The Rise and Current State of Stablecoins
In the wave of digital currencies, stablecoins have emerged as a unique category, gradually gaining public attention. Simply put, a stablecoin is a type of digital currency pegged to real-world assets, designed to address the high price volatility of traditional cryptocurrencies like Bitcoin. It retains the advantages of blockchain technology—such as decentralization and efficient cross-border payments—while reducing volatility through reserve assets or algorithmic mechanisms, serving as a "bridge" between traditional finance and the crypto world.
In November 2014, Tether launched the world's first stablecoin, USDT (Tether USD). Its asset-collateralized model, pegged to the U.S. dollar, provided the cryptocurrency market with the first price-stable medium of exchange, marking the beginning of the stablecoin industry. Since then, the stablecoin market has gone through phases of initial growth, risk impacts, and adjustments, and is now in a period of recovery and expansion. As of late 2024, the total market capitalization of global stablecoins has approached $200 billion, with USDT accounting for over $130 billion and USDC reaching $39 billion. Together, they dominate more than 90% of the market.
The applications of stablecoins continue to expand. In cryptocurrency trading, they provide a stable haven for transactions involving highly volatile assets. In cross-border payments, their peer-to-peer, on-chain transactions offer low costs and high efficiency, reducing transfer times from traditional 3–5 days to mere minutes or even seconds, with minimal fees. This has attracted attention from major e-commerce platforms, banks, and credit card companies. In countries with high inflation, many small businesses and individuals purchase stablecoins to hedge against currency devaluation.
Are Stablecoins Truly Stable?
Mechanisms Behind Stablecoin Stability
Stablecoins maintain relative price stability through unique mechanisms. Currently, most stablecoins rely on either asset collateral or algorithmic adjustments to achieve this.
Asset-collateralized stablecoins are the most common type and can be further divided into fiat-collateralized and crypto-collateralized variants. Fiat-collateralized stablecoins like USDT and USDC require the issuer to hold $1 in reserve for every unit of stablecoin issued, ensuring a 1:1 peg to the U.S. dollar. For example, USDC, issued by Circle, holds reserves in cash and short-term U.S. Treasury bonds, with regular audits to verify authenticity and sufficiency. Crypto-collateralized stablecoins use cryptocurrencies like Bitcoin or Ethereum as collateral. Due to the volatility of these assets, they often require over-collateralization. For instance, MakerDAO's DAI requires users to collateralize Ethereum worth at least 150% of the DAI generated. If the collateral value drops below a threshold, the system automatically liquidates it to maintain DAI's stability.
Algorithmic stablecoins do not rely on physical asset collateral. Instead, they use complex algorithms and smart contracts to adjust the supply of stablecoins, thereby maintaining price stability. When demand increases and the price rises above the peg, the algorithm mints more stablecoins to increase supply and bring the price down. Conversely, when demand decreases and the price falls, the algorithm burns stablecoins to reduce supply and push the price back up. This process resembles a central bank adjusting money supply but is fully automated through code and smart contracts.
Analysis of Stablecoin Instability Events
Despite these mechanisms, stablecoins have experienced several "de-pegging" events, causing significant impacts on investors and the broader cryptocurrency market.
In May 2022, the collapse of the algorithmic stablecoin TerraUSD (UST) shocked the crypto world. UST was built on the Terra blockchain and relied on an arbitrage mechanism with its sister token, LUNA, to maintain its 1:1 peg to the U.S. dollar. When UST traded above $1, users could burn LUNA to mint more UST, and vice versa. To attract users, UST offered an annualized yield of up to 19.5% through the Anchor Protocol, drawing massive investor participation.
However, when market conditions shifted and investor confidence wavered, large-scale sell-offs caused UST's price to drop below $1. To defend the peg, the project team sold off Bitcoin reserves to buy back UST, exacerbating market panic and triggering a "death spiral" for both LUNA and UST. LUNA's price plummeted from nearly $120 to almost zero, and UST fell to as low as $0.051. The event wiped out investors' funds and triggered a broader market crash, affecting even major cryptocurrencies like Bitcoin.
