Most traders think of liquidity as the orders they see on exchange books. In fact, the visible markets tell only part of the story. Off-exchange “shadow” liquidity – huge blocks of stablecoins flowing through OTC desks, internal matchers, cross-chain bridges and market-maker treasuries – largely powers crypto trading.
For example, Kaiko data show roughly 94% of stablecoin trading volume happens on centralized exchanges. But that figure is misleading: what happens on public order books is dwarfed by off-exchange flows. Behind the scenes, billions of USDT, USDC and other stables shuffle between wallets, prime brokers and block trades, quietly supplying the liquidity that keeps prices aligned.
These “shadow stablecoins” – unlisted or bridge tokens that never appear on a standard ticker – form a hidden plumbing critical to market function. Despite appearances, crypto’s liquidity is mostly hidden. Kaiko finds that about 94% of stablecoin market activity occurs on centralized venues, leaving decentralized venues with a tiny share.
Yet real volume flows through private channels: OTC desks, internal crosses, and cross-chain transfers. In effect, every visible USDT trade may be backed by multiple transactions happening off-book. We use “shadow stablecoins” as shorthand for any dollar-pegged tokens circulating outside public orderbooks – minted on less-visible chains or exchanged privately – that nevertheless fuel market activity. Though invisible to retail traders scanning orderbooks, these hidden stablecoins supply the depth behind nearly every big crypto trade.
Industry data underscore how deeply stablecoins have permeated OTC. Stablecoins now dominate institutional spot trades: Finery Markets reports ~75% of OTC volumes (H1 2025) were settled in stablecoins. In concrete terms, Circle’s USDC network alone moved roughly $850 billion between fiat and blockchain in just the first half of 2025.
In practice, an asset manager looking to shift $50 million of bitcoin might not hit an orderbook at all. Instead, they deal with a prime broker or OTC desk, often receiving freshly minted USDC/USDT off exchange, then selling it into market via rapid swaps. Likewise, exchange futures and options desks frequently internalize trades, matching clients off-book without ever showing in aggregate exchange volume.
In short, the plumbing of crypto markets – OTC desks, prime brokerage networks and market-makers – generates vast off-exchange stablecoin flows that underlie price formation.
What Are Shadow Stablecoins?
Shadow stablecoins are dollars-on-chain that never appear as distinct symbols on CEX tickers. Consider Tether on Tron (TRC-20 USDT). Almost 60% of all USDT supply now lives on Tron, yet most exchanges (e.g. Binance, Coinbase) simply lump all USDT together. Thus TRC-20 USDT passes through a unified “USDT” ticker without fanfare. Similarly, Binance’s peg tokens (BSC-based USDC/USDT), Circle’s brief foray minting USDC on Tron, or stablecoins deployed on new chains (Avalanche, Base, etc.) are practically invisible.
These shadow tokens circulate via OTC swaps and bridges. For example, FXC Intelligence notes that Tron accounts for ~51% of USDT’s supply, a total of roughly 51.6 billion USDT on Tron versus 35.4 billion on Ethereum. An institution in Asia might buy TRC-20 USDT directly (paying $0.01 fee on Tron) and then sell or swap it on a CEX wallet – but as far as the public markets see, it’s just another dollar in the general USDT pool.
Shadow stablecoins thrive in global corridors where traditional rails are weak. In many emerging economies, residents use USDT as a store of value and remittance medium. Chainalysis observes that Latin America and sub-Saharan Africa are embracing stablecoins to hedge inflation and send money cheaply.
Reports find the Tron network is now “used most frequently for operations with USDT/USDC” in 35 of 50 studied countries across Asia, Africa and Latin America. Low fees are a big draw: transferring USDT on Tron costs only about $0.01, making it “extremely attractive” for users in low-income regions. Indeed, a recent report notes Nigeria’s stablecoin volume reached nearly $3 billion by Q1 2024, becoming the dominant form of sub-$1 million retail payments there. Much of that liquidity rides on Tron or other off-chain routes. Crucially, none of it shows up as separate exchange liquidity; instead it quietly backs transactions from one on-ramp to another.
Other shadow stables include intermediary assets and cross-chain bridges. A trader might mint USDC on Ethereum, swap it for BTC on a CEX, then bridge USDC out to an EVM chain, redeem it with Circle, and repeat – all steps that create or extinguish tokens without obvious exchange volume.
Automated market makers (like Curve or Uniswap) also play a role: often, stablecoin inventory moves in and out of DEX pools off-book, then is arbitraged back. In aggregate, shadow stablecoins are essentially private payment rails. They include tokens issued by regulated banks or agents (e.g. Paxos’s issuer-backed stables), as well as anything pegged to the dollar that is exchanged OTC or via permissioned channels.
