Bitcoin Stablecoins: Coming back with a vengeance?
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The report was written in collaboration with Will Owens: https://x.com/owenswill14
Key Takeaways:
- Stablecoins started on Bitcoin, they are now coming back to Bitcoin thanks to a technological Renaissance - the market is not paying attention.
- If Bitcoin stablecoins manage to grow at a similar rate compared to crypto stablecoins, we estimate that they could capture between $108B - $483B in market cap by 2030.
- As institutional demand for Bitcoin yield grows, Bitcoin-native stablecoins are poised to become an appealing solution for companies and funds holding significant Bitcoin reserves.
- The emerging Bitcoin Stablecoin ecosystem is leveraging the core strengths of the Bitcoin network to bring less centralized alternatives to market. Among them, Avalon Labs stands out with $600M TVL and ranked a fourth-place in the CDP sector within just one week of its launch, followed by Hermetica, Ducat and Yala.
- As Bitcoin L2s dominate the Season 2 narrative, we expect that their integration with Bitcoin Stablecoin projects will bring additional utility to users and serve as a liquidity bridge in an ever more fragmented ecosystem.
Outline:
I. Why Stablecoins Should Come Back to Bitcoin
II. The Current Opportunity
III. The Emerging Bitcoin Stablecoin Ecosystem
IV. Game Theory and Moon Math
V. The Bull Case for Bitcoin Stablecoins
I. Why we believe that Stablecoins should come back to Bitcoin
Origins.
Stablecoins may now dominate other blockchains like Tron and Ethereum, but it’s crucial to remember where they first took root: Bitcoin.
USDT (Tether)
Launched in 2014, Tether (USDT) was initially issued on Bitcoin via the Omni Layer protocol. This made Bitcoin the first blockchain to host a fiat-backed stablecoin. Tether’s concept was simple but powerful: peg a token to the U.S. dollar, allowing users to move fiat currency-like assets across blockchains with the security of Bitcoin’s network. However, as Bitcoin’s popularity soared, so did its transaction fees, which made using USDT on Bitcoin costly and slow. Tether eventually migrated to faster, more scalable blockchains like Ethereum and Tron, where lower fees and quicker settlement made it more viable for everyday transactions.
BitUSD
Launched on July 21, 2014, BitUSD was the world’s first attempt at creating a crypto-collateralized stablecoin. It was built on the BitShares blockchain and aimed to allow users to transact in a price-stable currency without relying on centralized entities like banks of fiat-backed systems.
However, this model came with inherent risks that were not widely appreciated at the time. Without any external price oracle, the system relied almost entirely on market psychology and the speculative nature of BitShares, the asset itself. The key flaw was the volatility of its collateral (BitShares)—in periods of sharp declines in the price, the collateral became insufficient to support the peg, leaving BitUSD holders exposed. As soon as too many investors piled into the sell-offs and BitShares’ price collapsed, the system broke. The lack of a strong redemption mechanism led to BitUSD losing its peg in 2018, from which it never recovered.
Lessons Learned
These early projects offer crucial lessons for today’s stablecoin innovators, especially those building Bitcoin-native stablecoins. While BitUSD relied on a volatile/untested asset as collateral, modern Bitcoin-native stables benefit from Bitcoin’s robustness and liquidity. Bitcoin’s track record as the most secure, decentralized, and scarce asset makes it a far superior choice as collateral for stablecoins. Bitcoin-native stablecoins now have the opportunity to improve upon the original vision of BitUSD by leveraging Bitcoin’s superior security and implementing risk-minimized design that can withstand periods of market stress.
Bitcoin’s Resurgence
While stablecoins have largely migrated to Ethereum and Tron, the broader market dynamics tell a different story about Bitcoin’s enduring dominance.
“89% of BTC—$1.3 trillion in market cap—is completely unleveraged. There's a huge opportunity to offer BTC-native leverage to that $1.3 trillion.” –Ducat Protocol Docs
II. What’s the Opportunity Size?
Currently, Tether (USDT) and Circle (USDC) command the majority of market share across major blockchains Ethereum, Tron, and Solana. This section explores the possible TAM (Total Addressable Market) for stablecoins, deployment across platforms, and the potential for Bitcoin-native stablecoins to capture a significant amount of market share.
Current Stablecoin Ecosystem
Stablecoins have cemented themselves as the backbone of blockchain activity, with USDT and USDC supply reaching close to $175bn. As the market fit for stablecoins continues to be proven globally, we expect this market to continue expanding and the dominance of existing players to be challenged.
