A Deep Dive into Stablecoins: Models, Trends, and Hong Kong

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According to data from Token Terminal, the monthly trading volume of stablecoins has increased tenfold, rising from $100 billion to $1 trillion. On June 20, 2024, the total trading volume of the entire cryptocurrency market was $74.391 billion, with stablecoins accounting for 60.13%, or approximately $44.71 billion. Among them, USDT (Tether) is the most widely used stablecoin, with a market capitalization of $112.24 billion, representing 69.5% of the total value of all stablecoins. On June 20, USDT's trading volume reached $34.84 billion, accounting for 46.85% of the day's total trading volume.

Stablecoins are a crucial component of the cryptocurrency market. Essentially, they are cryptocurrencies pegged to fiat currencies or other assets to achieve value stability. The Bank for International Settlements defines stablecoins as "cryptocurrencies pegged to fiat currencies or other assets," designed to maintain a stable value relative to the specific asset or basket of assets they are pegged to, thereby enabling stable value storage and acting as a medium of exchange. This mechanism is very similar to the gold standard, but since they are issued on the blockchain, they also feature decentralization, peer-to-peer transactions, no need for central bank clearing, and immutability of encrypted assets.

This report delves into the definition and main models of stablecoins, analyzes the current market landscape and competitive dynamics, and focuses on the operational principles, advantages, and disadvantages of fiat-collateralized, crypto-collateralized, and algorithmic stablecoins. It also examines the performance and future development prospects of different types of stablecoins in the market.

What Are Stablecoins? Definitions and Key Models

Basic Definition: Pegged to Fiat Currencies for Stable Value

As the name suggests, stablecoins are cryptocurrencies with stable values. The Bank for International Settlements defines them as cryptocurrencies pegged to fiat currencies or other assets. The primary purpose of creating stablecoins is to maintain a stable value relative to the pegged specific asset or combination of assets, thereby functioning as a stable store of value and medium of exchange. In this regard, it is very similar to the gold standard. Since they are issued on the blockchain, they also possess characteristics such as decentralization, peer-to-peer transactions, no need for central bank settlement, and immutability of encrypted assets.

The main difference between stablecoins and traditional central bank-backed fiat currencies lies in their objectives: stablecoins aim for exchange rate parity with fiat currencies, while fiat currencies seek to maintain stable purchasing power over time. In simple terms, the goal of stablecoins is to achieve token value stability by pegging to the fiat currency system.

Main Models: Collateral Assets and Degree of Centralization

For stablecoins to maintain a peg to the fiat currency system, they are typically backed by underlying assets and can be categorized into collateralized and non-collateralized types. In terms of issuance, they can be centralized or decentralized. To ensure value stability, using valuable real-world assets as collateral to issue stablecoins and achieve a peg to fiat currencies is the simplest and relatively safest method. A high collateral ratio indicates sufficient solvency. Based on the type of collateral, they are further subdivided into fiat-collateralized, crypto-collateralized, and other asset-backed types.

In terms of basic operational models, the value stability of stablecoins primarily relies on collateral assets or algorithmic regulation to keep the stablecoin price within a controllable range for fiat currency exchange. The key is not the volatility of the coin's price but how to reasonably correct this volatility to operate within a stable range.

Stablecoin Market Overview and Competitive Landscape

Pegged Fiat Currencies: The U.S. Dollar Dominates the Market

From the perspective of pegged currencies, aside from stablecoins like PAXG, which is pegged to the price of gold, 99% of stablecoins are pegged 1:1 to the U.S. dollar. There are also some stablecoins pegged to other fiat currencies, such as EURT pegged to the euro, with a market capitalization of $38 million; GYEN pegged to the Japanese yen, currently with a market capitalization of only $14 million; and IDRT pegged to the Indonesian rupiah, with a market capitalization of $11 million. Their overall market capitalization is very small.

Currently, U.S. dollar-based stablecoins account for approximately 99.3% of the market, with the remainder primarily consisting of the euro, Australian dollar, British pound, Canadian dollar, Hong Kong dollar, and Chinese yuan, among others.

