What Exactly Are Stablecoins?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging its price to an external asset, such as a fiat currency or a commodity. Issuers of stablecoins aim to sustain this price stability by holding reserve assets or employing other mechanisms. This addresses the issue of extreme price volatility seen in cryptocurrencies like Bitcoin, making stablecoins suitable for everyday transactions or as a store of value within crypto markets.
Fundamentally, stablecoins represent the tokenization of real-world fiat currencies or assets on a blockchain. They are a product of the integration between traditional financial assets and blockchain technology. The issuance process involves collateralizing traditional financial assets, which are then converted into cryptographic digital assets expressed through smart contracts and decentralized ledgers. This upgrades traditional financial assets into new forms that can flow and trade on blockchains, serving as a bridge connecting the real world with the digital realm. By combining the stability of real assets with the technological advantages of crypto assets, stablecoins stand out as one of the most practical innovations in financial technology.
Jurisdictions like the United States, Hong Kong, and the European Union are actively advancing their stablecoin legislation to seize opportunities in the global stablecoin market.
Types of Stablecoins
Stablecoins can be broadly categorized into fiat-collateralized stablecoins, crypto-backed or commodity-backed stablecoins, and algorithmic stablecoins. Currently, fiat-collateralized stablecoins dominate the market, with USDT and USDC accounting for approximately 85% of the total stablecoin market capitalization of $251.2 billion.
Fiat-Collateralized Stablecoins
These are the most common type, backed by real fiat currency reserves and typically pegged at a 1:1 ratio. They are widely understood and accepted by the general public. Dollar-based stablecoins like USDT and USDC have gained broad recognition for their role in crypto market transactions and financial activities. The upcoming Hong Kong Dollar stablecoin also falls into this category.
The operational mechanism is straightforward. For example, when a user deposits $1, the issuer mints one stablecoin worth $1 on the blockchain. When the user redeems the stablecoin, the issuer burns the corresponding token and returns an equivalent amount of dollars.
The profit model for issuers comes from investing user deposits in short-term, safe financial products. User deposits serve as reserve assets, typically held as cash in banks or invested in secure instruments like government bonds. Holders of stablecoins do not receive interest, and the spread between investment returns and operational costs constitutes the issuer’s earnings.
Although fiat-collateralized stablecoins appear secure due to their 1:1 or over-collateralized models, they are not without risks, including regulatory compliance and de-pegging dangers. For instance, in March 2023, the collapse of Silicon Valley Bank affected Circle, the issuer of USDC, which held $3.3 billion in cash reserves there. This led to a temporary loss of confidence, triggering massive redemptions and causing USDC’s price to drop to $0.87 before recovering.
Crypto-Backed or Commodity-Backed Stablecoins
This innovative category uses cryptocurrencies like Ethereum or physical commodities such as gold or real estate as collateral to issue stablecoins. The operational mechanism is similar to fiat-collateralized stablecoins, with issuer revenue primarily coming from minting and redemption fees.
Crypto-backed stablecoins often require over-collateralization to mitigate extreme price volatility. However, they remain a niche segment due to inherent risks. For example, DAI, an Ethereum-backed stablecoin launched in 2017, has a total market capitalization of $5.36 billion but has seen declining prominence.
Commodity-backed stablecoins, like PAXG (backed by gold), allow investors to gain exposure to physical assets via blockchain technology. Each PAXG token is supported by one ounce of gold stored in LBMA vaults in London. These stablecoins offer advantages such as faster transactions, higher liquidity, smaller divisible units, and lower costs compared to traditional commodity investments.
Despite their potential, achieving true stability without relying on fiat remains challenging due to regulatory uncertainties, custody opacity, and liquidity issues.
Algorithmic Stablecoins
Algorithmic stablecoins rely on economic algorithms and market incentives to maintain their peg. They use floating minting and burning mechanisms to adjust supply and demand, without being backed by traditional assets like fiat, gold, or bonds.
For instance, if an algorithmic stablecoin trades above its target price (usually $1), the system automatically mints new coins to increase supply and lower the price. Conversely, if it trades below, coins are burned to reduce supply and raise the price.
The critical weakness of algorithmic stablecoins is the risk of a death spiral, embedded in their design. A prominent example is Terra’s UST and LUNA collapse in 2022. As UST’s price fell, the mechanism required minting LUNA to buy back UST, but panic selling caused both tokens to plummet, resulting in a total crash.
Without value backing, algorithmic stablecoins are highly speculative and have largely been abandoned by the market.
Primary Use Cases of Stablecoins
Medium of Exchange
In crypto markets, most digital asset transactions use stablecoins for pricing or settlement. They effectively serve as a unit of account and means of payment, overcoming the volatility障碍 of other cryptocurrencies. The cross-chain compatibility of stablecoins also enhances their utility for transfers across different blockchains. In high-inflation countries like Argentina and Turkey, stablecoins have even partially replaced local currencies for everyday use.
Decentralized Finance (DeFi)
Stablecoins are foundational to the DeFi ecosystem, often being the first asset users acquire to participate in decentralized financial activities. DeFi aims to provide composable financial services without traditional intermediaries, enabling various protocols, products, and services to combine flexibly.
In DeFi, stablecoins function in two key areas:
- Collateral in Lending Protocols: Users can抵押 stablecoins to borrow other crypto assets, simplifying protocol design and enhancing market security.
- Pricing Benchmark and Liquidity Pool Asset: Stablecoins serve as the pricing unit for other cryptocurrencies on decentralized exchanges (DEXs), acting as an intermediary layer between crypto and fiat. For example, trading pairs like BTC/USDT or ETH/USDC are common.
