The Inevitable Future of Stablecoins
Stablecoins are widely regarded as crypto’s first “killer app.” Once a niche product used primarily as collateral in lending protocols and swaps on decentralized exchanges (DEXs), stablecoins have evolved into being recognized by financial institutions as a potential disruptor to power all global payments and settlements. Today, they are a $200B+ asset class powered by a wide variety of entities– from crypto-native companies like Circle and Tether to onchain applications like Maker and Frax and even fintech incumbents like PayPal.
While their importance is undeniable, scaling stablecoins across the most active and promising blockchains, amongst a subset of the hundreds that exist today, remains a critical challenge. For stablecoins to materially disrupt traditional payment and settlement rails, they must exist ubiquitously across every chain where meaningful financial activity occurs.
This report explores the opportunities and challenges for issuers of stablecoins and explains why LayerZero’s Omnichain Fungible Token (OFT) standard is the optimal solution to future-proof these digital assets.
What Are Stablecoins?
Debating the precise definition of a stablecoin is, in our view, a nonessential discussion best left to the crypto Twitter crowd. For the purposes of this report, we prefer the definition similar to the one proposed by Nic Carter, that a stablecoin is “an on-chain liability that is intended to trade at a dollar.” Accordingly, any token commonly referred to as a “stablecoin” amongst the crypto-native audience, will be treated as such in this report.
Stablecoins are digital assets issued on blockchains designed to maintain a stable value, typically pegged to a fiat currency like the US dollar. They achieve this stability typically through reserves of fiat, but assets such as a commodity like gold, other cryptocurrencies, or algorithmic mechanisms are also used, as illustrated in Figure 1.
Stablecoins come in various forms, each being optimized as a medium of exchange, unit of account, store of value, or a combination of these (this dynamic is clearly stated in The Future of Stablecoin Design). Some, especially recent ones, include additional features like yield and compliance. At their core, stablecoins combine the stability of traditional fiat currencies with blockchain technology’s unique advantages, like near-instant, global, irreversible settlement, and seamless integration with smart contracts (i.e. composability). As such, these features position stablecoins as an ideal form of digital money to be used for a wide range of financial activities, including payments, remittances, swaps, and lending.
Note: While most stablecoins are not inherently yield-bearing, some, such as Ethena’s USDe and Ondo’s USDY, integrate yield generation into their structure and are commonly known as “synthetic dollars” or “stablecoin alternatives”. In this report, we bucket these under the stablecoin category.
The Stablecoin Landscape
Demand
The demand for stablecoins, thus far, stems from their stability in the inherently volatile world of crypto and their practicality as a form of money for individuals in regions with unstable monetary systems, as well as businesses seeking to mitigate foreign exchange risks. In this way, we will break down the demand for stablecoins based on their use-cases, which can be broadly categorized as a DeFi token (catering to speculative users) and as a medium of exchange (serving more traditional “money” purposes).
In DeFi, stablecoins are used as collateral in lending protocols like Aave and Morpho, reliant sources of liquidity for decentralized exchanges (DEX) – ensuring assets can be bought or sold without significant price impact – or for earning yield through depositing in pools such as the Dai Savings Rate (DSR) or Ethena’s staking pool (to receive sUSDe).
On the other hand, stablecoins are gaining a ton of traction as a more traditional form of money i.e. medium of exchange, for payments, remittances, and cross-border transactions. In regions with monetary instability or limited access to the U.S. dollar, like Latin America and Sub-Saharan Africa, stablecoins have seen notable adoption and growth as a form of payment, with year-over-year (YoY) growth in those regions exceeding 40%. Additionally, prominent companies like Tesla are reportedly leveraging stablecoins to bypass foreign exchange risks.
Overall, the growing demand for stablecoins has driven the total market cap to over $200B – an increase of approximately 59% over the past six months. An even more compelling indicator of adoption is the monthly transfer volume, which grew from around $1 trillion a year ago to consistently exceed $2 trillion today. This rapid growth shows how stablecoins are becoming essential instruments for improving efficiency in DeFi and access in the global financial system.