Market Share and Market Value: USDT Leads Absolutely, While USDC Is Catching Up

The issuance of stablecoins is closely related to market trends. Monitoring data shows that overall issuance has been steadily increasing, although it declined during the transition from the last bull market to the bear market in March 2022. Currently, it is in a slight upward phase, indicating the current bull market.

According to the latest data from Coingecko, as of May 4, USDT's market share in the stablecoin space is 70.5%, USDC's is 21.3%, DAI's is 3.39%, FDUSD's is 2.5%, and FRAX's is 0.41%.

In terms of market capitalization, the total market capitalization of all stablecoins has exceeded $160 billion, with USDT leading by a wide margin and growing steadily. Its current market capitalization exceeds $110 billion, while USDC's market capitalization has steadily risen to $33 billion but still lags behind USDT. Other stablecoins remain relatively stable.

Top 10 by Market Capitalization: Fiat-Backed Stablecoins Dominate, Covering Various Types

Among the current top 10 mainstream stablecoins, centralized U.S. dollar stablecoins like USDT, USDC, and FDUSD have collateralization rates exceeding 100%. DAI is a decentralized stablecoin collateralized by crypto assets; USDE is a synthetic dollar backed by crypto assets; FRAX is an algorithmic stablecoin; and PAXG is a stablecoin backed by gold.

Holder Addresses: USDT Remains Stable, While USDC Has Recently Weakened

Changes in the number of holder addresses for both are clearly visible. The sharp decline in holder addresses for both was due to decoupling from the U.S. dollar. On March 11, 2023, USDC was affected by the SVB crisis, temporarily decoupling from the dollar and falling to approximately $0.88, causing a sharp reduction in holder addresses. Although it later recovered, the number of holder addresses again lagged behind USDT.

As shown in the chart, after the decoupling event, the number of USDC addresses holding over $1,000 to over $10 million decreased significantly. Compared to the peak period, it fell by about 30%, while USDT steadily increased.

Operational Principles, Advantages, and Disadvantages of Mainstream Stablecoins

Based on previous analysis, mainstream stablecoins are currently distinguished primarily by the type of collateral assets and the degree of centralization in issuance. Generally, fiat-collateralized stablecoins are mostly issued by centralized institutions and currently dominate the market. Crypto-collateralized or algorithmic stablecoins are mostly issued in a decentralized manner, with each category having its leaders. Each stablecoin design framework has its advantages and disadvantages.

Fiat-Collateralized Stablecoins (USDT, USDC, FDUSD)

USDT's Main Operational Principles

Basic Introduction
In 2014, Tether, a company belonging to iFinex, created the stablecoin USDT. The company also owns the cryptocurrency exchange Bitfinex. Both companies are registered in the British Virgin Islands, with headquarters in Hong Kong. Tether's headquarters are in Singapore. The current CEO is Paolo Ardoino (the company's former CTO), an Italian who initially developed trading systems for hedge funds. He joined Bitfinex as an executive in 2014 and Tether in 2017. He currently owns 20% of Tether.

Issuance and Circulation
This involves five main steps. First, users deposit U.S. dollars into Tether's bank account. Second, Tether creates a corresponding Tether account for the user and mints an equivalent amount of USDT. Third, USDT circulates in transactions between users. Fourth, during redemption, if users want to redeem U.S. dollars, they must return USDT to Tether. Fifth, Tether destroys the corresponding value of USDT and returns the U.S. dollars to the user's bank account.

Technical Implementation
Issuing USDT requires blockchain technology to achieve the above steps, divided into three layers.

The foundation of issuance and technical implementation is Tether's reserve proof mechanism, ensuring that each USDT issued has an equal amount of U.S. dollar reserves. In other words, each USDT issued must have an equal amount of U.S. dollar collateral to ensure 100% backing.

