Software has eaten the world, and blockchain is sucking in all the capital. The popularity of stablecoins and on-chain economic activity now form a mutually reinforcing closed loop, making this growth structurally irreversible. The mechanism behind this is: stablecoins are on the chain, developers create use cases to承接资金, these use cases attract more stablecoins, and the cycle repeats, pulling in more funds with each turn. Capital migrated to the chain becomes productive, deeply embedded in lending markets, DEXs, and derivatives. Pulling this capital back to traditional infrastructure means giving up all this utility, so the capital stays and the flywheel keeps spinning.
This closed loop has spawned a new financial economy, generating billions of dollars in revenue each year. When $1 billion in new stablecoins enters the on-chain economy, it is dispersed throughout the financial system, reused more than a hundred times a year, and generates tens of millions of dollars in annual revenue. Every $1 billion in stablecoins generates approximately $122.00 billion in economic activity per year, with a turnover rate of approximately 122 times. For reference, dollars in PayPal turn over about 40 times a year, while the velocity of U.S. M2 is only 1.4 times. This means that a dollar on the blockchain is about 3 times more efficient than a dollar in PayPal and 87 times more efficient than a dollar in M2.
The $122.00 billion in annual economic activity generated by $1 billion in stablecoins is composed of: approximately $68.00 billion in payments and transfers; approximately $34.00 billion in derivatives; approximately $18.00 billion in DEXs; approximately $1.00 billion in lending; and approximately $400.00 million in RWAs. Each $1 billion in stablecoins introduced generates approximately $19.00 million in protocol revenue per year. These revenues support the next generation of products and attract the next billion-dollar scale of stablecoins to the market. It should be noted that the $19.00 million only covers the on-chain revenue directly observable at the protocol layer, and does not include the float income earned by stablecoin issuers, nor does it include the large amount of revenue generated by wallets, payment processors, fiat currency exchange channels, custody, and compliance.
Once capital is on the chain, it becomes productive, which allows the closed loop to continue. Returning to the traditional track means giving up T+1 settlement and being limited by bank business hours. Since the beginning of 2020, the supply of stablecoins has grown by approximately 60 times, from approximately $5.00 billion to approximately $300.00 billion, currently accounting for approximately 1.4% of U.S. M2. In 2025 alone, more than $120.00 billion in new stablecoins were minted, and stablecoin transaction volume reached $33.00 trillion.
Retail capital and crypto-native use cases have driven infrastructure construction over the past five years, and the next few turns of the flywheel will be driven by institutions. Institutional capital is beginning to move on-chain, incentivizing more asset issuers to tokenize products, such as BlackRock’s BUIDL and Apollo’s on-chain credit fund. Currently, RWA is one of the smallest but fastest-growing categories in the entire technology stack, connecting the on-chain economy with the trillion-dollar institutional capital market. As institutions begin to use infrastructure such as DEXs and lending markets, a major capital migration is taking place. The flywheel that once absorbed stablecoins is now beginning to absorb stocks, credit, treasuries, and structured products, and will eventually absorb all assets onto the chain.
[ChainCatcher]
The Siphoning Effect: How Blockchain is Fundamentally Reshaping Capital Allocation
The emergence of a self-reinforcing closed-loop ecosystem within blockchain finance represents a paradigm shift in capital allocation that experienced investors must recognize. This “siphoning effect” – where stablecoins and on-chain economic activity create mutually reinforcing growth – is structurally irreversible and poised to fundamentally alter the financial landscape.
Market Impact & Structural Shifts
The data presented reveals a startling acceleration of capital migration to on-chain systems: stablecoin supply has grown 60x since 2020, from $5 billion to $300 billion, now representing 1.4% of U.S. M2. More impressively, the velocity of capital on-chain (122x annually) dwarfs traditional financial systems – 3x more efficient than PayPal and 87x more efficient than M2. This isn’t merely incremental growth; it represents a fundamental reimagining of how capital works.
The closed-loop mechanism described – where stablecoins fund use cases that attract more stablecoins – creates powerful network effects. When $1 billion in new stablecoins enters the system, it generates $122 billion in annual economic activity and approximately $19 million in protocol revenue. This revenue then funds further development, attracting the next billion in capital. The flywheel isn’t just spinning; it’s accelerating.
Token Price Implications
For investors, this siphoning effect creates clear investment theses:
-
Infrastructure Tokens: Protocols underpinning this economic activity – particularly DEXs, lending markets, and derivatives platforms – are positioned to capture significant value as usage scales. The revenue generation described ($19M per $1B in stablecoins) suggests sustainable tokenomics for well-designed infrastructure tokens.
-
RWA Protocols: The tokenization of real-world assets represents the next frontier. As BlackRock’s BUIDL and Apollo’s on-chain credit fund demonstrate, institutional capital is beginning to flow into tokenized products. Protocols facilitating this transition – particularly those addressing compliance, custody, and institutional-grade settlement – could experience exponential growth.
-
Stablecoin Ecosystems: Beyond the issuers themselves, the entire ecosystem supporting stablecoin utilization – from wallet providers to fiat on-ramps – stands to benefit from the network effects described.
Risks & Headwinds
Despite the bullish thesis, significant risks demand attention:
-
Regulatory Crosscurrents: As the on-chain economy grows and increasingly competes with traditional finance, regulatory scrutiny will intensify. The tokenization of real-world assets, in particular, presents complex regulatory challenges that could disrupt growth trajectories.
-
Systemic Concentration: The flywheel effect could lead to winner-take-all dynamics, where a few dominant protocols capture most value and capital, potentially stifling innovation and creating new points of systemic risk.
-
Security Vulnerabilities: As more capital flows on-chain, the value of exploits increases. The interconnected nature of DeFi means a single vulnerability could have cascading effects throughout the system.
-
Market Maturity Transition: The shift from retail-driven to institutional-driven growth presents challenges. Institutional capital demands different risk profiles, compliance measures, and operational standards than retail crypto capital.
Opportunities & Investment Strategies
For sophisticated investors, the siphoning effect creates compelling opportunities:
-
Institutional On-Ramps: As institutions begin moving capital on-chain, services that facilitate this transition – particularly those addressing compliance, reporting, and risk management – will be critical infrastructure.
-
Cross-Chain Arbitrage & Bridges: As the on-chain economy expands across multiple blockchains, efficient cross-chain solutions that enable seamless asset movement will become increasingly valuable.
-
DeFi Innovation: The high velocity of capital on-chain creates fertile ground for innovative financial products that can capture value from this activity.
-
Data Analytics & Oracles: As system complexity grows, sophisticated analytics and reliable oracles for price feeds and off-chain data will become essential infrastructure.
Conclusion: The Unavoidable Migration
The siphoning effect described represents more than just crypto market growth – it’s a fundamental reshaping of capital allocation. The velocity and efficiency advantages of on-chain finance, combined with the self-reinforcing nature of the closed-loop system, suggest this migration is structurally irreversible.
As institutional capital begins to flow on-chain and the system expands to include real-world assets, we’re witnessing the early stages of a parallel financial ecosystem forming. For investors, the key is identifying protocols that provide essential infrastructure, facilitate this institutional transition, and can capture value from the growing on-chain economy. The flywheel is spinning, and the capital migration has just begun.