Why 'Stable' Is a Relative Term in a Multi-Currency On-Chain World

Stability is a local optimum. A token's peg holds within a specific liquidity pool or ecosystem, not universally. USDC on Arbitrum is a different asset than USDC on Solana; their stability depends on the canonical bridge and DEX liquidity of each chain.

Pegs break at the edges. The 2022 depeg of TerraUSD demonstrated that algorithmic stability fails when the reflexive feedback loop between LUNA and UST reverses. Even collateralized stablecoins like DAI face volatility when its collateral ratio shifts during market stress.

The unit of account shifts. Protocols like Aave and Compound denominate debt in their native stable assets (GHO, cUSD). This creates isolated stability zones where the reference currency is the protocol's own ledger, not USD.

Evidence: The Curve 3pool is the canonical stability benchmark. Deviations in its USDC/USDT/DAI ratios signal systemic stress, proving stability is a networked property of DeFi primitives, not an inherent token trait.

Stability is a function of denomination. A user holding USDC on Ethereum perceives volatility in ETH gas fees, but their asset is stable. On a hypothetical USDC-gas chain, the same user would perceive ETH as volatile collateral. The base currency sets the volatility benchmark for all economic activity on that chain.

Multi-currency execution fragments the stable state. Protocols like UniswapX and CowSwap abstract gas payment into the intent, allowing users to transact in a stable denomination while the solver pays in the chain's volatile native token. This creates a dual-layer economy where user stability and network security are decoupled.

Cross-chain systems expose the base currency dilemma. A bridge like LayerZero or Wormhole must quote fees and finality in the source chain's native token. The user's cost basis for a cross-chain swap is therefore pegged to the volatility of the origin chain's gas asset, not their intended stablecoin.

Evidence: The EIP-1559 burn mechanism on Ethereum demonstrates this principle. Its deflationary pressure and fee market stability are measured solely in ETH, making the network's economic policy irrelevant to a user operating purely in a USDC-denominated environment on L2s like Arbitrum or Optimism.

Gas is priced in ETH. Every transaction, from a Uniswap swap to an NFT mint, requires a fee denominated in ETH, making it the base currency for all on-chain operations.

Collateral is valued in ETH. DeFi protocols like Aave and MakerDAO use ETH and its derivatives (wETH, stETH) as primary collateral, anchoring their entire risk models to its price volatility.

Liquidity pools are ETH-anchored. The deepest liquidity pairs on DEXs like Uniswap V3 are WETH/USDC and WETH/USDT, forcing stablecoin liquidity to be routed through ETH as the central hub.

Evidence: Over 70% of the total value locked (TVL) in DeFi is in ETH or ETH-derivative assets, not USD-pegged stables, according to DefiLlama.

Stability is a liquidity game. A token's price stability is not inherent; it is a function of its liquidity pool depth and the velocity of capital flows. A large, sticky liquidity pool on Uniswap V3 provides more stability than a shallow pool for a fiat-pegged asset during a market shock.

Native assets are the ultimate stablecoin. For a protocol like Aave, its own governance token, when used as primary collateral, creates a reflexive stability loop. This internal economic system is more resilient than relying on external, cross-chain bridged assets from LayerZero or Wormhole which introduce oracle and bridge risk.

Protocols must design for volatility. Smart contract logic, especially for lending/borrowing, must assume collateral value is dynamic. Over-collateralization ratios on MakerDAO or Compound are not static safeguards; they are dynamic parameters that must adjust based on the volatility profile of the underlying asset, whether it's ETH, a liquid staking token, or a bridged stablecoin.

Stability is a vector, not a point. A token's stability depends on its liquidity depth and its velocity within the DeFi ecosystem. A token pegged to USD but trapped on a low-liquidity chain is less stable than a volatile native asset with deep pools on Uniswap and Aave.

The peg is a liability, not an asset. Fiat-pegged stablecoins like USDC introduce centralized failure modes and regulatory attack surfaces. Crypto-native assets like ETH or LSTs derive stability from their utility as collateral and their role in core protocols like MakerDAO and Lido.

Composability creates monetary gravity. A token's stability increases with its integration into money legos. Wrapped Bitcoin (WBTC) is stable because it's a trusted input for lending on Compound and trading on Curve. Its stability is a network effect.

Evidence: During the March 2023 banking crisis, USDC depegged due to off-chain bank failures, while the DAI stablecoin, backed by a diversified basket of crypto collateral, maintained its peg through automated MakerDAO auctions.