Asset (Collateral) Reserves
The total asset reserves currently exceed $110 billion, consistent with its market capitalization. The breakdown of asset reserves: cash and cash equivalents account for 83%, and other assets account for 17%.

More specifically, cash and cash equivalents primarily include short-term U.S. Treasury bills (approximately 80%), overnight repurchase agreements (approximately 12%), with the remainder consisting of money market funds, cash and bank deposits, term repurchase agreements, and non-U.S. government bonds. Other asset categories include Bitcoin, high-grade corporate bonds, precious metals, and secured loans, with Bitcoin and secured loans accounting for a significant proportion.

Audit reports from the past three years show that Tether's asset reserves closely follow macroeconomic conditions, with increasing proportions of short-term U.S. Treasury bills and money market funds and decreasing proportions of corporate bonds, cash, and bank deposits. Since these assets have varying maturities, the biggest risk of shorting USDT is maturity mismatch. Audit data show that Tether's Treasury bills and term repurchase agreements are ultra-short-term, with maturities not exceeding 90 days. The only long-term assets are corporate bonds and non-U.S. government bonds, with maturities ranging from 150 to 250 days.

This asset allocation indirectly improves its asset operating income while reducing risk factors, further enhancing asset security. In particular, shorter maturities prevent shorting due to maturity mismatch.

Business Model

USDC's Main Operational Principles

Similar to USDT, USDC is issued, circulated, and technically implemented in a similar manner, pegged at 1 USDC = 1 USD. It was created by Coinbase and Circle in 2018, later than USDT, but there are some differences in specific operational details:

FDUSD's Main Operational Principles

After the New York State Department of Financial Services ordered the crypto company Paxos to stop issuing new BUSD, the world's largest exchange, Binance, also stopped supporting BUSD products on December 15, 2023. They announced that BUSD balances would be automatically converted to FDUSD. Since then, FDUSD's market value has steadily risen, ranking third among stablecoins.

Summary of Fiat-Collateralized Stablecoins

Reviewing the top three fiat-collateralized stablecoins—USDT, USDC, and FDUSD—reveals three different paths to success. Here is a brief overview:

Overall, for fiat-collateralized stablecoins, their success depends on several key factors:

Crypto-Collateralized Stablecoins (DAI, USDE)

Due to the high volatility of crypto assets, their credit foundation is weaker compared to risk-free assets like U.S. dollar deposits or government bonds. Therefore, they are typically over-collateralized. However, synthetic dollars created through derivative hedging can achieve close to 100% collateralization. As crypto assets, they usually possess decentralized characteristics.

DAI's Main Operational Principles

Its creation process is as follows:

DAI's price stability mechanism: Unlike fiat-collateralized stablecoins with risk-free characteristics and high liquidity, decentralized stablecoins collateralized by crypto assets require a price stability mechanism to cope with market fluctuations and trading. This primarily involves interest rate adjustments and liquidation. Interest rates include stability fees and the DAI Savings Rate (DSR). Stability fees are based on risk factors for maintaining the dollar peg, similar to loan interest; DSR is DAI's basic return rate or deposit interest rate. This stability logic is similar to traditional bank loans. If loan income (stability fee income) is lower than DSR income (DAI deposit interest expenditure), the protocol will generate bad debt. To cover bad debt, MKR (governance token) needs to be issued, passing the burden to MKR holders. This mechanism ensures fairness during stability fee voting.

DAI's liquidation mechanism: Similar to traditional credit, if the collateral value is significantly lower than the debt, banks force recovery. DAI has a similar mechanism, using Dutch auctions (gradually lowering the price, with the first bid winning). Auctions are triggered based on the collateral debt ratio (liquidation ratio). Different users' vaults have different liquidation ratios. For example, if ETH is collateral with a collateral ratio of 75% and a market price of $3,000, the user can mint up to $2,250 worth of DAI. If the user mints only $2,000 worth of DAI for safety, the collateral coverage ratio is 1.5, and the utilization rate is 66.7%. When the utilization rate exceeds the collateral ratio, liquidation risk occurs, meaning the ETH price drops to $2,666.