Liquidity pools enable direct token swaps via algorithms instead of traditional order books. Providing liquidity involves depositing equal values of two tokens (e.g., ETH and USDC) into a pool. Larger pools reduce slippage, improve capital efficiency, and offer higher yields for liquidity providers.
New Financial Infrastructure
Stablecoins’ role extends beyond crypto circles into broader financial infrastructure. Traditional institutions are exploring blockchain to enhance efficiency in areas like settlement, custody, and cross-border payments. While attempts to combine NFTs with real-world assets faced challenges like valuation complexity and liquidity issues, stablecoins have gained rapid acceptance among investors and regulators. They are becoming key components in cross-border payments, banking integration, and standardized on-chain asset trading and清算.
Asset Allocation and Wealth Preservation
Amid global financial turbulence, currency devaluation, and increasing capital controls, stablecoins are emerging as important tools for global asset allocation and personal wealth preservation. In regions with high inflation or capital flow restrictions, stablecoins offer a bridge to escape local currency risks and access global markets.
They are widely used for hedging, wealth management, and fund transfers. Pegged to major reserve currencies like the US dollar, stablecoins naturally provide anti-inflation and devaluation hedging features. They also offer alternative channels for asset diversification and can sometimes circumvent foreign exchange controls through peer-to-peer transactions on public blockchains.
Global Regulatory Developments
As stablecoins expand in scale and application, major economies are intensifying efforts to develop or refine regulatory frameworks to balance innovation with risk prevention.
The US, Hong Kong, and EU have each proposed stablecoin legislation, sharing common principles such as fiat pegging, licensed issuance, at least 1:1 reserve assets, high liquidity, segregated management, redemption guarantees, no interest, customer protection, and anti-money laundering measures. However, differences reflect各自的 priorities:
- Hong Kong aims to enhance its competitiveness as an international financial center, attract global projects, and build expertise in crypto assets, particularly serving the development of a RMB-HKD cross-border payment network.
- The US seeks to maintain the dollar’s leadership in the digital economy, positioning dollar stablecoins as tools for global digital payments with high regulatory standards to prevent systemic risks.
- The EU prioritizes financial stability in the eurozone, with detailed and principled compliance requirements.
Broader Economic Implications
Impact on Treasury Markets
US stablecoin legislation allows short-term Treasuries as compliant reserve assets, making stablecoin issuers significant participants in the Treasury market. For instance, Tether, the issuer of USDT, held approximately $98.5 billion in US Treasuries as of March 2025, accounting for about 2.7% of the total US Treasury market—more than many sovereign nations.
This growing demand for stablecoins could:
- Increase demand for short-term Treasuries, affecting pricing dynamics traditionally dominated by banks, money market funds, and central banks.
- Push down short-term interest rates due to偏好 for high-liquidity, low-risk assets.
- Reshape the structural landscape of Treasury markets, prompting regulators to consider stablecoin entities in debt management and financial stability frameworks.
Reshaping the International Monetary System
Stablecoins are deeply介入 the competition and reshaping of the international monetary system, serving as strategic tools in the monetary rivalry between major economies like the US and China. Dollar-based stablecoins reinforce the global dominance of the US dollar, while Hong Kong Dollar and potential offshore RMB stablecoins offer new pathways for RMB internationalization.
- Dollar Stablecoins: With USDT and USDC dominating the market, the US dollar inadvertently becomes the base currency for on-chain financial activities, lowering global access barriers and extending dollar influence beyond traditional systems.
- RMB Internationalization: Hong Kong Dollar stablecoins and potential offshore RMB stablecoins could facilitate the revaluation of RMB assets by enabling global pricing and trading through Hong Kong’s offshore market, addressing current undervaluation issues.
Investment Opportunities
- Stablecoin Infrastructure Companies: These firms provide critical support for issuance, trading, maintenance, and protocols, forming the core of the stablecoin ecosystem. As adoption in finance grows, their potential is substantial.
- Decentralized Application (DApp) Service Providers: The value of stablecoins lies in their utility. DApps like decentralized exchanges (DEXs) and lending platforms drive demand for stablecoins. Some of these platforms issue their own tokens (e.g., UNI for Uniswap, COMP for Compound), which may offer investment opportunities. However, the market is mixed, requiring careful evaluation.
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Frequently Asked Questions
What is a stablecoin?
A stablecoin is a cryptocurrency designed to maintain a stable value by pegging it to an external asset like a fiat currency or commodity. It combines the benefits of blockchain technology with the stability of traditional assets.
How do fiat-collateralized stablecoins work?
They are backed by reserves of fiat currency held by the issuer. For every stablecoin minted, there is an equivalent amount of fiat currency held in reserve. Users can redeem stablecoins for the underlying fiat at any time.
What are the risks of algorithmic stablecoins?
Algorithmic stablecoins rely on complex mechanisms to maintain their peg without collateral. They are prone to death spirals during market stress, as seen in the Terra-LUNA collapse, making them highly risky and speculative.
Why are stablecoins important in DeFi?
They provide a stable unit of account and medium of exchange essential for lending, borrowing, and trading on decentralized platforms. Without them, DeFi activities would be hindered by the volatility of other cryptocurrencies.
How do regulators view stablecoins?
Major jurisdictions are developing frameworks to ensure stability, transparency, and consumer protection. Regulations typically focus on reserve backing, redemption guarantees, and anti-money laundering measures.
Can stablecoins be used for cross-border payments?
Yes, their borderless nature and stability make them efficient for cross-border transfers, often faster and cheaper than traditional systems, especially in regions with limited banking infrastructure.