Stablecoins behave like a fragmented foreign exchange market, where liquidity is spread across blockchains and pools, creating price differences and uneven access to dollar liquidity.
Moving stablecoins looks simple on the surface. But under the hood, it’s often a multi-step transaction routed across chains and pools.
“It’s a very special case of a foreign exchange market onchain, and that leads to bad user experience, with unexpected slippage, transaction reversion and unfamiliar information when moving your dollar from point A to point B,” Ryne Saxe, CEO at stablecoin infrastructure company Eco, told Cointelegraph.
Stablecoins now have a market capitalization above $320 billion, led by Tether’s USDt (USDT) and Circle’s USDC (USDC).
But as institutions and large traders enter the market, moving large sums of stablecoins becomes harder to execute cleanly.
Stablecoins aren’t as fungible as they seem
A stablecoin may be pegged to the dollar — or other fiat currencies — but it does not trade as a unified asset, with liquidity split across issuers, blockchains and decentralized finance (DeFi) venues, each with its own depth, pricing and access conditions.
“Stablecoins, between them, aren’t very fungible,” said Saxe. “The different profiles between those markets mean pricing and moving stablecoins seamlessly and efficiently across them is actually a hard problem that people take for granted.”
In practice, a dollar stablecoin on one chain may not be equivalent to the same asset elsewhere. Differences in collateral backing, market access and liquidity depth create pricing gaps that widen with size or in thinner markets.
Those differences are typically negligible in liquid markets and for smaller transactions. But as trades get larger, the gaps become bigger.
“The more major DeFi markets focus on stablecoins, the more chains focus on stablecoins, the more stablecoin assets there are, the more fragmented,” Saxe said. “People think these are just dollars, but they’re actually not.”
In a March report, payments startup Borderless found that pricing divergence in stablecoins depends largely on where liquidity is sourced.
Related: Instant settlement strains crypto’s capital efficiency: Ethan Buchman
The report collected hourly buy and sell rates throughout February across 66 stablecoin-to-fiat corridors — or conversion routes such as USDC to Mexican pesos — covering 33 currencies and seven blockchains. The data showed that USDC and USDT traded almost identically in most cases.
Larger differences emerged at the provider level, where pricing gaps in the same corridor could exceed hundreds of basis points, making execution quality dependent on access to liquidity and routing across venues.
Stablecoins become harder to move at size
As stablecoins currently stand, their market structure resembles foreign exchange, where dollar proxies circulate across disconnected markets, according to Saxe. That becomes more visible in larger stablecoin movements across chains.
Stablecoins have become a centerpiece for institutions moving into digital assets, used for trading, cross-border payments and onchain treasury management. Firms rely on them to move capital between venues, settle trades and access yield opportunities across DeFi markets.
Related: Why yen stablecoins are key to Japan’s crypto ambitions
Unlike retail users, institutions often move tens of millions of dollars at a time, where execution needs to be fast, predictable and efficient.
“If liquidity is spread out, trying to sell $10 million of one stablecoin and buy $10 million of another in a single step will move the market,” Saxe said. “What usually needs to happen is breaking that transaction into multiple branches, which may route differently and converge at the destination.”
In such cases, fragmentation becomes a constraint. Instead of drawing from a single pool of dollar liquidity, institutions must navigate multiple chains, issuers and venues, each with different liquidity conditions. Moving size can shift prices, require splitting trades and introduce uncertainty into execution.
“Right now, they don’t have the risk management, trust and infrastructure that they need to move or hold a lot of stablecoins at size onchain by default,” Saxe said.
Stablecoins need infrastructure, not more supply
Companies are starting to build infrastructure to address those gaps, but they are doing so from different assumptions about what the problem actually is.
Circle is treating stablecoins as the foundation of a new FX system, where multiple currencies, liquidity providers and settlement layers are connected through shared infrastructure. Meanwhile, Eco focuses on routing and execution, aggregating liquidity across fragmented markets.
Both approaches point to the issue of stablecoins existing across multiple chains or issuers, but the liquidity behind them is distributed and uneven. Moving funds requires interacting with that fragmented liquidity, which introduces pricing differences, routing complexity and execution risk.
“Fragmentation creates more spread between prices, meaning worse execution in many cases. To solve that, you need to read across markets, see the full liquidity picture, even if it’s fragmented, and route across it,” Saxe said.
For institutions, that complexity directly limits how much capital can move onchain. As Saxe explained, stablecoin flows need to become far more predictable before institutions have the risk management and trust required to move or hold large amounts onchain.