Supply
The supply side of stablecoins has become increasingly diverse, with a growing number of issuers entering the market. This trend is driven by the profitability of stablecoin issuance, exemplified by Tether. Stablecoin issuance typically involves a custodian–either onchain via smart contracts or offchain via banks–accepting deposits (crypto or fiat) and issuing stablecoins in return.
In a high interest rate environment, this is a highly lucrative setup for issuers. They can invest the deposited funds in the U.S. Treasuries, which have yielded between 4-5% over the past couple of years–a strategy that has worked well (to say the least) for Tether, which realized net profits of $2.5B in Q3 '24. Furthermore, this profitability margin explains why the U.S. Treasuries comprise about 80% of some issuer's total reserves.
Note: If interest rates decline further, which is expected to occur, it will be interesting to observe whether stablecoin issuers continue to prioritize U.S. Treasuries or shift towards higher-yielding options, potentially in DeFi protocols. We will explore this dynamic in a future report.
As a result, the stablecoin market has seen a proliferation of new entrants, with hundreds of stablecoins now available and more launching every week, it seems. As of December 9, 2024, over 20 stablecoins have market capitalizations exceeding $100 million, with six surpassing the $1 billion mark. Notable examples include Tether’s USDT, Circle’s USDC, Ethena's USDe, PayPal's PYUSD, and Ondo's USDY. Despite the influx of new stablecoins, the market remains highly concentrated. Tether (USDT) continues to dominate with approximately 66.8% of the total stablecoin market capitalization, with Circle (USDC) accounting for roughly 20.5% market share. Thus, while there is a growing number of new stablecoins, market data still indicates a significant reliance on a few dominant players.
Where Are Stablecoins Headed?
Differentiation through opinionated features and strategies.
The stablecoin market is at a pivotal moment. Established giants like Tether (USDT) and Circle (USDC) maintain significant market dominance, but many new entrants are vying for attention with differentiated products and go-to-market strategies.
One such feature is yield. For instance, Ethena, the issuer of USDe, employs a cash-and-carry trade mechanism to generate consistently high yields. This incentivizes users to buy USDe, stake it, and earn returns through sUSDe (receipt token)–which can then be used in DeFi protocols. Similarly, Ondo’s USDY generates yield via exposure to the U.S. Treasuries and attributes the yield to its holders automatically.
Another approach is through embedding confidentiality. PayPal’s PYUSD stablecoin on Solana plans to use token extensions allowing PYUSD transactions to conceal transaction amounts, visible only to the sender and receiver. While these amounts are hidden from public view, the token creator (PayPal) can still access and disclose transaction data to regulators when required.
Beyond product-focused features, issuers can differentiate themselves through targeted go-to-market strategies. A horizontal strategy can be used to extend the stablecoin across many different chains like Ethena did with USDe, whereas a vertical approach involves embedding stablecoins deeply within specific chains and DeFi protocols, positioning them as a de facto option within those ecosystems and then expanding to others from there.
Stablecoins are becoming much more opinionated in their feature set and go-to-market strategies. Yet, there is not a one size fits all approach. There are many types of stablecoins that make different tradeoffs and tailor to contrasting audiences. For the purposes of this report, we will focus less on how stablecoins could evolve beyond a plain-vanilla medium of exchange, and instead point out what the market is indicating to be an inevitable feature.
Interoperability is inevitable.
Interoperability enables the transfer of assets and data across chains. Over the past few years, the explosive growth in the number of chains has driven heightened activity for interoperability protocols. Looking specifically at stablecoins, as shown in Figure 3, stablecoin supply is expanding across a broader range of chains, with 10 chains now exceeding a market cap of $1 billion. And this growing supply is met with a growing amount of cross-chain volume via interoperability protocols. For instance, USDe has consistently averaged over $230M in monthly cross chain volume since inception. CCTP, an interop protocol specific to USDC, transferred over $3B in volume last month. At this stage, interoperability is no longer optional—it is an inevitability, and we are witnessing its rapid acceleration.