DAI's peg stability module: In traditional financial terms, this can be understood as a currency swap agreement, simply achieving a 1:1 exchange between DAI and stablecoins like USDC. By exchanging stablecoins, the protocol converts USDC in the reserve pool into U.S. dollars for short-term financial investments, increasing its returns and boosting DSR returns to attract users.

DAI's profit analysis: Primarily obtained through stability fee income (loan interest), equivalent to USDT's minting fees. Other sources include liquidation penalties, peg stability module exchange fees, and RWA collateral investment income. In 2023, the protocol's income was $96 million.

USDE's Main Operational Principles

USDE's operational principle: Application of delta-neutral strategy in cryptocurrency

Ethena Labs' USDE is a synthetic dollar protocol. In the context of cryptocurrency, a synthetic dollar protocol means issuing a U.S. dollar-pegged stablecoin through a series of crypto derivative combinations.

In practice, USDE employs a delta-neutral strategy. Traditionally, delta = change in option price / change in underlying asset price. Delta neutrality usually refers to an investment portfolio whose value is unaffected by small price changes in the asset, often called delta neutral (delta equal to 0).

Ethena's neutral strategy works as follows: When a user mints $1 of Ethena stablecoin, ENA simultaneously deposits $1 worth of ETH on a derivative exchange and opens a short perpetual contract for 1 ETHUSD. If ETH drops 10x, this contract will gain 9 ETH in profit, bringing ENA's total holding to 10 ETH. Since the price also drops 10x, the total value of its holdings remains unchanged; the same logic applies when the price rises. This ensures the stability of the minted stablecoin. If the user chooses to redeem U.S. dollars, ENA will quickly close the short position. Basically, USDE's collateral is spot ETH and the corresponding short position. In a bull market, it is almost 100% fully collateralized, and if including ENA tokens, the overall collateralization rate exceeds 120%.

The secret to USDE's rapid rise: It has characteristics of a Ponzi scheme but is essentially a term arbitrage financial product.

First, for users minting USDE, they can quickly stake it into Ethena to earn staking rewards. Unlike other stablecoins like USDT that do not pay dividends, USDE immediately shares minting rewards. This alone attracts large institutions, considering the market soared when the track's return rate reached 8%, let alone SUSDE (staked USDE certificate) yields once exceeding 30%.

Second, $ENA is the project's governance token. When users earn basic returns by staking USDE, they also receive ENA token rewards. Conversely, holding ENA can also increase staking USDE rewards.

Fundamentally, USDE builds a stablecoin architecture based on Ethereum as the underlying asset. Its core anchor point is maintaining the value stability of the collateral through derivative futures contracts. To attract users, it shares portfolio returns with stablecoin minters, allowing them to enjoy both the price stability of stablecoins and seigniorage interest. Additionally, the platform issues ENA tokens, and staking USDE earns ENA, and vice versa, increasing stablecoin staking rewards. While it has Ponzi-like characteristics, it is not a simple Ponzi scheme because its core profit model is term arbitrage. As an individual, you can also use this method, but ENA pools everyone's funds for greater collective returns.

USDE's profit model:
Minting USDE requires users to provide stETH and simultaneously open short perpetual contracts. Profits are divided into two parts: staking yield from stETH (APY 3–4%) and funding rate income from short positions. The funding rate mechanism is straightforward; to keep the contract price in line with the spot price, when long positions outnumber short positions, longs pay shorts funding fees, and vice versa. During bull markets, funding rates for longs are usually high (APY 25%) to attract counterparts. This is the project's main source of profit. It is worth noting that the project does not store stETH on regular CEXs but on custody platforms like Cobo and Ceffu to prevent misuse or CEX failures.

