Deep Dive into Stablecoins: From Market Dilemma to Future Landscape

Why the Cryptocurrency Market Needs Stablecoins

There is a fundamental contradiction in the blockchain ecosystem: cryptocurrencies are revolutionary, but their volatility deters adoption. Imagine you run a business, and yesterday you earned 1 Bitcoin worth $10,000, but today it may have shrunk to $5,000. Such drastic value fluctuations make it difficult for merchants and institutional investors to accept cryptocurrencies as a means of transaction.

To fill this market gap, stablecoins emerged. In 2014, Tether launched USDT for the first time, marking the first attempt in the blockchain world to peg the value to fiat currencies. Subsequently, institutions like MakerDAO (2015), Paxos, and Gemini (2018) entered the scene. By 2020, during the DeFi boom, the number and use cases of stablecoins grew exponentially.

Core Mechanisms of Stablecoins

Stablecoins address not only the issue of “stability” but also provide a liquidity foundation for the entire crypto financial ecosystem.

Medium of Exchange: On decentralized exchanges, stablecoins serve as the base unit for all trading pairs. Compared to fiat on-ramps and off-ramps, stablecoins enable instant settlement and incur very low costs, especially advantageous in cross-border remittances—solving the pain points of slow and costly traditional bank transfers.

Risk Hedging Tool: When mainstream assets like Bitcoin and Ethereum drop over 10% in a single day, investors can quickly convert their positions into stablecoins to lock in gains. This highlights the “safe haven” value of stablecoins.

DeFi Infrastructure: Major DeFi protocols like Aave, Compound, and MakerDAO rely heavily on stablecoins. Users can collateralize digital assets to borrow stablecoins for consumption or reinvestment, or provide stablecoin liquidity to earn trading fee shares and liquidity mining rewards.

The Four Major Schools of Stablecoins

Based on technical principles and collateralization methods, the stablecoin market has formed four different operational paradigms:

Fiat-Collateralized Stablecoins: Backed by centralized institutions, with fiat currencies like USD, EUR, etc., held in reserve 1:1. USDT, USDC, BUSD, TUSD belong to this category. These stablecoins align with traditional financial logic but carry centralization and regulatory risks—such as BUSD being halted by the US SEC.

Cryptography-Based Stablecoins: Created through over-collateralized crypto assets (like Bitcoin, Ethereum), with DAI, RAI, MIM as representatives. These schemes are highly decentralized, but if collateral prices plummet, smart contracts automatically liquidate collateral, risking investor losses.

Commodity-Backed Stablecoins: Pegged to physical assets like gold or silver, exemplified by PAXG, XAUT. These stablecoins combine crypto and physical assets but often have lower liquidity compared to fiat-backed stablecoins.

Algorithmic Stablecoins: Abandon traditional collateral, maintaining price stability solely through smart algorithms and incentive mechanisms. Projects like AMPL, USDD, FRAX follow this logic, but history shows this approach carries the highest risk—UST’s collapse in 2022 is a stark lesson.

The Light and Shadow of the Stablecoin Ecosystem

Advantages: Stablecoins uniquely combine blockchain efficiency with fiat stability. Their relatively constant prices allow investors to hedge quickly during market volatility; they facilitate cross-border payments far more efficiently than SWIFT; and the thriving DeFi ecosystem depends heavily on stablecoins as a foundational element.

Risks: The centralized issuance model of mainstream stablecoins poses hidden dangers—Tether has long been questioned about insufficient reserves, and market trust in its transparency remains discounted; the possibility of government asset freezes or censorship always exists; risks like liquidation failures in fiat-backed stablecoins and collateralization risks in crypto stablecoins should not be overlooked.

The Current Landscape of the Stablecoin Market

As of August 2025, the total global market cap of stablecoins exceeded $268.18 billion, with USD stablecoins dominating (99.6% market share). USDT and USDC together control 85% of the market. In contrast, euro stablecoins are only worth $400 million, and other stablecoins are negligible.

Regulatory Evolution: Over 50 jurisdictions have initiated stablecoin legislation. The US “GENIUS Act” authorizes licensed entities to issue payment stablecoins; Hong Kong became the first region to introduce a “Stablecoin Regulation”; Japan and Singapore permit corporate issuance; the UAE attracts compliant issuers through tiered licensing. The overall trend is that non-compliant stablecoins face shrinking space.

Expanding Use Cases: Stablecoins are no longer limited to trading pairs; new scenarios such as cross-border payments, RWA (real-world asset) tokenization, and savings in high-inflation countries are emerging.

Future Trends for Stablecoins

Regulatory Compliance as a Survival Necessity: Future non-compliant projects will be eliminated by both markets and policies; only stablecoins with proper licensing in various countries will survive long-term.

Parallel Multi-Currency Systems: Currently, USD stablecoins dominate, but the emphasis on national sovereignty is driving the rise of local currency stablecoins. The emergence of RMB, JPY, and emerging market stablecoins will reshape the market’s monopolar landscape.

Deepening Application Scenarios: In regions with weak financial infrastructure, stablecoins may become more reliable savings tools than local currencies; beyond DeFi, RWA, enterprise payments, and CBDC-related applications are potential use cases.

Technological Empowerment: Innovations like multi-chain deployment, privacy-preserving technologies, and smart contract upgrades will enhance the security and flexibility of stablecoins.

Trading and Yield Logic of Stablecoins

Although called “stable,” stablecoins are still subject to price fluctuations, creating trading opportunities. Small exchange rate differences between stablecoins can be arbitraged—for example, short-term price swings between USDT and USDC—where large principal participation in spot trading can generate profits.

However, note that stablecoin trading opportunities are mostly short-term and not suitable for long-term holding or capital occupation. Black swan events, though rare, can create explosive profit opportunities (such as the USDC de-pegging during the Silicon Valley Bank crisis), but such events are unpredictable and difficult to capture.

Compared to trading, collateralization and liquidity provision are more stable income methods. New stablecoins often offer high APY incentives upon launch, allowing investors to earn relatively substantial returns through early liquidity provision—another dimension of extracting value from stablecoins.