Congress is still working on a framework for comprehensive crypto legislation, and it looks like the starting point is going to be stablecoin legislation. The growing consensus seems to be that if Washington lawmakers can figure out how to regulate stablecoins, then they should be able to figure out a way to regulate other cryptos.
Thus, new stablecoin legislation could provide a nice boost to the overall crypto market. But which individual cryptos stand to benefit the most?
The stablecoin investment thesis
To answer that question, it's important to understand why stablecoins are so popular and how they are used. The biggest stablecoins -- such as Tether (CRYPTO: USDT) and USD Coin (CRYPTO: USDC) -- rank among the top five cryptos in terms of market cap. Tether, for example, has a market cap of $83 billion, while USD Coin has a market cap of $29 billion. Combined, that's approximately 10% of the entire crypto market, which has a current market cap of $1.1 trillion.
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The most popular stablecoins are pegged 1:1 to the U.S. dollar, and thus function much like digital dollars. In theory, you should always be able to exchange one "digital dollar" for one "physical dollar." This makes them enormously useful in bridging the gap between traditional finance and decentralized finance (DeFi). Some have called them "the glue" between the real economy and the blockchain economy. Without stablecoins, you wouldn't have decentralized exchanges, crypto lending, or crypto staking. Once you have stablecoin legislation in place, you have a strong foundation for DeFi.
Ethereum, Avalanche, and Solana
For that reason, I think the biggest beneficiaries of stablecoin legislation will be the big Layer 1 blockchains such as Ethereum (CRYPTO: ETH), Solana (CRYPTO: SOL), and Avalanche (CRYPTO: AVAX) that rank among the biggest players in DeFi. The more "stable" stablecoins are (as a result of legislation), the more stable their DeFi ecosystems are going to be. And that could provide a massive impetus for future growth.
Ethereum figures to be the most obvious beneficiary of stablecoin legislation. That's because Ethereum is the DeFi king. According to the Total Value Locked (TVL) metric, which is often used to gauge overall DeFi strength, Ethereum is the clear leader, and it's not even close. According to DeFi Llama, for example, Ethereum accounts for a whopping 57% of all TVL across all blockchains. And, if you add in all the Layer 2 scaling solutions used by Ethereum, that number is even higher.
Another big Layer 1 blockchain that ranks in the top 10 by TVL is Avalanche, a super-fast, super-scalable competitor to Ethereum. While the Avalanche DeFi ecosystem does not have nearly the size nor diversity of Ethereum's, it is impressive nonetheless. Avalanche, which accounts for 1.5% of all TVL in the blockchain world, is home to a number of popular decentralized exchanges and DeFi protocols.
Finally, there's Solana, another big Layer 1 ecosystem that's perhaps better known for its prowess in non-fungible tokens (NFTs) than DeFi. However, Solana founder Anatoly Yakovenko has called stablecoins the "killer app" that could spark the next big boom in crypto adoption. As he sees it, once people have stablecoins in their blockchain wallets, they will want to transform them into tokens that can be used on the blockchain. Yakovenko actually says that stablecoin legislation is "my big dream."
Is DeFi the best use case for stablecoins?
Of course, some would argue that DeFi is not the best use case for stablecoins. From a naysayer's perspective, stablecoins are just enablers for crypto speculation and lots of risky DeFi alchemy. In recent testimony in front of the House Financial Services Committee, for example, Rep. Stephen F. Lynch (D-Mass.) suggested that stablecoins are "speculative instruments" containing "structural fragilities" that pose a risk to the traditional banking and finance sector.
So before you get too excited about stablecoins, make sure you understand why they are used, how they work, and how they can fail. As I see it, new legislation will help to clean up stablecoins and make them safer for everyone.
And the biggest winner is...
Ethereum would seem to be the biggest beneficiary of stablecoin legislation. You simply can't go wrong with the world's DeFi leader. Long-term, I'm bullish on Ethereum and I fully expect the new stablecoin legislation -- if Congress ever gets around to passing it -- to provide a nice boost to Ethereum's growth prospects.
