Crypto Long & Short: Inside the 300-to-1 onchain gap between the dollar and euro

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This is your institutional newsletter, Crypto Long & Short. This week:

By Ryan Connor, research partner at RockawayX

The euro is the world’s second money, representing 20% of global FX reserves versus the dollar’s 57%. The eurozone is the world's third-largest economy, and all of its activity — from trade to capital markets — is denominated in euros. Across measures of currency activity and demand, USD usage is approximately three times that of the euro. But onchain, that ratio explodes past 300-to-1. All euro-pegged stablecoins sum to €711 million, less than 1% of total stablecoin supply in dollar terms.

Euro stablecoin activity is small, but rapidly growing. Euro vault AUM across DeFi increased from roughly €12 million a year ago to €135 million today, still representing only 2.4% of total vault AUM. We believe euro-denominated real-word asset (RWA) yield products will accelerate EUR stablecoin growth.

Onchain euro issuance is trailing the offchain world primarily for two reasons: a historical path dependency and lack of euro-denominated DeFi infrastructure.

Path dependency. Stablecoins were built to settle crypto trading, and crypto pairs were originally priced in dollars. Since the base pair was USD, USD stablecoins launched to match the assets they settled.

Missing infrastructure. Vault infrastructure and looping (where each loan funds the next purchase) accelerated dollar-denominated DeFi. Dollar-denominated yield-bearing assets were issued onchain. Lending protocols accepted them as collateral and issued dollar debt against them, allowing users to buy more dollar-denominated yield-bearing assets.

Consequently, every major lending market onchain today reflects this dollar-denominated looping trade. Euro-denominated leverage markets did not take off because the legs of the loop didn’t exist.

Dollar Defi is Insufficient for Euro-Denominated Users

Euro-denominated vault infrastructure is a market necessity for European asset managers, corporate treasuries that operate and report in euros and European DeFi users who think in euro terms. These users represent significant latent demand, as they have been structurally limited from fully participating in the onchain economy due to burdensome FX risk and hedging costs.