Stablecoins: The “stabilizing force” of the crypto world

Before understanding the deep impact of stablecoins, we must first clarify its basic concept. Simply put, stablecoins are a special type of cryptocurrency whose core mission is to overcome the defects of the violent price fluctuations of traditional cryptocurrencies , thus playing the role of a "stabilizing force" in the world of digital assets. This "stability" does not come out of thin air, but is maintained by linking its value to a relatively stable asset or through a sophisticated algorithmic mechanism.

At present, stablecoins can be mainly divided into the following categories:

1. Fiat-collateralized stablecoins: the most mainstream “digital dollar”

This is the most common type of stablecoin with the largest market value. As the name implies, the value of this type of stablecoin is pegged to a certain legal currency (such as the US dollar, euro, RMB, etc.) at a 1:1 ratio. For example, the well-known USDT (Tether) and USDC (US Dollar Stablecoin) are typical legal currency-collateralized stablecoins, both of which are pegged to the US dollar.

The operating principle is relatively straightforward: for every stablecoin issued, the issuer will deposit an equivalent amount of fiat currency in a bank account as a reserve. This means that if you hold 1 USDC, in theory you can redeem it for 1 USD at any time from the issuer.

Advantages : Easy to understand and highly stable, directly anchored to the most liquid and trusted assets in the real world.

Risks : transparency of reserve assets, creditworthiness of issuers, and regulatory compliance. Once reserves are insufficient or information is opaque, it may trigger " de-anchoring risk ", causing the price of stablecoins to deviate from their anchor value, or even trigger a run.

2. Crypto-asset collateralized stablecoins: an attempt at decentralization

Unlike fiat-collateralized stablecoins, crypto-collateralized stablecoins are issued with other cryptocurrencies (such as Ethereum, Bitcoin, etc.) as collateral. In order to cope with the price fluctuations of the collateral itself, such stablecoins usually adopt an " over-collateralization " mechanism, that is, the value of the collateral is much higher than the value of the issued stablecoin. For example, issuing a $100 stablecoin may require collateralizing Ethereum worth $150 or even more.

Features : Decentralized, not dependent on centralized issuing agencies, more in line with the spirit of blockchain.

Challenges : The volatility of crypto assets themselves remains their biggest challenge. Under extreme market conditions, over-collateralization may also face liquidation risks.

3. Algorithmic stablecoins: an exploration of high risk and high return

Algorithmic stablecoins are the most innovative and controversial type of stablecoins. They do not rely on any physical or crypto assets as collateral, but automatically adjust the supply of stablecoins through a set of preset algorithms and smart contracts to maintain their price stability. When the price of the stablecoin is higher than the anchor target, the algorithm will increase the supply; when the price is lower than the anchor target, the algorithm will reduce the supply.

Advantages : High degree of decentralization and no need for external collateral, which theoretically allows for unlimited scalability.

Risk : The complexity of the algorithm and the uncertainty of market expectations make it extremely risky. Historically, some algorithmic stablecoin projects have collapsed due to algorithmic design flaws or extreme market conditions, causing huge losses to investors.

4. Gold Stablecoin: A New Chapter for Digital Gold

Gold stablecoin is a special type that has emerged in recent years. It combines the characteristics of stablecoins with the value storage properties of gold. Each gold stablecoin represents a certain weight of physical gold, which is usually held in custody by a third-party institution.

Advantages : It combines the anti-inflation and safe-haven properties of gold with the convenience and liquidity of blockchain.

Representative projects : XAUT coin issued by Tether and PAXG coin issued by Paxos.

Challenges : Issues such as custody and audit transparency of physical gold, linkage with the traditional gold market, and regulatory compliance.

Stablecoins: the all-rounder in the crypto world

The value of stablecoins lies not only in their "stable" characteristics, but also in their "versatile" role in the crypto market and the real world. It is not only a bridge connecting traditional finance and the digital world, but also an important infrastructure to promote the development of the digital economy. The following are the main functions and application scenarios of stablecoins:

1. A safe haven for cryptocurrency trading

For investors who are accustomed to the dramatic fluctuations of mainstream cryptocurrencies such as Bitcoin and Ethereum, stablecoins provide an ideal "safe haven." When the market falls sharply, investors can quickly convert other cryptocurrencies into stablecoins, thereby locking in the value of their assets and avoiding further losses.

Function : Improve market liquidity and transaction efficiency, and become an indispensable tool in cryptocurrency trading.

