Why Stablecoin Dominance Threatens Native Token Utility in Payment Networks

Stablecoins dominate transaction volume. Over 70% of on-chain economic activity is now denominated in USDC or USDT, not ETH, SOL, or AVAX. This creates a direct utility bypass where users pay fees in stablecoins via meta-transactions, never touching the native token.

Payment networks require fee tokens. A token's core utility is its fee market capture. When protocols like Circle's CCTP or LayerZero's OFT enable stablecoin-native gas, the native token becomes a speculative governance coupon detached from daily network usage.

This is a security subsidy. Networks like Solana and Arbitrum currently subsidize stablecoin transfers with native token security. This creates a long-term economic misalignment where the most valuable activity contributes the least to validator/staker revenue.

Evidence: On Arbitrum, over 90% of DEX volume uses stablecoins, yet ARB staking rewards are not directly tied to this activity. The fee switch debate across L2s highlights this growing tension between user convenience and token utility.

Payment friction kills adoption. Users reject the volatility and multi-step process of acquiring a native token just to pay fees. This creates a user experience chasm that stablecoins and account abstraction directly solve.

Stablecoins are the default currency. Protocols like Ethereum (EIP-4337) and Starknet (account abstraction) enable fee sponsorship and payment in USDC. This makes the native token a purely speculative governance asset, decoupled from network usage.

The data proves the shift. Over 40% of gas on Arbitrum is now paid in USDC via Gelato's Web3 Functions and similar infrastructure. The fee token economic model is obsolete when users never touch it.

Infrastructure follows demand. Cross-chain messaging protocols like LayerZero and Axelar prioritize stablecoin transfers. Payment rails like Solana Pay are built for USDC, not SOL. The market votes with its transactions.

Stablecoins become the fee asset, not the native token. Users and applications default to paying gas in USDC or USDT for predictability, bypassing the native token's primary utility as a transaction fee engine. This is the Solana/Saga model, where stablecoin volume dwarfs SOL-denominated payments.

Governance becomes a ghost function. Without a steady stream of fees accruing to the treasury or being burned, the native token's value is decoupled from network usage. Governance rights over a fee-less system hold minimal economic weight, as seen in early-stage L2s before sustainable fee models.

The protocol subsidizes its own obsolescence. Networks often incentivize stablecoin adoption with lower fees or better UX, accelerating the native token's utility erosion. This creates a death spiral where decreased token demand further reduces its viability as a payment medium.

Evidence: On Arbitrum, over 80% of DeFi TVL is in stablecoins, and gas is paid in ETH, not ARB. This demonstrates the structural preference for exogenous assets, relegating ARB's utility almost entirely to periodic governance votes disconnected from core economic activity.

Governance tokens are misaligned assets. Their primary function is protocol control, not transactional utility. A user paying for coffee with a volatile governance token faces immediate price risk, creating friction that stablecoins like USDC/USDT eliminate by design.

Governance creates a velocity sink. Valuable governance rights encourage holding and staking, reducing the token's circulation as a medium of exchange. This directly opposes the high-velocity requirements of a functional payment network, where money must move, not be locked.

The fee-burn fallacy is insufficient. Protocols like EIP-1559 on Ethereum or Arbitrum's fee burn attempt to create scarcity from usage. However, this speculative value accrual does not improve the token's function as a payment tool; it merely makes the asset more expensive and less practical to spend.

Evidence: Look at Uniswap's UNI. Despite governing the largest DEX, its primary utility is fee-switch voting, not payment. In contrast, Solana's network fee market uses the native SOL token, but its success as a payment layer is driven by its speed and low cost, not its governance features, which are minimal.

Stablecoins decouple usage from value. Payment networks like Solana and Arbitrum process billions in USDC/USDT volume, but this activity does not accrue value to SOL or ARB. The fee token becomes a pure speculative governance token, detached from the fundamental utility of the chain it secures.

This creates a security subsidy. Validators are paid in a volatile native token while users pay in stablecoins. This mismatch forces protocols like EigenLayer to invent complex restaking mechanisms to bootstrap security, because native token fees alone are insufficient.

The counter-intuitive solution is fee abstraction. Protocols must enable gasless transactions paid in any asset, then automatically swap a portion to the native token via on-chain markets. This model, pioneered by Biconomy and Gelato, ensures economic activity directly supports network security without burdening the end-user.

Evidence: Over 90% of DeFi transaction volume on Arbitrum and Optimism is stablecoin-denominated, yet sequencer fee revenue remains a fraction of the network's TVL, highlighting the severe value capture gap.