In March 2023, the collapse of Silicon Valley Bank (SVB) also severely impacted the stablecoin market, particularly USDC. As a fiat-collateralized stablecoin issued by Circle, USDC held reserves in multiple banks, including SVB. When SVB failed, market confidence in USDC eroded, leading to massive sell-offs and de-pegging, with its price dropping to $0.877. Although Circle assured investors that its reserves were sufficient to cover all circulating USDC and had support from other financial institutions, the event raised widespread concerns about the security of stablecoin reserves.
These incidents highlight the risks stablecoins face. For asset-collateralized stablecoins, the security and transparency of reserves are critical. If issuers face issues like bank failures or asset mismanagement, de-pegging can occur. Algorithmic stablecoins, on the other hand, are vulnerable to market sentiment and algorithmic flaws. In extreme market conditions, algorithms may fail to adjust supply effectively, leading to rapid price declines.
Risks and Challenges of Stablecoins
Reserve Transparency Issues
Reserve transparency is a major risk for stablecoins. Take USDT, for example: While Tether claims that each USDT is backed by $1 in reserves, its authenticity and sufficiency have long been questioned. In 2019, the New York Attorney General's office found that Tether's reserves were not entirely cash but included receivables and other crypto-related assets, contradicting its 1:1 dollar reserve claim. Since then, USDT has repeatedly faced rumors of insufficient reserves, with critics alleging that user funds might be invested in high-risk assets for higher returns.
Although Tether publishes periodic audit reports, their credibility and transparency remain controversial. The independence of auditors, the rigor of audit methods, and the depth of report details often fail to reassure investors. Ordinary users cannot easily verify these reserves. If an issuer faces a liquidity crisis or engages in financial fraud, stablecoins could quickly lose their value, becoming "air coins" and causing significant investor losses.
Regulatory Uncertainty
Stablecoins face regulatory uncertainty worldwide. Due to their innovative and complex nature, different countries and regions have varying regulatory approaches. The United States, a key player in the crypto market, has drawn attention with its regulatory stance. The recently passed Guidance for Establishing National Innovation for U.S. Stablecoins (GENIUS) Act establishes a comprehensive framework for stablecoin issuance, imposing strict requirements on issuers, reserve assets, and transparency. For example, it allows only "approved payment stablecoin issuers" to operate, prohibits tech giants from directly issuing stablecoins, and mandates 1:1 high-liquidity asset backing with monthly audited reserve reports.
In Europe, the Markets in Crypto-Assets (MiCA) regulation imposes clear rules on stablecoins, limiting the use of non-euro stablecoins for daily payments and banning the issuance of large-scale stablecoins to protect consumers and maintain financial stability. Hong Kong has taken a pioneering step by implementing the Stablecoin Ordinance, effective August 2025, becoming the first jurisdiction to establish comprehensive regulation for fiat-backed stablecoins. It requires issuers to obtain licensing from the Hong Kong Monetary Authority, meet strict reserve asset management and redemption mechanisms, and maintain cash reserves of at least 80%.
These regulatory disparities create operational challenges for stablecoin issuers, who must invest significant resources to comply with regional requirements. Uncertainty also increases risks for investors, as changes in regulations could disrupt business models and market values.
Systemic Risks
The widespread use of stablecoins may introduce systemic risks to the global financial system. Over 95% of stablecoins are pegged to the U.S. dollar, reinforcing dollar hegemony and potentially undermining the monetary sovereignty of other countries. In economies with high inflation, people may hold dollar-backed stablecoins for transactions and savings, reducing the circulation of local currency and diminishing the effectiveness of monetary policy.
Moreover, the growing interconnection between stablecoins and traditional finance means that large-scale redemptions or de-pegging events could trigger chain reactions, spreading to traditional financial systems. For instance, if stablecoin issuers face redemption pressures, they might be forced to sell reserve assets like U.S. Treasury bonds, destabilizing bond markets and affecting broader financial stability. The Bank for International Settlements (BIS) has warned that stablecoins, if unregulated, pose risks to financial stability and monetary sovereignty due to their shortcomings as reliable monetary forms.
Future Outlook for Stablecoins
Regulatory Trends
As the stablecoin market evolves, regulation will play a crucial role in shaping its future. Globally, regulators are shifting from观望 to active oversight, aiming to mitigate financial risks, protect investors, and maintain stability. The U.S. GENIUS Act provides a foundational framework for compliant stablecoin issuance, setting standards for issuer qualifications, reserve management, and transparency. This legislation could serve as a model for other countries.