In 2025, stablecoins and their issuers must take advantage of this multi-chain reality. Their success progressively depends on being natively interoperable to meet the demands of an increasingly connected and dynamic ecosystem. And many stablecoin issuers have been seizing this opportunity by leveraging interoperability protocols (See Figure 5).
Why? Well, these protocols alleviate the issuer’s operational costs associated with expansion, and allows them to focus more on product innovation and go-to-market ecosystem growth, instead of building and managing in-house solutions.
Ethena’s adoption of LayerZero’s OFT standard for USDe is a prime example. By relying on LayerZero for interoperability, USDe has easily expanded and thrived across 10+ chains – realizing close to $50M USD weekly volume cross-chain since launch – allowing the Ethena team to prioritize its yield-bearing mechanics and establish USDe as a leading stablecoin in DeFi.
While the inevitability of natively interoperable stablecoins is clear, the reasoning behind it may still need further explanation. In the following section, we’ll break this down in more detail and uncover why stablecoin interoperability is a difficult and necessary problem to solve.
Figure 3: This chart shows the percentage growth of stablecoin transaction volume over the past year (Dec. 01, 2023 - Dec 01, 2024). Data is referenced from Artemis. Note: the majority of volume is still largely through USDT and USDC stablecoins on Ethereum and Tron.
Interoperability is Inevitable, but Complex
The rapid growth of blockchain networks presents an incredible opportunity for stablecoins to expand their utility and adoption. With developments like Ethereum’s rollup-centric roadmap, modular blockchains, and the adoption of non-EVM chains like Solana and Aptos, the crypto economy in total is only becoming more technically diverse.
While issuing stablecoins across these environments is an obvious next step, it’s not without significant challenges.
1. Interoperability is Operationally Challenging Managing stablecoins across multiple chains has historically been a complex and inefficient process. Issuers maintain sufficient liquidity on each chain to enable minting and redemption, which requires constant asset rebalancing, intricate operational oversight, and often high transaction fees. As issuers expand to more chains, these inefficiencies intensify, becoming a significant barrier to stablecoin adoption and growth across multiple chains.
Before interoperability protocols provided reliable solutions, issuers navigated a disconnected system. Stablecoins were issued directly on specific "native" chains, where the stablecoin was fully managed and issued by the issuer itself. To connect these native chains with others, issuers relied on liquidity-pool-based bridges – a highly capital-intensive practice.
A custom interoperability solution might suffice for one or two chains, but the complexity and costs grow exponentially with each additional chain. To date, only Circle has built its own stablecoin bridge, while all other projects have turned to interoperability protocols. And even yet, Circle’s CCTP even has its struggles given the amount of fragmented USDC liquidity and wrapped USDC versions.
Note: Wrapping a token involves locking the original token on its native chain and issuing a synthetic version on the non-native chain. This practice introduces a slew of challenges, including security vulnerabilities, fragmented liquidity, and increased operational overhead.
2. Wrapped Assets are Flawed in Most Cases
Since blockchains are permissionless environments, allowing tokens to get wrapped by third-parties became the standard approach early on for stablecoins like USDC and USDT to get to non-natively issued blockchains. This led to multiple versions of wrapped assets for the same underlying stablecoin on various chains, as different entities vied for recognition as the "official" version through social consensus.
This leads to challenges for both users and issuers, but any issues faced by users ultimately impact issuers as well. These can be summarized as follows:
- Security Risks: Locking tokens creates single points of failure. Custodial systems or smart contracts managing these locked tokens are frequent targets for exploits, and history has shown just how devastating these attacks can be for issuer reputation and trust.