USDE's core risks:
As a crypto-backed stablecoin, USDE's basic model is based on arbitrage between futures and spot markets. The collateral essentially consists of spot ETH and corresponding short positions. In bull markets, it is usually 100% fully collateralized, not to mention ENA's own circulating market capitalization, indicating no current risk of collapse. However, there is an exception if the LST collateral (stETH) decouples from ETH itself, as seen during the 3AC collapse when stETH decoupled by nearly 8%. The biggest risk is size limitation; if the short position ratio on a single exchange is too large, there may be no counterparty, reducing funding rate income. Given the current market, the safe minting limit is about $10 billion. Another risk is the sustainability of staking yields, which is self-evident. Additionally, ENA's custody model theoretically carries the risk of misconduct or even bankruptcy, triggering a series of leveraged liquidations. Finally, the biggest risk is the project team absconding with the funds.

Summary of Crypto-Backed Stablecoins

Compared to fiat-pegged stablecoins, crypto-backed stablecoins do not rely on specific situations or centralized exchanges. Whether DAI or USDE, their paths to success are very consistent: wealth effects and transparent management. Both DAI and USDE were born in bull markets and grew rapidly. Due to bull markets, lending protocols derived from DAI provided retail investors with leverage for higher returns. Additionally, unlike fiat-pegged stablecoins, crypto-backed stablecoins usually offer basic interest returns as an anchor to attract customers. These interest-bearing assets and the wealth effects they generate are the main reasons crypto-collateralized stablecoins can remain strong and spiral upward. In contrast, holding USDT and USDC does not provide interest dividends and carries the risk of asset depreciation due to exchange rate changes or inflation.

Uncollateralized/Algorithmic Stablecoins (FRAX)

The previous peak of algorithmic stablecoins was UST, an algorithmic stablecoin created by Luna, which eventually collapsed due to its Ponzi-like mechanism. As of now, there are no widely successful algorithmic stablecoins in the market. Projects like FRAX remain relatively unknown. Algorithmic stablecoins have two models: single-token and multi-token. The former was the main model of early algorithmic stablecoins, like Ampl and ESD. The latter is primarily represented by FRAX, a hybrid algorithmic stablecoin. The biggest flaw of single-token algorithmic stablecoins is that unless designed as Ponzi schemes (high returns), they struggle to grow effectively, and the extreme volatility of crypto markets makes it hard for users to trust the algorithm itself. Based on this, Frax developed a hybrid model of collateralized and algorithmic stablecoins.

Frax designed a relatively complex hybrid stablecoin model involving collateral and algorithms. Collateral primarily includes USDC and FXS (the project's governance token). Its core foundation is arbitrage trading.

Main operational logic:
When the protocol was first launched, minting 1 FRAX required 1 USDC. As market demand for FRAX increased, the USDC collateral ratio decreased, e.g., to 90%. This means minting 1 FRAX requires only 0.9 USDC and burning 0.1 FXS token. Similarly, during redemption, 0.9 USDC and 0.1 FXS are returned. This model's stability basically relies on arbitrage trading. If FRAX's value falls below $1, arbitrage traders will buy FRAX, redeem USDC and FXS, and sell FXS for profit. This increased demand for FRAX helps restore its rate. Conversely, if FRAX's value exceeds $1, the same logic applies. In the latest version, the project introduced Algorithmic Market Operations (AMO) controllers. The main improvement is that while maintaining the 1:1 peg to the dollar, the protocol's collateral is deposited into other DeFi protocols to generate income.

Main profit model:
The main source of profit comes from fees for issuing and burning stablecoins, AMO mechanism income in various DeFi protocols, and Frax lending. Additionally, collateral assets like ETH can be used to run validation nodes and earn rewards. Currently, the total market capitalization exceeds $600 million. Core bottleneck: Compared to stablecoins like USDC/USDT and DAI, although Frax improved security through partial collateralization, its limitations in application scenarios (arbitrage within the ecosystem) currently cap its growth. This is the main bottleneck for algorithmic stablecoins: how to expand their application scenarios in the crypto ecosystem.