By definition, they bypass the visible liquidity on orderbooks – but they’re real and ample. In fact, the two largest stablecoins (USDT and USDC) now see trillions in monthly flows, most of which is settled through these off-exchange mechanisms.
The Plumbing of Crypto Liquidity
At its core, crypto liquidity is like a shadow-banking system in miniature. Institutional desks and prime brokers stitch together the on- and off-chain world. In practice, large trades often skip the lit market entirely. Finery Markets finds that three-quarters of institutional spot trading volume now settles in stablecoins, reflecting crypto’s growing reliance on dollar-rail transfers.
Likewise, flows between fiat and crypto are staggering: Circle reports roughly $850 billion of USDC moving between banks and blockchains in just six months. Most of that crosses through OTC channels or custody services, not public exchanges. For example, a treasury manager may swap dollars for USDC via a bank and immediately send it to a market-maker’s wallet; the maker then uses it to fund crypto purchases on any connected exchange. To outsiders, only the final exchange trade is seen.
New prime brokerage infrastructure has begun formalizing this. Providers like Copper and BitGo now offer unified custody pools that feed multiple exchanges in real time. One industry note explains that an institution can deposit a single USDC or USD amount with a custodian and execute on any connected venue without re-depositing funds. In effect, a firm maintains one stablecoin “bank account” behind the scenes.
This creates a de facto internal liquidity pool: if one CEX has short USDT while another has excess, the prime broker can shift the balance instantly. Such back-end networks amplify off-exchange depth and make liquidity appear more seamless, even as it remains off-book.
Market makers further recycle stablecoins across venues. These firms typically run delta-neutral books: they hold equal values of volatile crypto and USD tokens, hedging one against the other. In volatile times they may briefly over- or under-hedge, then use stablecoin issuers or DEX pools to rebalance.
They swap between USDC, USDT, DAI, etc., chasing the cheapest funding or the most liquid on-ramps. Kaiko reports that even on major exchanges depth is limited: a 1% price move in USDC on average requires around $100 million of quoted bids or asks, and for USDT it’s about $200 million. Block trades, however, can be much larger. So dealers frequently coordinate mint/redeem cycles behind the scenes.
For instance, if USDT is scarce on one exchange, a maker might convert USDC into USDT on-chain or buy it OTC, then top up that exchange’s inventory without posting orders. When redemptions close to L1 become available, they burn or swap stablecoins back. This perpetual loop – mint, deploy to trading, redeem or swap back, and remint if needed – quietly distributes liquidity where it’s needed.
The interplay of these elements keeps prices aligned across markets. In normal times, arbitrageurs and market-makers use off-exchange funding to iron out tiny price gaps. But inefficiencies can surface if the plumbing is strained. For example, research shows that stablecoins with fewer active arbitrageurs can deviate more from $1.
On average, USDT trades about 0.55% below par, versus USDC’s roughly 0.01%, partly because USDT historically restricted primary-market access (only a limited number of arbitrageurs can redeem USDT directly). In effect, USDT’s shadow liquidity is somewhat less transparent than USDC’s, so it sometimes shows slightly larger spreads.
Case Study: USDT on Tron as a Global Rail
Network designers and analysts note that Tron’s fast, cheap transfers made it a “rail” for global transactions. According to independent data, Tron now carries far more USDT than any other chain. In practice, dollars flow onto Tether’s book (say, in Hong Kong or the Cayman Islands) and emerge on Tron USDT, which then enters crypto markets or crossing corridors.
This shift has strong regional drivers. In Asia and Africa, Tron-based USDT is the preferred stablecoin. For instance, research shows in markets like Indonesia, the Philippines, Vietnam, Nigeria and Ghana – all key crypto hubs – Tron is the leading network for stablecoin transfers. The reason is simple: sending USDT on Tron costs only a penny or two, versus far higher fees on Ethereum. A Binance commentator observes that “$0.01 fees make USDT on TRON extremely attractive for users from low-income countries”.
Thus, remittance flows from Singapore or Dubai to Nigerian traders often route through Tron USDT, not traditional wire transfers. On-ramps in Africa commonly accept USDT into mobile wallets where Tron is implicit. As a result, stablecoin rails on Tron have become a digital backbone for regions starved of fiat exits: one report notes stablecoins were the largest segment of payments in Nigeria (~$3B) by early 2024, largely via Tron rails.