While USDT and USDC have clearly dominated the space, their reliance on centralized custodians presents risks that have not yet been successfully dealt with. This sets the stage for the next evolution of stables: a more secure and resilient ecosystem anchored by Bitcoin.
Stablecoin Deployment by Chain
In this section, we take a look at which chains currently see the most activity with stablecoins, starting with monthly active addresses and moving into market cap by chain.
This is necessary to delve into the TAM for stablecoins, laying the groundwork for our thesis on how Bitcoin-native stablecoins could be transformative.
Which chains have the most monthly active stablecoin addresses?
Tron’s adoption in emerging markets has been primarily driven by its low-cost infrastructure, a critical factor in its continued stablecoin dominance. Users in regions such as Asia, Africa, and Latin America prefer Tron’s stablecoin ecosystem for transactions due to its near-zero transaction fees, which make it accessible for individuals and businesses handling high-frequency, lower-value remittances and savings.
Stablecoin Deployment Variation
The TAM for stablecoins is immense, with current supply nearing $1,175 billion. Yet, despite this massive market, stablecoin design remains constrained by fiat collateralization models and centralized custodianship. This is where Bitcoin-native stablecoins can bring unmatched security and decentralization to the table.
In the past 30 days, the global on-chain volume of stablecoins has exceeded $2.4 trillion, averaging around $80 billion per day. With growing institutional adoption of cryptocurrencies, increasing regulatory clarity, and other bullish factors such as improved infrastructure and mainstream integration, this volume could soon expand to $3 trillion.
Analysis of Current Stablecoin Designs
Stablecoin design refers to the specific structure and mechanisms used to maintain price stability. It includes how the stablecoin is pegged, the type of collateral backing it (fiat, crypto, or algorithmic), and the technology or protocol used to enforce the peg. The main goal is to ensure a consistent value regardless of market volatility.
To better analyze and compare these designs, we organized the information into a table, clearly laying out the pros and cons of each type of collateral and design. This approach helps identify which models might offer the best balance between security, decentralization, and capital efficiency.
Avalon Labs ($USDa)
Avalon Labs is the largest Bitcoin-stablecoin protocol, boasting $600M in TVL. USDa is the core of Avalon Labs’ CeDeFi platform, providing Bitcoin holders with a seamless combination of stability, liquidity, and yield generation. By using Bitcoin as collateral, users can mint USDa at an industry-low fixed rate of 8%. Users can effortlessly convert USDa to USDT at a 1:1 ratio without slippage on the Avalon CeDeFi lending platform, backed by a robust $2 Billion CeFi credit line, scalable with demand. This mechanism secures the 1:1 peg between USDa and USDT. USDa holders can earn around 15% APY, supported by Avalon’s lending revenues.
Strengths: 1) Sustainable yield; 2) extensive DeFi composability; 3) the fixed borrowing rate offers Bitcoin holders the lowest capital costs, boosting profit margins.
Weaknesses: The 60% LTV overcollateralization requirement for Bitcoin may limit capital efficiency.
Hermetica ($USDh)
Hermetica is a Bitcoin-native stablecoin protocol that issues USDh, a synthetic dollar backed by Bitcoin and a short perpetual futures position. Users can hold USDh on Bitcoin, earning up to 25% yield, while the peg is maintained through arbitrage and custodians. A Reserve Fund protects against negative funding environments. Hermetica is also very capital-efficient compared to its overcollateralized competitors.
Strength - High yield (backtested too), capital efficiency
Weakness - Reliance on custodians and complex perpetual futures positions
DUCAT ($UNIT)
Ducat is a Bitcoin-native protocol that issues UNIT, a Bitcoin-backed stablecoin soft-pegged to the USD. It uses zk-proof Bitcoin Ordinal circuits to enable decentralized and permissionless smart contracts without relying on centralized custodians. UNIT is governed by the DUCAT token and maintains stability with a 125-150% collateralization ratio, providing a self-custodial solution for Bitcoin's untapped potential in the stablecoin market.
Strength - Decentralized, self-custodial solution with high security
Weakness - High overcollateralization may limit capital efficiency
BAMK ($NUSD)
Bamk.fi issues NUSD, a Bitcoin-native synthetic dollar. Phase 1 backs NUSD 1:1 with Ethena's USDe, while Phase 2 will transition to Bitcoin-backed, delta-neutral yield generation through perpetual swaps. BAMK is the governance token, and NUSD holders earn rewards as the protocol shifts to full decentralization.
