantly lower amount of gas burned due to cheaper transaction fees. However, regardless of the choice between L1 and L2 as a venue, projected stablecoin growth at the scale suggested by Scott Bessent would make the Ethereum network significantly deflationary.

This is occurring at the same time where we are starting to see a demand crunch from staked ETH and spot ETF interest. Currently just under 30% of the total circulating supply of Ethereum is being staked on the Beacon chain. That ratio increased almost entirely linearly, following a staff statement from SEC Commissioner Hester Pierce that the act of staking was not considered a securities offering in late May, 2025. If we include the total cumulative ether held by Spot ETH ETF’s, that percentage increases to almost 33%.  

Earlier this week, the REX-Osprey SOL + Staking ETF was launched – the first of its kind to directly hold SOL tokens and the first in the US to have staking approved. This will likely mean a flurry of staking-enabled ETFs in the foreseeable future – including the potential conversation of converting existing ETFs into staking-enabled ETFs. Therefore, we could anticipate an even bigger increase in flows towards ETH Spot ETFs, which could potentially find its way into the beacon chain.

Therefore, the wider exponential adoption of stablecoins, particularly on the second-largest cryptocurrency, Ethereum, will increase the value proposition of the network from a deflationary aspect; and will simultaneously occur alongside a larger demand crunch for Ether tokens to be staked.

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What could mitigate the impact on Ethereum?

It is important to note, however, that the adoption of stablecoins from Trad-Fi institutions may not have an instant impact on the Ethereum network. Many of the aforementioned institutions looking to build on Ethereum will operate behind a walled garden – requiring KYC verification before users can transact using their token. This in turn limits the volume of transactions in the short-term as only a selected pool of individuals will be permissioned.

Nonetheless, even a walled garden approach from institutions could have a second-order effect on more openly accessible stablecoins such as USDT and USDC as institutional interest brings a bigger mass of individuals into the blockchain space. It is also likely that should these institutions successfully pilot their stablecoins, they may relax KYC regulations, which would open the floodgates for adoption even further.

Additionally, it is worth noting that the two key benefits of stablecoin adoption – namely, increased transaction fees paid to validators (therefore more demand for the ether token), and secondly the amount of ether burned on the network, were both mitigated by the Dencun and Pectra upgrades. In previous reports we highlighted that Pectra and Dencun, at least in the short-term, reduce the fees for validators due to cheaper transactions and reduce the attractiveness of staking ether on the network. However, had it not been for these changes and fees on Ethereum were still at 2021 levels (over $70 on average per transaction), institutions may have not built their infrastructures on Ethereum.

The regression above shows that, post-Pectra, the Ethereum mainnet can handle a larger volume of transactions without spiking gas fees on the network. Indeed, stablecoin demand en masse could be the critical factor that gives participants of the network a smaller slice of a bigger pie which ultimately ends up benefiting ETH holders in the long-term and bolsters the case for Ethereum ecosystem.

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The Impact on Staking

The growing use of stablecoins on Ethereum will increase network usage. A higher level of network usage translates to higher validator rewards, because validators receive a portion of transaction fees and priority tips. When the network is congested or in high demand, as with widespread stablecoin transactions, users are willing to pay higher fees to get transactions processed quickly, boosting validator income.

However, the ultimate impact on ETH’s staking yield depends on whether the increased rewards from network usage outpaces the increase in ETH staking. As more ETH is staked, individual validator yields vary inversely proportional to the square root of staked ETH.

staking yield ∝ 1 / √(staked ETH)

Since the SEC provided the clarity that staking not being considered a security, the Beacon chain balance, which is the total ETH staked on the network, has grown substantially and remains in a growth phase. In addition, the Dencun and Pectra upgrades to the Ethereum network, implemented in March 2024 and May 2025 respectively, have drastically reduced transaction fees by making Layer-2 data cheaper to post on-chain. As a result, transaction fees are no longer as responsive to increased network activity, meaning that a higher increase in activity is required to push priority fees to their historic levels.

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Conclusion

With Ethereum and its Layer 2s positioned as the blockchains of choice for institutional stablecoin deployment, growing adoption could significantly boost network usage and institutional adoption. However, recent upgrades to the network and an increased validator set mean that the ultimate impact on transaction fees, burned fees, and staking yield will require an order of magnitude increase in activity.

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