Crucially, most of these Tron flows never light up an exchange book. Centralized exchanges typically don’t distinguish on-chain provenance – they simply show “USDT”. When a trader in Chile buys USDT and sells it in Brazil, the underlying tokens could have hopped from Ethereum to Tron to BSC and back, all off-screen. If an exchange runs low on liquidity, internal desks will often top it up by fetching USDT from these alternate rails.
For example, if Binance’s USDT inventory drained, the exchange might have a warehouse with Tron and Ethereum USDT. A withdrawal to an OTC or a large sell order could be filled by moving coins from Tron inventory into Binance’s wallet. Because the ledger only sees “USDT in, USDT out”, the Tron activity is hidden to outside observers. In short, Tron USDT underpins global trading without ever appearing as “Tron-USDT” on a chart – it flows through the shadow zone.
Market Makers & Inventory Loops
Professional liquidity providers orchestrate much of this hidden flow. Large market-making firms carry massive reserves of USD tokens on hand so they can meet demand instantly. To manage risk, they deploy delta-neutral strategies: for instance, buying a portfolio of crypto assets while holding an offsetting value in stablecoins.
These firms constantly rebalance: if one stablecoin is in higher demand, they convert their stash accordingly. They exploit tiny pricing differences across venues: if USDC is priced slightly above USDT on one exchange, they swap between tokens (via OTC or DEX) to arbitrage away the gap. In effect, the makers are running internal swap desks that constantly merge and split stablecoin liquidity.
Collateral swaps are routine. Market-makers may park tokens in yield pools (e.g. Curve), borrow against them in DeFi or lend in CeFi, then reallocate. For example, if BUSD supply is needed to arbitrage a bridge, dealers might swap or redeem USDC for BUSD on-chain. Conversely, if USDC demand surges, they’ll mint or buy more USDC, often sourcing it through internal routes (like a connected US bank account via Circle) to avoid impacting public order books.
This continuous loop of minting, trading, redeeming and reminting keeps liquidity well-distributed. Indeed, public attestations hint at this: Circle’s disclosures show that during stress events, hundreds of millions of USDC were minted and burned daily to balance flows.
On the ground, these mechanisms translate to tighter spreads and resilient markets. In normal conditions, off-exchange liquidity providers absorb order imbalances so the visible book stays liquid. But when things go awry, limitations can show. For example, Bitcoin-priced traders typically exchange BTC for USDT when selling – a fall in demand for BTC pushes more stablecoins into markets. If arbitrage paths are disrupted (say, redemption channels slow), then even these market-makers can only do so much.
USDT typically has fewer authorized arbitrage desks than USDC, which partly explains why USDT can stray a bit further from $1 under stress. In short, market makers use shadow stablecoins as their working capital: their inventory loops underlie the liquidity on exchanges, aligning prices unless a crisis overwhelms the system.
Liquidity During Stress Events
The importance of off-book stablecoins becomes stark during crashes or bank runs. The Terra/LUNA collapse (May 2022) offers one illustration. As UST broke its peg, whales and even Terra backers scrambled to swap vast amounts of UST for fiat-backed stablecoins. Chainalysis reports that before UST failed, unidentified traders purchased over $480 million of UST with USDT in just 48 hours to prop up the peg.
This massive bid for USDT–UST swaps was a classic OTC intervention: the trades happened through Curve pools and OTC channels, drawing in Tether from everywhere. Ultimately, though, the convert-and-burn recipe failed and UST crashed. But in those final hours, the hidden flows of USDT were the only thing attempting a rescue.
Similarly, after FTX collapsed in late 2022, $3+ billion of USDC and USDT was momentarily trapped on its platform. This sudden loss of liquidity meant other venues had to compensate. Prices on some exchanges briefly widened as desks scrambled to cover positions with the remaining network flows. Though definitive data are sparse, it’s clear that FTX’s demise created a cold storage shock in the stablecoin pipeline – one reason why institutions keep surplus stables off-exchange.
The USDC de-peg in March 2023 is a concrete case study of arbitrage under stress. When Silicon Valley Bank (SVB) froze, Circle couldn’t process millions of redemption requests immediately. USDC briefly traded as low as ~$0.88. A Fed analysis shows that during that week, USDC’s market cap plunged by about $10 billion while USDT’s grew by ~$9 billion.
In other words, many traders dumped USDC for USDT or other liquid stables. Over the weekend, specialized firms organized block trades converting USDC to USDT, and Circle prioritized redeeming $6 billion to restore trust. By Monday, markets stabilized. But in those few days, off-exchange deals and prime broker swaps were the only lifeline: retail orderbooks were thin, and the quick rerouting of capital through OTC channels kept the system from freezing entirely.