Track Predictions and Thoughts on Hong Kong Stablecoins

Advantages and Disadvantages of Different Types of Stablecoins

Whether fiat-collateralized, crypto-collateralized, or uncollateralized algorithmic stablecoins, each type has its respective advantages and disadvantages in terms of decentralization, capital efficiency, and price stability, which are key to their development.

Stablecoin Track Summary

By reviewing the stablecoin track, it can be seen that whether collateralized by fiat, crypto, or algorithmic stablecoins, their common feature is supporting application scenarios. They either have sufficient convenience and credit backing, or the use of stablecoins in scenarios can generate profits for users. USDC's rise proves the importance of regulatory recognition, FDUSD's rise demonstrates the importance of scenarios brought by transaction flow, and USDE's rapid explosion once again proves that the most incentivizing force in crypto projects is always the wealth effect.

Based on the above analysis, if a stablecoin project wants to gain market recognition, the path is relatively clear under the current market structure.

For fiat-collateralized stablecoins, two important conditions for success are the trust foundation of compliant regulation and scenario support brought by transaction/payment institution flow. Both are indispensable.

For crypto-collateralized and algorithmic stablecoins, necessary conditions for success are basic/high returns to meet users' efficiency needs for crypto asset turnover and continuous expansion of decentralized/payment application scenarios. If these two points are met, stablecoin projects have a preliminary possibility of success. Additionally, project parties must always seek balance and trade-offs among capital efficiency, value stability, and decentralization.

Thoughts on Hong Kong Stablecoins

For Hong Kong, besides pegging to the U.S. dollar, options include pegging to the Hong Kong dollar and offshore Chinese yuan. Aside from strict regulatory issues, there is almost no practical difficulty in creating stablecoins from an operational perspective. However, the challenging part lies in the application scenarios (or circulation issues) after creation. If they cannot be used for large-scale real-world payments or cross-border remittances, even with major exchange cooperation, there will be significant obstacles given the strong credit and circulation of the U.S. dollar. From a regulatory perspective, Hong Kong's stablecoin regulatory framework will be introduced sooner or later, especially after the implementation of Hong Kong's virtual asset license in 2023, making regulatory trends relatively clear. If pegged to the Hong Kong dollar as legal tender, it can be expanded by:

1) Introducing the interest-bearing effect of crypto assets into fiat collateral. That is, distributing the income from collateral assets to users to gain their early trust.
2) Hong Kong dollar stablecoin payments. Expanding it as a payment tool, not just a medium of exchange, including Hong Kong dollar cross-border trade settlement. Additionally, since the Hong Kong dollar is pegged to the U.S. dollar, its necessity and appeal are minimal if not used as income-generating financial products/payment tools.

Besides the Hong Kong dollar, Hong Kong has over RMB 10 trillion in offshore Chinese yuan and yuan-denominated assets (including offshore yuan bonds), with nearly RMB 1.5 trillion in offshore deposits, mainly concentrated in Hong Kong and Singapore. In fact, offshore yuan stablecoins are not new, such as TCHN launched by Tron, CNHT launched by Tether, and CNHC issued by the CNHC Group (the project team was arrested in mainland China in 2023, but not for the stablecoin project). Their lack of growth is mainly due to the uncertainty of Hong Kong's regulatory framework and failure to find a suitable entry point. For offshore yuan, the core keys are:

1) Offshore yuan is not subject to domestic foreign exchange controls, but the identity issue of asset holders remains an obstacle. The People's Bank of China is most concerned about the legal status of the yuan. If stablecoins are only pegged to offshore yuan, it benefits yuan internationalization and, more importantly, activates huge offshore yuan assets. The biggest bottleneck currently is that most offshore yuan holders are from mainland China, bringing significant practical challenges and obstacles.
2) Support from institutions like Bank of China (Hong Kong). Bank of China (Hong Kong) is the clearing bank for offshore yuan. If offshore stablecoins are issued, subsequent clearing and custody related to Bank of China (Hong Kong) can solve the core trust issue.
3) Expanding payment and procurement scenarios under cross-border trade will be the most critical application for offshore yuan. Currently, offshore yuan (CNH) mainly comes from cross-border trade, procurement, and payments, retained in Hong Kong/Singapore, especially in Belt and Road countries. Given the global shortage of offshore U.S. dollars and the instability of many local currencies, trade with China is often settled in yuan. Offshore yuan stablecoin/USDC trading pairs will significantly enhance yuan-to-dollar trading channels for Belt and Road countries. Additionally, trade payments can collaborate with cross-border payment institutions to explore payment scenarios in e-commerce, gaming, and commodity trading.
4) Attempt to create unique income models for offshore yuan. Besides traditional minting and redemption fees, the key is how to meet users' return expectations. Hybrid yuan and U.S. dollar collateral can also be尝试ed to achieve exchange rate neutrality, higher stability, and dual-asset short-term investment returns as the stablecoin's basic yield. Additionally, consider securitizing foreign high-grade domestic credit entities' physical assets (RWA) for on-chain issuance as another anchor for stablecoin returns (reference DAI), including the offshore yuan foreign exchange derivatives market. Furthermore, offshore bonds issued annually worth up to RMB 300 billion can also be tokenized.

In summary, whether Hong Kong dollar stablecoins or offshore yuan, the biggest challenge is not issuance but the design of application scenarios. From future development trends, offshore yuan has broader application space and scenarios compared to the Hong Kong dollar. If tightly pegged to the yuan and regulated under Hong Kong's framework, it does not directly conflict with the yuan's legal status. On the contrary, it expands the convenience of offshore yuan payments (no need to open bank accounts, pay anytime anywhere), enriches the global issuance of onshore yuan assets, and significantly expands the global liquidity of onshore yuan assets. This has certain policy space and acceptance in the current period of strict foreign exchange controls and economic downturn.

Frequently Asked Questions

What is a stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging it to a reserve asset, such as a fiat currency (e.g., the U.S. dollar), commodities (e.g., gold), or other cryptocurrencies. This stability makes them suitable for everyday transactions, store of value, and as a medium of exchange in the volatile crypto market.

How do fiat-collateralized stablecoins like USDT and USDC work?
Fiat-collateralized stablecoins are backed by reserves of fiat currency held in bank accounts. For example, each USDT or USDC in circulation is supposed to be backed by one U.S. dollar held in reserve. These reserves are regularly audited to ensure transparency and trust. Users can redeem their stablecoins for the underlying fiat currency, and the stablecoins are minted or burned based on demand.

What are the risks associated with algorithmic stablecoins?
Algorithmic stablecoins rely on complex algorithms and smart contracts to maintain their peg without full collateral backing. Their main risks include vulnerability to market volatility, loss of peg due to design flaws or market manipulation, and potential collapse if confidence wanes (as seen with UST). They often require continuous growth and user adoption to sustain stability, making them riskier than collateralized stablecoins.

Why are stablecoins important in the cryptocurrency ecosystem?
Stablecoins provide a stable store of value and medium of exchange in the highly volatile crypto market. They facilitate trading, lending, and borrowing on crypto platforms, enable cross-border payments with low fees and fast settlement, and serve as a gateway for traditional investors to enter the crypto space without exposure to price fluctuations.

What is the future of stablecoins in Hong Kong?
Hong Kong is exploring the regulation and adoption of stablecoins, particularly those pegged to the Hong Kong dollar or offshore Chinese yuan. The focus is on ensuring compliance, expanding application scenarios like cross-border trade and payments, and leveraging Hong Kong's role as a financial hub. Success will depend on regulatory clarity, trust-building measures, and innovative use cases that differentiate them from dominant U.S. dollar-pegged stablecoins.

How can users earn returns with stablecoins?
Users can earn returns on stablecoins through various methods, including staking in DeFi protocols for interest (e.g., DAI's DSR), providing liquidity in trading pools, participating in yield farming, or using platforms like Ethena that offer rewards for minting and staking synthetic stablecoins. However, these returns often come with risks, such as smart contract vulnerabilities or market changes.