Stablecoins Live or Die by Network Effects
Liquidity : the key network effect driving stablecoin growth
Disclaimer: The views expressed in this article are my own and do not represent those of my employer.
In the world of financial infrastructure, few concepts are as misunderstood yet as decisive as network effects. From social networks to settlement rails, network effects shape market structure by creating self-reinforcing feedback loops: the more a system is used, the more valuable it becomes to others.
In Web2, this logic led to the consolidation of entire sectors around dominant players — Google in search, Amazon in e-commerce, WhatsApp in messaging.
More users → more value → more users. Simple.
This same principle is playing out again in the stablecoin industry. But here, the nature of the network is different. In this emerging domain, liquidity itself constitutes the network.
For emerging stablecoins — especially euro-based ones — this creates a brutal dynamic. Even with good tech or regulation, low liquidity equals low usage, which further reduces liquidity. It’s a coordination failure.
Breaking out of this trap isn’t just about protocol design. It’s about:
Distribution through real-world integrations
Strategic partnerships
Incentives that bootstrap early liquidity and drive adoption
Until the market adopts you organically, you have to engineer liquidity like infrastructure.
The Primacy of Liquidity in Stablecoin Adoption
Stablecoins derive their utility from integration and convertibility. Each additional venue — whether a centralized exchange (CEX), decentralized finance (DeFi) protocol, wallet, or payment service — increases the potential use cases and decreases the friction of transaction.
However, the connective tissue enabling all of these functions is liquidity: the ability to enter and exit positions quickly and predictably, with minimal slippage.
Since as early as 2015, the stablecoin market has been dominated by U.S. dollar-denominated instruments such as USDT (Tether) and later by USDC (Circle). This dominance was not accidental. It mirrored long-standing conventions in traditional finance, where the U.S. dollar serves as the global settlement currency and the standard unit of account in cross-border trade and capital markets. When financial institutions and market makers entered crypto markets, they brought these conventions with them :
Exchanges priced assets in USD terms; trading pairs defaulted to dollar-denominated tokens.
DeFi protocols integrated dollar stablecoins as the primary source of liquidity and collateral.
The effect was a strong first-mover advantage that evolved into a form of economic gravity: once deep liquidity pools formed around USD stablecoins, every new protocol or market participant had a rational incentive to adopt them.
Why Even Big Names Can’t Break In (even with USD projects) ?
This dynamic creates a formidable barrier for new stablecoins, particularly those denominated in non-USD currencies such as the euro or yen. Even if these projects offer strong technical architecture, regulatory clarity, or institutional support, they frequently struggle to overcome the cold start problem. The issue is not just low adoption but low liquidity, which leads to limited utility, which in turn discourages adoption — a classic coordination failure.
Several recent examples illustrate this challenge even with USD Stablecoin.
PayPal, one of the most trusted fintech brands globally, launched its own stablecoin, PYUSD, in 2023.
Around the same time, a consortium including Robinhood, Kraken, Nuvei, and Worldpay introduced USDG, aiming to build a new settlement layer across crypto and payments.
Despite the considerable institutional backing behind these initiatives, their impact on the stablecoin landscape has been minimal: as of mid-2025, PYUSD maintains a market cap under $1 billion, and USDG remains under $350 million. Combined, they account for less than 1% of the total stablecoin market.
Despite their resources, these stablecoins have yet to achieve real network effect. It’s not for lack of trying:
PayPal tried to tap into DeFi by deploying PYUSD on Solana and offering yield incentives to attract users and liquidity.
The USDG consortium offered a revenue-sharing model for distributors, hoping to create aligned incentives across platforms and partners.
Launching a successful stablecoin isn’t just about brand recognition or financial backing. It’s about deep liquidity and sticky use cases.
Engineering Liquidity
Historically, new financial instruments have faced similar challenges. Credit default swaps (CDS), exchange-traded funds (ETFs), and index derivatives all began with negligible liquidity. In nearly every case, early success required some combination of three factors:
A clear, unmet market need or functional innovation
Strong, strategic counterparties to provide early volume
Incentive structures to subsidize liquidity in the early phase
For instance, CDS succeeded because they helped banks optimize capital efficiency in a regulatory environment that penalized certain forms of credit exposure.
ETFs like SPY gained early traction through partnerships with institutional hedgers and brokers who ensured tight spreads and constant liquidity, even at low volumes. These instruments weren’t launched via public campaigns; they were embedded into the workflows of institutions with tangible needs.
The implication for stablecoin issuers is clear: distribution and liquidity must be engineered, especially in the absence of organic demand. Launching a stablecoin as a generic “on-chain cash” is unlikely to succeed. Instead, issuers must focus on embedding the stablecoin into financial processes that already matter to key users — whether that’s cross-border payments, FX hedging, collateral in lending, or treasury settlement.
Practical Levers for Creating Liquidity
A credible go-to-market strategy for a new stablecoin involves several coordinated actions. First, the product must address a specific pain point, not just in theory, but in the real workflows of financial institutions or platforms.
A notable example is Lugh, a euro-denominated stablecoin backed by Groupe Casino, one of France’s largest retail conglomerates, which I co-launched in 2021.
Unlike most stablecoin initiatives that prioritized crypto-native trading use cases, Lugh was originally conceived to address a specific, structural pain point in the retail sector: improving the interoperability of loyalty programs and enabling seamless value transfer across a network of affiliated merchants.
This vision was both innovative and strategically sound — it sought to apply blockchain technology not for speculative purposes, but to solve a real-world inefficiency in consumer retail infrastructure. However, the practical execution deviated from this initial roadmap. The key integrations required to embed the stablecoin into retail workflows were repeatedly delayed or deprioritized, as attention shifted toward more immediate opportunities in the crypto trading ecosystem.
While this pivot provided short-term market relevance, it ultimately eroded the project’s strategic differentiation. By moving away from its utility-driven foundation, Lugh forfeited the opportunity to build defensible, real-world network effects — a cost that became increasingly apparent over time.
Early partnerships with strategic institutions are critical. These may include exchanges, payment networks, OTC desks, or fintech apps that can serve as liquidity anchors. Rather than targeting mass adoption from day one, the focus should be on embedding the stablecoin in a small number of high-volume, high-relevance venues, where it can gain organic transaction flow and credibility.
Liquidity Begets Liquidity
In stablecoins, liquidity is the network. Every new integration, every trading pair, every user increases the value of the system as a whole. Once this feedback loop is in motion, it can become self-sustaining, but reaching that point requires intentional design, targeted incentives, and a deep understanding of the financial workflows you’re trying to serve.