Each episode reinforces the same lesson: public order books only tell part of the story. When UST fell or SVB failed, the actual rebalancing happened through silent, giant transfers of stablecoins that never registered as typical “volume.” Even when DEX orderbooks drained, stablecoin issuance and redemption blunted the blow. After March 2023, USDC’s peg recovered as soon as Circle began redeeming; that process was fueled by the vast shadow liquidity that providers had raised and were holding ready.
Arbitrage Flows & Price Discovery
Shadow stablecoins play a crucial role in aligning prices across venues. Suppose USDT is fractionally cheaper on a small Asian exchange than on a U.S. venue. A trader can use off-exchange channels to rebalance: for example, they could swap USDT for USDC, bridge that USDT out of Asia, and then bring it back on a different rail, netting a small profit. Such arbitrage flows rapidly tighten cross-exchange spreads. In fact, the presence of ample stablecoin liquidity off-book means even retail orders quickly get filled at fair prices.
In practice, arbitrage is a multi-stage cycle. A trader might sell ETH for USDT on Exchange A, then send those USDT to Exchange B for BTC, and ultimately bring dollars home by redeeming USDT with Tether. Or they could loop through DeFi: if Coinbase USDC trades above Binance USDC, an arbitrageur might swap USDT→USDC on Curve, move coins on-chain, and profit as prices converge.
These settlement cycles depend on shadow stockpiles: without the large off-exchange reserves in market makers’ wallets, such cross-venue trades would drive bigger price swings. Quantitative analysis underscores this effect. Kaiko finds the on-book depth for stablecoins is limited (roughly $100–$200M for a 1% move), yet actual price impact is usually far smaller thanks to these hidden flows. In other words, shadow liquidity amplifies the apparent depth seen by a retail trader.
However, arbitrage can break down if off-chain rails jam. We’ve already seen one example: the USDC de-peg caused an unusual decoupling of supply. Secondary market prices differed starkly for a few hours as “primary market” redemption lagged. Similarly, if stablecoin issuers pause redemptions (as Tether did in September 2023 during a banking scare), or if blockchain networks congest, stablecoins on one chain can trade at slight premiums to those on another. In such moments, retail order books are not enough: the hidden flows become the arbiter. When they falter, spreads widen.
Traders learned this in spring 2023: even though stablecoins are supposed to stay at $1, both USDC and DAI dipped under $0.90 after SVB’s collapse. That reflected a temporary failure of the usual off-exchange cycle, not just retail panic. In essence, when OTC and prime-broker pipes clog, arbitrageurs can’t rebalance quickly, and visible prices can deviate until the invisible plumbing is restored.
Retail Trader’s Dilemma
For the average trader, on-screen liquidity can be a mirage. A crypto exchange might advertise deep USDT orderbooks, but that depth is only what is posted publicly. Behind it, whole rivers of stablecoins might be poised to enter. Conversely, a seemingly liquid orderbook might disappear if hidden counterparty risk suddenly awakens. How can one gauge the true situation? In practice, savvy traders look at the signals beyond bid/ask.
One useful check is stablecoin flow metrics. Many analytics firms now track large transfers of USDC/USDT on-chain. A spike in CEX inflows, for example, often precedes volatility: when many coins pour into exchanges, it may indicate sellers lining up, implying worse execution. Conversely, a sudden outflow of stablecoins suggests funds are hiding or moving off-exchange.
Public attestations (like Circle’s weekly reports) let traders see net mint/burn flows of USDC; unusually high minting means institutions are hoarding dollars off-chain. Retail can use such data (via crypto data dashboards) to supplement orderbook info.
Another tip is to treat visible depth with healthy skepticism. If you plan a large trade, don’t rely on the quoted 2% depth on a single exchange. Instead, check multiple venues and on-chain liquidity pools. For instance, Curve’s total USDC/USDT liquidity (tracked by DeFi analytics) gives a rough floor for how much can be swapped on-chain without much slippage.
If Curve’s pool is thin, it might be safer to break orders or use a TWAP strategy. In general, smaller, staggered orders reduce the impact. Many veteran traders avoid “all-at-once” market sells in crypto; they split trades over minutes or hours, letting hidden liquidity from OTC routes slowly soak up the volume.
Finally, venue selection matters. Centralized exchanges have their limits – sometimes high withdrawal fees or KYC delays. In contrast, if you have access, DEXs or cross-chain routers might offer better price control (at the cost of on-chain gas). For example, swapping USDT→BTC on a DEX like Binance might mean trekking through Tron or BSC bridges, which incur minimal slippage.