The EU's MiCA regulation imposes strict limits on non-euro stablecoins, while Hong Kong's Stablecoin Ordinance establishes a licensing regime with rigorous capital, reserve, and redemption requirements. Looking ahead, stablecoin regulation will likely become stricter and more standardized. Regulators may intensify scrutiny of issuers' capital strength and risk management capabilities. Reserve asset oversight will also tighten to ensure authenticity, sufficiency, and liquidity, reducing de-pegging risks. Additionally, regulators may enhance monitoring of trading platforms to prevent money laundering, terrorist financing, and other illegal activities.
Technological Innovations
To improve stability and expand applications, stablecoins are exploring technological innovations. Real-World Asset (RWA) collateralization is a promising direction. By tokenizing assets like U.S. bonds or real estate as collateral, stablecoins can achieve a more solid value foundation. For example, issuers could hold tokenized U.S. Treasury bonds as reserves, enhancing stability and offering investors more options. Some projects are experimenting with real estate tokenization, using smart contracts to fractionalize and trade property ownership, thus diversifying collateral sources.
Multi-currency pegging is another emerging trend. While most stablecoins are pegged to a single currency like the U.S. dollar, multi-currency stablecoins could peg to a basket of fiat currencies, such as offshore人民币 or the euro, reducing reliance on any one currency and challenging dollar dominance. Hong Kong has already explored this approach, allowing stablecoins pegged to multiple currencies, which could facilitate global adoption and cross-border transactions.
Advancements in blockchain technology will also drive improvements in privacy, scalability, and transaction efficiency. Techniques like zero-knowledge proofs can enhance transaction security and privacy without exposing sensitive information. Solutions such as sharding and sidechains could boost scalability and processing capacity, meeting growing market demands.
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 like the U.S. dollar or through algorithmic mechanisms. It combines the benefits of digital currencies with reduced volatility.
How do stablecoins maintain their peg?
Most stablecoins use asset collateralization (holding reserves in fiat or cryptocurrencies) or algorithmic supply adjustments. Collateralized stablecoins rely on audited reserves, while algorithmic ones automatically mint or burn tokens based on market demand.
What are the risks of using stablecoins?
Key risks include reserve transparency issues, regulatory changes, and systemic vulnerabilities. Events like bank failures or algorithmic failures can cause de-pegging, leading to investor losses.
Are stablecoins regulated?
Regulation varies by region. The U.S., EU, and Hong Kong have introduced frameworks to oversee stablecoin issuance, reserves, and transparency. However, global standards are still evolving.
Can stablecoins be used for daily payments?
Yes, stablecoins are increasingly used for cross-border payments and transactions due to their low fees and fast settlement times. However, regulatory limits may apply in some regions.
What is the future of stablecoins?
The future hinges on tighter regulation and technological innovation. Trends like RWA collateralization and multi-currency pegging could enhance stability, while advanced blockchain tech may improve scalability and security.
Conclusion: A Balanced Perspective on Stablecoins
Stablecoins represent a significant innovation in the cryptocurrency space, offering potential for efficient cross-border payments and expanded financial services. Their rapid growth reflects market demand for innovative payment tools and financial transformation. However, events like the collapse of UST and the de-pegging of USDC serve as reminders that stablecoins are not immune to risks. Issues such as reserve transparency, regulatory uncertainty, and systemic threats loom large, endangering investor assets and financial stability.
For investors, maintaining rationality and caution is essential. Understand the mechanisms and risks behind stablecoins, research issuers' credibility and reserve structures, and stay informed about regulatory developments. Diversify investments to avoid overexposure to stablecoins.
From an industry perspective, regulation and technological innovation are pillars for sustainable growth. Regulators should enhance international cooperation to harmonize standards and close loopholes. 👉 Explore advanced regulatory frameworks to ensure market fairness and transparency. Issuers and developers must invest in tech upgrades, improving stability, security, and scalability through advanced cryptography, smart contracts, and blockchain architecture.
Stablecoins present both opportunities and challenges for finance. By addressing risks through robust regulation and innovation, the industry can foster healthy, orderly development, making stablecoins a true force for financial progress and economic growth.