2. The “highway” for cross-border payments and settlements

Traditional cross-border payments often face high fees, long settlement times, and complex intermediate links. The emergence of stablecoins has brought revolutionary changes to cross-border payments:

• Speed : Stablecoin transactions based on blockchain technology can achieve fast point-to-point transfers, shortening the settlement time of traditional banks from days or even weeks to minutes or even seconds.
• Cost : It saves a lot of intermediary fees and the transaction cost is much lower than the traditional method.

Application scenarios : international trade, labor remittances, charitable donations and other fields.

3. The “foundation” of decentralized finance (DeFi)

Decentralized finance (DeFi) is one of the hottest areas in the crypto world in recent years, and stablecoins are the indispensable "cornerstone" of the DeFi ecosystem. In DeFi's various applications such as lending, trading, and insurance, stablecoins, as a stable medium of value, provide users with reliable collateral and trading pairs.

Example : On decentralized lending platforms, users can use stablecoins for lending, avoiding the cumbersome KYC process and high interest rates in traditional finance.

4. Digital Shield Against Inflation

Against the backdrop of increasing global economic uncertainty and high inflation in some countries, stablecoins have also become a "digital shield" for some people to fight inflation. In countries and regions where the local currency continues to depreciate and purchasing power continues to decline, people can hedge the risk of local currency depreciation by holding US dollar stablecoins and indirectly holding US dollar assets.

Data support : Data from the International Monetary Fund (IMF) shows that in high-inflation countries such as Argentina and Turkey, the penetration rate of US dollar stablecoins has exceeded 30%.

5. “New Ways” to Make Profits from Investment

The issuers of stablecoins have also achieved considerable profits through their unique business model. Taking the fiat-collateralized stablecoin as an example, after receiving the fiat currency pledged by users, the issuer usually invests these reserve assets in low-risk, high-liquidity financial products such as U.S. Treasury bonds and bank demand deposits.

Case : Tether has made huge profits by purchasing U.S. Treasuries. Even with only more than 100 employees, its net profit in 2024 will be as high as more than 14 billion U.S. dollars .

Stablecoins: From the "gray area" to the "compliance era"

With the rapid development and widespread application of stablecoins around the world, governments and regulators are paying more and more attention to them. In the past, stablecoins have long been in the "gray area" of regulation, but now, a global "legalization wave" is sweeping in, marking that stablecoins are gradually entering the "compliance era".

1. The United States: Legislation first, aiming at the "digital dollar"

As the world's largest economy and financial center, the United States has always been at the forefront of stablecoin regulation. Recently, the United States Senate passed the "United States Stablecoin Guidance and Innovation Act of 2025" (hereinafter referred to as the "GENIUS Act"), which is undoubtedly a milestone in the field of stablecoin regulation. The core provisions of the bill include:

• Reserve asset requirements : Stablecoin issuers must hold reserve assets of equal value, and these reserve assets must be highly liquid assets such as U.S. dollars, bank demand deposits, and short-term U.S. Treasury bonds.
• Restrictions on issuing entities : Only licensed “payment stablecoin issuers” can legally issue payment stablecoins, and these issuers must be US registered entities.

U.S. Treasury Secretary Besant even publicly stated that the current government will use stablecoins to maintain the dominance of the U.S. dollar, revealing the United States' strategic intention to consolidate the dollar's hegemony in the era of digital currency.

2. Asia: Hong Kong leads the way, and Chinese giants enter the game

In Asia, Hong Kong has shown a positive attitude in the regulation of stablecoins and has become the world's first jurisdiction to implement full-chain supervision of fiat stablecoins. Influenced by this, Chinese e-commerce giants Ant Group and JD Finance have also stated that they will apply for stablecoin licenses.

In addition, South Korean President Lee Jae-myung promised to allow local companies to issue stablecoins at the beginning of his term. Asian countries such as Japan, Singapore, Australia, and India have also launched stablecoin legislation.

3. Europe: UK is next

Europe is also not absent from this wave of stablecoin regulation. The UK recently released regulatory proposals on stablecoin issuance, crypto asset custody, and the financial soundness of crypto asset companies, aiming to provide clear regulatory guidance for the stablecoin market.

4. The core objectives of supervision: transparency, safety, and risk prevention

Although countries differ in the specific paths of stablecoin regulation, their core goals are highly consistent:

• Improve transparency : Require issuers to disclose reserve asset information and conduct regular audits.
• Protecting investors’ interests : Protecting investors from fraud and market manipulation through licensing systems, compliance requirements and other measures.
• Prevent financial risks : Avoid excessive speculation and systemic risks in the stablecoin market and maintain the stability of the financial system.