Combining strategies (limit orders on CEX plus strategic on-chain swaps) often yields the best result. The key is awareness: real liquidity lies beyond the visible depth, so measure execution risk in terms of dollar value of needed flow, not just orderbook ticks.
Regulatory & Transparency Challenges
The shadowbank-like nature of off-exchange liquidity poses a regulatory puzzle. No global regulator oversees OTC stablecoin trading; it’s largely peer-to-peer and cross-jurisdictional. Traditional on-chain reporting regimes don’t capture these trades. As one observer put it, much of crypto’s dollar flows resemble shadow banking – fast and opaque.
This raises concerns about hidden systemic risk. If a few institutions concentrate stablecoin funds off-book, their failure could unleash a cascade unseen until too late. Indeed, Congress and regulators have started to notice: for example, the proposed U.S. GENIUS Act would treat large stablecoin issuers as banks, demanding full 1:1 reserves and strict auditability.
Circle and Tether would face unannounced reserve reporting, essentially forcing formerly “permissionless” tokens into an on-chain shadow of traditional finance. In Europe, MiCA (Markets in Crypto-Assets) has similarly imposed heavy requirements on asset-referenced tokens, trying to shrink the shadow by bringing stablecoins under a unified framework.
Yet enforcement lags. Major exchanges and OTC desks rarely disclose how much stablecoin liquidity they hold off-book. Even Tether and Circle, which offer attestations, only cover aggregate supply, not flows into private channels.
Given this, some analysts liken stablecoins to shadow banking – full of “hidden leverage” that regulators might only see when prices wobble. For policy-makers, the lesson is clear: one must account not just for exchange volumes, but also for the unseen networks of liquidity when assessing stability. Tools like proof-of-reserve contracts or mandatory disclosures could shine light on the shadows, but industry adoption is nascent. Until the off-chain flows are at least partially visible, the system will remain harder to oversee than traditional securities.
Looking Ahead: The Future of Shadow Liquidity
Will the “shadow” in stablecoins ever fade? Some trends suggest creeping transparency. On-chain Proof-of-Reserves or periodic attestations could expand to include mint/redemptions by jurisdiction.
Finance firms like Paxos are testing tokenized bank deposits, which could one day allow on-chain proof-of-liquidity: for instance, a bank-issued stablecoin might publish live proof of collateral (as some crypto tokens do now). Central Bank Digital Currencies (CBDCs) could also reshape the rails: if commercial banks tokenize deposits on a CBDC ledger, they might plug directly into crypto exchanges’ back-ends, partially merging the shadow world with the on-book system.
Innovations in analytics may also demystify liquidity. Companies are working on “order flow surveillance” in crypto: tracking large transfers of USD tokens and flagging potential imbalances before they hit markets.
Trading protocols might one day include routing algorithms that tap OTC liquidity pools automatically, essentially internalizing some of the dark trades for retail clients. We may also see stablecoins evolve: so-called “programmable” stablecoins or real-time nets could reduce the need for discrete OTC swaps (e.g. built-in bridging functions). Over time, these features could pull hidden liquidity into view, or at least integrate it more seamlessly.
Yet even with new tools, some shadow will likely persist. The advantages of private negotiations and off-chain netting are too entrenched. What’s clear is that understanding crypto markets requires mapping both the light and the dark. Shadow stablecoins aren’t a glitch; they are a feature of global crypto liquidity.
As the ecosystem matures, serious traders and policy-makers must recognize that hidden flows of dollar tokens – from Tron rails to OTC deals – are as much a part of “the market” as exchange orderbooks. Only by acknowledging and, where possible, peering into this underworld can one fully comprehend liquidity, risk, and price discovery in crypto.
Shadow stablecoins underline a paradox: the crypto world builds on visible ledgers, yet its deepest liquidity flows in private. This is not a failure of design but an emergent property of decentralized finance meeting global demand. In practice, these off-exchange stablecoin circuits tighten spreads and fuel trades, but they also pose unique challenges – from execution risk for traders to regulatory blind spots.
Appreciating this “liquidity mirage” is essential. For institutions, it means leveraging prime brokerages and careful counterparty choice. For regulators, it means expanding the lens beyond exchanges. For retail, it means learning to read proxies (like stablecoin inflows) rather than just orderbook quotes. In the end, recognizing that liquidity lives off-screen is key. Shadow stablecoins are an invisible plumbing network – one that, when understood, reveals the true dynamics powering crypto markets.