Strength - Transition to Bitcoin-backed delta-neutral offers decentralized yield
Weakness - Early reliance on Ethena’s USDe may disincentivize Bitcoin Maximalists
Palladium ($PUSD)
Palladium is a Bitcoin-backed, overcollateralized stablecoin protocol on the Botanix Layer 2 network. It issues PUSD, a stablecoin with a minimum 110% collateralization ratio and a system buffer of 130%. The protocol is governance-free, relying on preset, immutable parameters. Users mint PUSD by locking Bitcoin into a smart contract and can redeem it for BTC at any time, with fees and arbitrage mechanisms ensuring a stable $1 peg. PDM, a second token, rewards early adopters by capturing fee revenue and offering yield through the stability pool.
Strength - censorship-resistance
Weakness - it’s only on Botanix, dependent on the L2
YALA ($YU)
Yala is a decentralized platform that bridges Bitcoin liquidity across multiple blockchains and issues $YU, a Bitcoin-collateralized stablecoin soft-pegged to the US dollar. Users mint $YU by locking Bitcoin in overcollateralized vaults, allowing them to generate yield through DeFi activities without selling their Bitcoin. Automated liquidation mechanisms ensure system stability, while incentivized actors called Keepers help manage price stability through arbitrage and market operations.
Strength - Cross-chain Bitcoin liquidity
Yala’s new MetaMint protocol enables direct minting of stablecoins from native Bitcoin without the need for intermediate wrapping.
Weakness - Complexity of multi-blockchain interactions (operational risk?)
IV. Game theory and moon maths
Imagine a future where Bitcoin-backed stablecoins reach the same adoption levels as those on Ethereum or Solana. Solana’s $6 billion peak stablecoin supply was driven by fast transactions and low fees—but Bitcoin offers unmatched security, decentralization, and trust. As the most secure blockchain in existence, Bitcoin-native stablecoins are uniquely positioned for long-term adoption, especially as demand grows for transparent, decentralized financial assets.
If Bitcoin-backed stablecoins capture even a fraction of the stablecoin market on other chains, the potential is immense. With Bitcoin’s dominance and global trust, this could translate into a market cap of $100 billion or more for Bitcoin-native stablecoins.
But that’s just the beginning. Consider Ethereum. It currently supports $80 billion in stablecoins, despite growing regulatory scrutiny and centralization risks. If Bitcoin-backed stablecoins could match or even surpass Ethereum’s stablecoin market (by a factor of 4, given Bitcoin’s advantages), we’re looking at a potential $400+ billion market.
These projections may seem moonbound, but they are not without foundation. The demand for trustless, transparent financial assets is growing. In a world where institutions, governments, and individuals are increasingly turning to Bitcoin as a reserve asset, Bitcoin-native stablecoins offer a decentralized alternative to fiat-backed models like Tether and USDC, which are vulnerable to regulation and third-party risks.
The centralization of stablecoin issuance poses significant risks to the broader financial ecosystem. Disruptions—bank failures—can trigger cascading liquidity crises. For instance, the collapse of Silicon Valley Bank caused USDC to depeg dramatically. Within hours of Circle revealing $3.3 billion of its reserves were trapped, USDC lost over 10% of its value. Unlike fiat-backed stablecoins, Bitcoin-native stablecoins leverage decentralized reserves, providing resilience to market shocks and insulating them from vulnerabilities tied to traditional banking systems.
Institutional Adoption and Yield Opportunities
As Bitcoin treasury plays like MicroStrategy (MSTR) continue to accumulate Bitcoin, they will increasingly turn to Bitcoin-native yield opportunities to maximize their holdings. Institutional players seeking stable yield-generating opportunities are likely to explore protocols like Hermetica’s USDh or Avalon’s USDa, which offer up to 15-20% APY through trust-minimized mechanisms.
These solutions position Bitcoin-native stablecoins as powerful tools for institutions to earn secure yield on their Bitcoin reserves, providing a compelling alternative to USDC, USDT, or USDe.
CEMENTING OUR BULL CASE: 🐂
We are incredibly bullish on the Bitcoin Stablecoin space. The fundamentals are there, the technology is ready, and demand is rising. Bitcoin-native stablecoins will not only capture market share but help to redefine the entire stablecoin ecosystem. As Bitcoin becomes the cornerstone of global financial stability, these stablecoins offer a path to a new, decentralized economy, where trust is algorithmic, and stability is underpinned by the world’s most secure asset: Bitcoin.
Disclaimer:
This analysis does not include every Bitcoin stablecoin on the market. For the purpose of this report, we focused primarily on a select group of leading Bitcoin-native stablecoin projects that align with our investment thesis and best illustrate the potential paradigm change being pushed forward by innovative founders.
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