- Trust Dependencies: Users are forced to trust third-party bridges to secure their assets. This dependency introduces unnecessary risks and runs counter to the ethos of decentralization.
- Fragmentation: Without a unified standard, multiple incompatible wrapped versions of the same token appear across chains (e.g., aUSDx, bUSDx, cUSDx). This creates confusion for users juggling different versions of the same token in their wallets, extra work for developers who have to integrate each token separately, increasing complexity and costs, and capital inefficiency since liquidity pools are created for each wrapped version.
- Lack of Monetization: Issuers lose the opportunity to collect transfer fees on each cross-chain transaction.
However, the good news is that interoperability is solved – eliminating the need for wrapped assets. Token standards, built on top of battle-tested interoperability protocols, can connect a stablecoin (and any token) across chains seamlessly and securely – important not just for the end user, but for the issuer itself.
Token Standards Simplify Stablecoin Interoperability
Interoperable token standards enable stablecoin issuers to natively deploy and manage assets across multiple chains simultaneously. This approach keeps issuers in control, allowing them to define how their assets move and directly collect fees, without the need to seed liquidity on every chain. End users benefit from the flexibility to move assets freely, while issuers avoid the added risks introduced by third-party bridges, resulting in a more secure and streamlined solution.
In summary, by leveraging message-based interoperability protocols, issuers can:
- Retain Control: Token issuers can choose to maintain authority over deployment, movement, and fees across chains – finding a balance between the issuer and user relationship. In the issuer’s hands, this ensures that all monetization opportunities, such as transaction fees and demand-based deployment incentives from chains, can benefit the issuer directly.
- Enhance Security: Native deployments eliminate single points of failure by removing reliance on third-party bridges and wrapped assets. Furthermore, it allows the issuer to control the verification of transfers – which is not possible if the asset is wrapped and transferred via third-party.
- Streamline Operations: Issuers can manage a single, unified token standard across all supported chains, reducing operational complexity and costs.
For end-users and developers, interoperable tokens offer a seamless experience. Users no longer need to juggle multiple wrapped versions of a token in their wallets, while developers benefit from standardized integrations that simplify application development.
Figure 4: Natively issued tokens use a burn-and-mint mechanism on cross-chain transfers (e.g., chain A to chain B); live tokens that adopt interoperable token standards use a lock-and-mint, where locking occurs only on the chains where they were previously live on (e.g., chain B to chain C)
How a message-based token standard solution works is that when a user transfers an interoperable token from one chain (Chain A) to another chain (Chain B), the token’s supply on Chain A is burned, and an equivalent amount is minted on Chain B. This ensures that the total supply of the token remains consistent across all chains.
For tokens already deployed without interoperable standards, locking mechanisms can be employed to enable cross-chain compatibility. In this case, when a token is moved from Chain B to Chain C (see Figure 4), the token on Chain B is locked in a smart contract, and a corresponding token is minted on Chain C. Although this introduces limited trust dependencies, risks are isolated to the specific contracts involved in the locking process, which the issuer owns. This mechanism grants issuers the ability to always adopt interoperable token standards, and have a unified experience for existing and future deployments.
Thus, by adopting interoperable token standards, stablecoin issuers can confidently expand their reach, address the operational inefficiencies and security vulnerabilities of multichain adoption, and unlock new opportunities in an increasingly interconnected blockchain ecosystem.
OFT: The Industry Standard for Stablecoins
The Omnichain Fungible Token (OFT) standard, built on LayerZero, solves all the challenges outlined above while providing additional features tailored to stablecoin issuers. This is why many of the industry’s top stablecoins have adopted the OFT standard.
Ethena (USDe)
Ethena publicly launched USDe in February 2024. In less than one year, it has grown to become the third largest stablecoin, behind USDT and USDC. Ethena executed a strategy to focus less on its stablecoin’s interoperability technology and more on its features (yield accrual mechanism) and ecosystem growth.
