Tether shifts to USDT0 standard, swaps all stablecoins on Arbitrum

Arbitrum, one of the L2 chains with the biggest supply of Tether (USDT) will swap out its assets for the new USDT0 standard. The stablecoin is being unrolled on multiple chains to achieve better compatibility. 

Arbitrum is among the chains switching to the new USDT0 standard, which aims to make the stablecoin more compatible for movements between chains. Arbitrum carried over $1.3B bridged USDT, in its mix of over $5.5B in other stablecoins. 

Tether will now replace the bridged tokens with the new cross-chain standard, USDT0. The migration will start on January 29, and all tokens will be swapped automatically, with no need for special actions from users.

Users on DeFi protocols will have their assets swapped automatically, with no additional action required. However, bridging between Arbitrum and Ethereum may cause delays. Any transaction sent during the seven-day migration period will be settled after February 5.

This handoff has been facilitated by Tether, who transitioned ownership of USDT contracts to USDT0 during the upgrade. Coordination with Offchain Labs ensures a seamless transition for users, developers, and projects across the Arbitrum DeFi ecosystem, such as Aave and GMX. 

The new token standard arrives at a time when Tether grows its international and DeFi presence, while diminishing its role for regulated trading in the European region. USDT retains a supply of 140.7B tokens, after a burn of 1.9B tokens in the past 30 days.

Until recently, Tether solved the issue of multiple chains by issuing native assets. However, not all chains provided enough activity. During the late 2024 bull rally, exchanges swapped out some of the idle USDT supply back to ERC-20 tokens for their better liquidity and cross-compatibility. 

USDT0 token to offer cross-chain compatibility

The new USDT0 token will work similarly to bridged assets, though it will be able to move between the chains in minutes. USDT0 is backed 1:1 by the standard ERC-20 USDT on Ethereum. However, the token will be able to move onto other compatible chains, such as Ink and Berachain, with no additional bridging and fees. 

The USDT0 standard appeared after noticing most liquidity was siloed within chains, due to the cumbersome project of bridging, which often incurs prohibitive fees. The new token is interoperable and carried by a new smart contract. Tether has coordinated the handover of bridged tokens, adding more chains each day. 

Third-party bridges like Stargate will not be affected. However, the Arbitrum USDT bridge will be discontinued from February 5, instead only using the USDT0 infrastructure. The new token standard aims to remove the risk of interacting with multiple bridges, which could be exploited, or have low liquidity.

The first chains to offer USDT0 will be Ink, Kraken’s newly launched L2, and Arbitrum. Berachain and MegaETH followed soon after, with the goal of onboarding more chains. The new token standard, introduced in the past two weeks, uses LayerZero technology, allowing a token to seamlessly deploy to multiple chains and to be used as liquidity within apps. 

LayerZero works as a native multisig bridge, allowing a faster tool to control assets on multiple chains. The LayerZero technology allows for smart contracts on different chains to coordinate, with no need for manual issuance and burns for USDT on different networks. For some, the usage of this approach holds its own risks, especially if the multisig access is exploited.

Initially, the Ethereum ecosystem supporters expected collaboration between chains to achieve free liquidity flows. The USDT0 token will achieve this on the asset level, bringing easier liquidity to DEX and DeFi lending protocols. 

Arbitrum sees the biggest weekly outflows

Days before the USDT0 migration, Arbitrum was the chain with the biggest outflows. The L2 network is widely used for DEX and DeFi, as a cheaper way to access Uniswap markets. 

In the past week, Arbitrum saw outflows of nearly $1B, moving back to Ethereum. Arbitrum remains one of the most liquid L2, competing with Base as the top spot for DEX activity, token transfers, and other Web3 features. 

Arbitrum saw outflows of $7.45B in the past quarter, as the chain lost some of its appeal to Solana and base. The L2 still carries $2.99B in liquidity, with most spread to Aave, GMX, and Uniswap.

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