ARK Invest stablecoin guide: An overview of the three main types of stablecoins from design mechanisms, historical development, and risk assessment.

This article discusses the design mechanisms, historical development, and risk assessment of stablecoins, analyzing the operational principles and trade-offs of the three main types: fiat-backed, multi-asset collateral, and synthetic dollar models. This article is based on a piece by ARK Invest, organized, translated, and written by Block unicorn. (Background: After the xUSD stablecoin depegged, the USDX pool has also dried up.) (Background Supplement: Balancer: V2 pool suffered a loss of $128 million due to a vulnerability attack; V3 was unaffected; Experts criticize: auditing a dozen times was fundamentally useless.) This article aims to explain the complex mechanisms in the stablecoin field. The operational mechanisms of stablecoins are very complex, and there is currently no comprehensive educational resource that integrates the mechanisms, risks, and trade-offs of various stablecoins. This series of articles aims to fill this gap. The series consists of four parts, with the first part introducing stablecoins, including their design and history. The remaining three articles will focus respectively on the three major mainstream categories of stablecoins: fiat-backed stablecoins (Part Two), multi-asset collateral stablecoins (Part Three), and synthetic dollar models (Part Four). These articles outline the management of stablecoin reserves, the opportunities brought by yield and incentive mechanisms, the convenience of token acquisition, and native integration, as well as the token resilience based on governance and compliance. Each article will also explore external dependencies and anchoring mechanisms, which determine whether stablecoins can maintain their value during market pressure. Part Two of this series will first introduce stablecoins that primarily use fiat as collateral, which is currently the most mainstream and direct design. Parts Three and Four will evaluate more complex types of stablecoins, including those backed by multi-asset collateral and synthetic dollar models. These in-depth analyses provide investors with a comprehensive framework to help them understand the relevant assumptions, trade-offs, and risk exposures of each type of stablecoin. Please enjoy the first part of this series. Stablecoins: The ChatGPT Moment of the Crypto Industry The emergence of stablecoins marks a turning point in the development history of the cryptocurrency industry. Today, governments, businesses, and individual users around the world recognize the advantages of using blockchain technology to simplify the global financial system. The development history of cryptocurrencies has proven that blockchain can serve as a viable alternative to traditional financial systems, enabling digital-native, global, and instant value transfer—all accomplished through a unified ledger. This understanding, combined with global demand for the US dollar, creates a unique opportunity to accelerate the integration of cryptocurrencies with traditional finance. Stablecoins are at the intersection of this integration, both for traditional institutions and governments. Key factors driving the adoption of stablecoins include: Traditional institutions strive to maintain their relevance as the global payment landscape modernizes. Governments are seeking new creditors to finance their fiscal deficits. Although the motivations of governments and existing financial institutions vary, they all understand that they must embrace stablecoins; otherwise, they risk losing influence as the financial landscape shifts. Recently, Lorenzo Valente, head of digital asset research at ARK, published a detailed paper on this topic—“Stablecoins May Become One of the US Government's Most Resilient Financial Allies.” Today, stablecoins are no longer just niche tools for cryptocurrency traders; their adoption among retail investors is also accelerating. They have become a primary means of obtaining US dollars for cross-border remittances, decentralized finance (DeFi), and emerging markets (which lack stable fiat currencies). Despite the increasing utility and popularity of stablecoins, the complex structures and mechanisms supporting the stablecoin system remain obscure to many investors. Understanding Stablecoins Stablecoins are tokenized rights issued on the blockchain, where holders can obtain an asset worth one dollar, which can be traded both on-chain and off-chain. Stablecoins are backed by collateral reserves, which are managed through traditional custodial institutions or automated on-chain mechanisms and stabilized via arbitrage mechanisms. Stablecoins aim to absorb fluctuations and maintain parity with the target asset (usually the US dollar or other fiat currencies). Stablecoins are heavily dollar-denominated, which is an inevitable result of their alignment with market demand for synthetic dollar exposure in dollar-scarce markets. Stablecoins combine the stability of the US dollar, the cost-effectiveness of blockchain, and round-the-clock accessibility, making them an attractive medium of exchange and a reliable store of value. This dynamic is particularly pronounced in markets long plagued by currency instability and American bank account access restrictions. In this context, stablecoins effectively serve as a digital gateway to dollar exposure, as evidenced by the fastest-growing regions for on-chain activity by 2025: Asia-Pacific, Latin America, and Sub-Saharan Africa. Furthermore, stablecoins have fundamentally changed cryptocurrencies, especially the development of decentralized finance (DeFi), by introducing a highly liquid and low-volatility unit of account. Without stablecoins, on-chain markets would be forced to trade in more volatile assets such as Bitcoin (BTC), Ethereum (ETH), or Solana (SOL), which not only exposes users to price risks but also diminishes the practical application value of decentralized finance (DeFi). By providing stability in on-chain assets pegged to the US dollar, stablecoins enhance price discovery and on-chain transaction settlement efficiency for DeFi protocols, thereby improving capital efficiency. This stability and reliability are crucial for the core infrastructure on which these new financial markets depend. Therefore, maintaining the specific anchoring mechanisms and reserve structures that uphold these characteristics is vital for their resilience, especially during periods of market pressure. Asset or Debt Instrument? Substantive Differences Arising from Stablecoin Design The underlying mechanisms and reserve structures of stablecoins directly affect their economic and legal behaviors. Different frameworks have their pros and cons regarding regulatory compliance, censorship resistance, the degree of crypto-native design, and control and stability. They also determine how stablecoins operate and the risks, behaviors, and limitations that holders should bear. These nuances raise critical questions about how to understand stablecoins—for example, whether certain types of stablecoins should be viewed as assets or debt instruments. In this context, when holders have direct legal ownership of stablecoins or their supporting reserves, allowing them to retain enforceable rights even if the issuer goes bankrupt, stablecoins can be viewed as “assets.” Conversely, when the issuer retains legal ownership of the reserves, and the holders only possess contractual claims, effectively functioning as unsecured creditors, stablecoins resemble “debt instruments.” This distinction depends on the legal design of the issuer and the structure of reserve custody. The classification of tokens primarily depends on who controls the reserves backing the tokens and whether that party has a legal obligation to fulfill redemption duties. While most issuers may intend to fulfill redemption obligations even under pressure, without clear legal obligations or user-controlled reserves, the token's function resembles that of a debt instrument. This distinction determines whether holders still possess enforceable rights to the underlying collateral in worst-case scenarios. The table below outlines the differences in this classification among different types of stablecoins. Such structures are often meticulously designed based on the region, target market, or specific use case that the stablecoin is addressing. Nevertheless, differences in legal structures can lead to nuances that may significantly impact token holders. It is worth noting that this is just one of many interesting cases where intentional or unintentional structural differences can have profound effects on stablecoins and investors. Past stablecoin failures are closely related to design flaws.