"LayerZero has been and will continue to be one of Ethena's most important partners in scaling USDe across networks," said Guy Young, founder of Ethena.
Still, interoperability remains a key part of Ethena’s growth strategy. Ethena adopted the OFT standard, allowing it to natively expand USDe, sUSDe (staked USDe), and ENA (governance token) to over 10 chains, and allow seamless transfers between them. In doing so, the team could focus more on the financial engineering of these tokens and ecosystem growth, as opposed to the technical nuances of interoperability. This strategy has paid dividends. It has been integrated into almost every major DeFi application, including Aave, Morpho, Pendle, EtherFi, Curve, Sky/Maker, and USDe has achieved a current market cap of $5.58B.
Looking forward, Ethena will be seamlessly pushing onto new DeFi ecosystems, EVM and non-EVM alike, and launching new assets such as USDTB.
PayPal (PYUSD)
PYUSD is a NYDFS regulated stablecoin, fully backed 1:1 by the US dollar. The PYUSD team announced that they adopted the OFT standard to facilitate transfers between Ethereum and Solana. PayPal, the entity behind the $500M+ and growing stablecoin decided to use LayerZero simply because it offered everything from a security standpoint it needed, particularly when it came to the configurability of verifiers.
Each PYUSD transfer is secured by PayPal USD’s and Paxos’ hand-picked group of Decentralized Verifier Networks (DVNs). At launch, the security stack includes Paxos, Google Cloud, and LayerZero Labs DVNs as verifiers, ensuring resilient, diverse and institutional grade security for transactions of all sizes. Paxos retains the flexibility to add or replace verifiers, ensuring continued security and eliminating vendor lock-in risks.
“We believe that PYUSD holders will welcome the flexibility and convenience offered by LayerZero,” said Jose Fernandez da Ponte, Senior Vice President of Blockchain, Cryptocurrency, and Digital Currencies at PayPal.
Ondo (USDY)
Ondo Finance is a provider of institutional-grade real world assets, including its market-leading United States Dollar Yield token (USDY), which is a US Treasuries-secured yieldcoin. USDY is a stablecoin alternative in that it is dollar-denominated, and provides daily yield accrual directly to the token price, based on US Treasury rates. USDY has expanded to 8 chains thus far, including Ethereum, Arbitrum, Mantle, Solana, and Sui, with $450m in total TVL and over 70 DeFi integrations.
With USDY, Ondo pioneered the next natural evolution of tokenized Real-World Assets (RWAs), bringing institutional-grade structuring and investor protections to a composable asset. With multichain deployments proving their own individual success, Ondo needed a way to connect these diverse deployments. So they built a custom bridge with the LayerZero bridging stack, reinforcing their commitment to institutional-grade security by utilizing a diverse set of mandatory DVNs, including Polyhedra, Axelar, and LayerZero, as well as beginning development on their own DVN.
Usual (USD0)
Usual, a decentralized fiat stablecoin issuer, utilizes the OFT standard to enable seamless movement of its assets across multiple blockchains. USD0 is a decentralized stablecoin fully backed by real-world assets (RWAs).
By adopting the OFT standard, Usual ensured its assets could integrate smoothly into DeFi ecosystems across various chains, establishing itself as a key player in the multichain DeFi landscape. This approach has proven successful: since its public launch in 2024, Usual has achieved a market cap of $1.86 billion, making USD0 one of the leading stablecoins by supply.
Why Stablecoins Adopt the OFT Standard
Here, we outline the key reasons stablecoin issuers are increasingly adopting the OFT Standard. The choice of which interop protocol to use boils down to its security and scalability, combined with the flexibility to accommodate diverse use-case requirements. The OFT Standard addresses both challenges simultaneously: by solving security and scalability in a modular way, it enables issuers to differentiate their offerings. More specifically, it provides issuers with control over critical features such as verification, finality, deployment, and other customizable options tailored to their assets.