Stablecoins: The “shadow” and challenges under the halo

Although stablecoins have attracted much attention for their "stable" characteristics and broad application prospects, their inherent risks and challenges cannot be ignored.

1. Payment risk and “de-anchoring” crisis: a test of trust

The "stability" of stablecoins is based on trust in their anchored assets. However, once the issuer conceals insufficient reserves or the quality of the reserve assets is problematic, it may trigger serious redemption risks, causing the price of the stablecoin to deviate from its anchored value, the so-called "de-anchoring".

Typical cases :

• Tether’s “dark history” : In 2021, Tether was investigated by US regulators for concealing its reserve deficit and was eventually fined $41 million.
• USDC’s “Silicon Valley Bank Shock” : In 2023, because the issuer Circle deposited approximately US$3.3 billion in reserves in Silicon Valley Bank (accounting for 8% of USDC’s total reserves), the price of USDC plummeted to US$0.88. Although the peg was eventually restored, it exposed the impact of external financial risks on stablecoins.

2. Credit Verification Issue: The Paradox of Decentralization and Centralization

For physically collateralized stablecoins, their value protection depends on the real asset reserves owned by the issuer. However, the authenticity and transparency of these reserves often need to rely on centralized custodians and auditing agencies for verification, which is a paradox with the core concept of decentralization and trustlessness pursued by blockchain technology.

3. Monetary sovereignty game: challenges at the national level

At the national level, the widespread use of stablecoins may lead to the erosion of monetary sovereignty. In countries and regions where the local currency is unstable and inflation is severe, people tend to use US dollar stablecoins instead of local currency savings, which may lead to the failure of the country's monetary policy and even become a tool for capital flight, weakening the effectiveness of foreign exchange controls.

Stablecoins: The future is here, with both challenges and opportunities

The emergence and development of stablecoins is an inevitable result of the evolution of the crypto market and even the global financial system. Looking ahead, stablecoins will continue to play an important role and present the following key trends in terms of technology, application and regulation:

1. Compliance becomes a core competitiveness

As the global regulatory framework gradually improves, compliance will no longer be a "plus point" but a "must have." Compliance requirements such as licensing systems, reserve audits, anti-money laundering (AML) and counter-terrorist financing (CFT) will become the norm.

2. Cross-chain and multi-chain development: breaking ecological barriers

In the future, stablecoins will accelerate their development in the direction of cross-chain and multi-chain, aiming to break down the barriers between different blockchains and realize the seamless flow of stablecoins between different public chains, consortium chains and even private chains.

3. Deep integration with the DeFi ecosystem: innovation never ends

As the "blood" of DeFi, stablecoins will continue to be deeply integrated with it, driving the emergence of more innovative products, such as more complex lending protocols, decentralized exchanges (DEX), synthetic assets and derivatives, insurance and risk management tools, etc.

4. Diversification of application scenarios: from virtual to reality

The application scenarios of stablecoins will be further expanded to the real economy, such as supply chain finance, digital asset securitization, games and metaverse, micropayments and remittances.

5. Competition and cooperation in central bank digital currencies (CBDCs)

Stablecoins will form a situation of both competition and cooperation with CBDC. As a digital currency backed by the sovereign credit of a country, CBDC will squeeze the market space of private stablecoins to a certain extent; while private stablecoins have advantages in technological innovation and application flexibility, and may complement CBDC.

6. Potential and Challenges of Gold Stablecoins

Gold stablecoins are expected to provide investors with a convenient and efficient digital gold investment channel, but their development still faces challenges such as transparency of physical gold custody, linkage with the traditional gold market, and regulatory compliance.

Conclusion

As an important innovation in the crypto market, stablecoins are changing the global financial landscape at an unprecedented speed. They are not only a bridge connecting traditional finance and the digital world, but also an important infrastructure to promote the development of the digital economy. However, behind the glamor, stablecoins also face many challenges such as reserve transparency, payment risks, regulatory compliance, and national monetary sovereignty.

In the future, with the continuous evolution of technology and the gradual improvement of supervision, the stablecoin market will become more mature and standardized. For investors, a deep understanding of the operating mechanism, risks and opportunities of stablecoins and the selection of compliant and transparent projects will help them seize the opportunity and share the development dividends in this digital financial revolution. The future of stablecoins is here, let us wait and see!