Security
Security is paramount for all stablecoin issuers, but security levels vary based on the type of stablecoins. LayerZero addresses diverse security requirements with a unique two-layer model: application-defined security and protocol-defined security.
Application-Defined Security: Stablecoin issuers can configure their security to meet specific needs. Issuers choose their verifiers (i.e. DVNs), combining their own and other verifiers to optimize for characteristics like security, cost, speed, compliance via blacklisting or any parameter they want. Furthermore, they can even operate their own DVN, just as Ondo and PayPal do for their assets (Figure 6).
Figure 6: Example showing Ondo’s security stack, requiring verification of each USDY transfer from Axelar, Polyhedra, LayerZero Labs, and Ondo DVNs.
Protocol-Defined Security: All DVN configurations and OFT transfers are secured by immutable, uncensorable smart contracts. These contracts guarantee tamper-proof operations, safeguarding stablecoins against malicious actors and third parties.
Scalability
OFTs allow issuers to deploy stablecoins seamlessly across LayerZero’s 100+ supported blockchains with minimal effort. They can focus on differentiating their asset rather than the mechanics of an interoperable token deployment.
This is possible because of the following features:
- Unified Supply: The burn-and-mint mechanism ensures a consistent token supply across all chains, eliminating the need for wrapped assets or fragmented liquidity pools. This approach avoids slippage and ensures capital efficiency.
- Seamless Integration: Through Layerzero’s universal semantics, enabling consistent development across all chains despite their technical differences, stablecoins can expand into new chains with minimal effort.
- Streamlined Inventory Management: Issuers can manage global token supply from a single chain or a multichain setup. Transfers, issuance, and redemptions are seamless, eliminating the need for complex bridging mechanisms.
- Minimal Overhead: Issuers can outsource verification and execution to third parties while maintaining sovereignty over their contracts. LayerZero’s modular architecture also supports issuers who prefer to run their own infrastructure.
Figure 7: Stablecoin issuers that use LayerZero can issue and manage supply from a single chain or multiple chains. This supply is delivered via LayerZero, ensuring no liquidity fragmentation and a unified supply.
Bonus Features
The OFT standard offers additional differentiated features that enhance security, functionality and provide issuers with monetization opportunities.
- Rate Limits: Rate limiting can be implemented directly on-chain, ensuring transactions are processed at a controlled pace and preventing overflow before essential checks are completed. For issuers requiring compliance measures, whitelisting and blacklisting mechanisms can be embedded into the OFT contract, enabling seamless risk management at both the contract and verification levels.
- Yield Attribution: LayerZero’s lzRead primitive simplifies yield attribution by allowing token contracts to query and credit yield accrued on other chains quickly and cost-effectively. This ensures stablecoins are accurately attributed their respective yield without operational complexity.
- Monetization: Issuers can also monetize their OFTs through DVN fees or by charging cross-chain transfer fees, unlocking new revenue streams while maintaining operational efficiency.
The Path Forward for Stablecoins
Stablecoins have come a long way from being a niche asset in DeFi to evolving into a cornerstone of the global crypto ecosystem and a potential disruptor for global finance. To fulfill their potential, stablecoins must overcome critical challenges like scalability and security.
This report has highlighted the pivotal role of interoperability protocols, particularly LayerZero's Omnichain Fungible Token (OFT) standard, in addressing these challenges. By adopting a unified, cross-chain token standard, issuers can not only streamline operations and enhance security but also unlock new growth opportunities in a rapidly expanding blockchain ecosystem.
The stablecoin market's future hinges on its ability to adapt to an omnichain world—one where stablecoins exist seamlessly across all blockchains, enabling users and developers to interact with them effortlessly across the interconnected onchain world. Those that embrace this vision today will lead the market tomorrow.
Thank you to Nick from Ethena, Arjun from LiFi, and Logan from Ondo for their thoughts and edits to this piece.
