In-Depth Analysis of Stablecoins: From Basic Understanding to Market Outlook, a Guide to Mastering the Stable Foundation of Crypto Assets

Why Does the Crypto World Need Stablecoins?

The high volatility of cryptocurrencies has always been a bottleneck for their large-scale adoption. Imagine a scenario: if you are a merchant, receiving 1 BTC (worth $10,000) yesterday, the asset might shrink to $5,000 today, and double again tomorrow. Such unpredictable price fluctuations deter both merchants and investors.

To address this pain point, the industry saw a turning point in 2014—Tether launched the first stablecoin USDT. Subsequently, institutions like MakerDAO (2015), Paxos, and Gemini (2018) introduced products such as DAI, PAX, and GUSD. By 2020, the explosion of the DeFi ecosystem led to a surge in stablecoin issuance.

Fundamentally, stablecoins are a type of cryptocurrency with relatively stable prices, serving a similar function to traditional fiat currencies. It’s important to note that stablecoins are not entirely risk-free; they are just significantly less volatile compared to non-stable coins like BTC and ETH.

The Core Role of Stablecoins in the Crypto Ecosystem

Because of their relatively constant prices, stablecoins play a crucial role in payments, hedging, and liquidity provision, forming the infrastructure of modern crypto finance.

Payment and Settlement Functions

In crypto transactions, stablecoins serve as a medium of exchange, effectively avoiding price fluctuation risks. Especially in cross-border payments, stablecoins demonstrate clear advantages—transactions are borderless, fees are low, and settlement is fast. Compared to traditional international remittances, which are costly and lengthy, the benefits are obvious.

Risk Hedging Tool

Crypto markets often see daily swings exceeding 10%. Stablecoins, being pegged to fiat or assets, maintain relatively stable prices and act as a “safe haven” during market turbulence. When Bitcoin crashes, investors can quickly convert their assets into stablecoins, effectively preventing significant asset devaluation.

The Lifeblood of the DeFi Ecosystem

Stablecoins are the core assets of decentralized finance, underpinning nearly all DeFi protocols. Users can collateralize crypto assets to borrow stablecoins or deposit stablecoins into protocols to earn interest. On decentralized exchanges, stablecoins often serve as the【base assets in trading pools】, reducing slippage and benefiting liquidity providers.

The Four Main Types and Operating Mechanisms of Stablecoins

Based on their underlying mechanisms, stablecoins can be divided into four categories:

Fiat-Collateralized Stablecoins

Backed by traditional fiat currencies (USD, EUR, HKD, etc.) issued on a 1:1 basis. Issuers deposit real fiat into bank or trust accounts as reserves, then issue equivalent amount of crypto tokens. Common examples include USDT, USDC, TUSD, BUSD.

Advantages include transparent reserves and relatively manageable risks, but they carry centralization risks—assets could be frozen or subjected to regulatory intervention by the issuing institutions.

Crypto-Asset Collateralized Stablecoins

Backed by cryptocurrencies like BTC, ETH, and operated via smart contracts. Due to the high volatility of crypto assets, issuers must over-collateralize with assets worth significantly more than the stablecoin’s value. If the collateral’s value drops sharply, smart contracts automatically liquidate collateral to maintain peg. DAI, MIM, sUSD are typical examples.

Risks here include liquidation risk—if collateralization ratios fall below thresholds, user assets face forced liquidation.

Commodity-Backed Stablecoins

Backed by physical assets such as gold or silver, maintaining a value relatively synchronized with the commodity’s price. Examples include PAXG, XAUT, DAX. These stablecoins combine hedging and store-of-value functions but are subject to commodity price fluctuations.

Algorithmic Stablecoins

Not backed by physical assets or fiat but maintained through algorithms and smart contracts that dynamically adjust supply to stabilize the price. Examples include AMPL, USDD. These are the riskiest—2022’s TerraUSD (UST) collapse serves as a stark warning.

Comparing the Advantages and Risks of Stablecoins

Core Advantages

• Price Stability: Compared to the extreme volatility of BTC and ETH, stablecoins offer a more stable asset option.
• Cross-Border Payment Revolution: Breaks through foreign exchange controls and high costs of fiat transfers, enabling low-cost, efficient global settlements.
• Support for DeFi Ecosystem: Fundamental currency for lending, liquidity mining, and other DeFi activities.

Major Risks

• Lack of Reserve Transparency: Many stablecoins claim 100% reserves, but audits are often incomplete. USDT’s reserve backing has long been questioned.
• Centralized Governance Risks: Issued and managed by specific institutions, risking asset freezes or censorship—BUSD’s halt by the US SEC is an example.
• Liquidation Risks: Crypto-backed stablecoins face forced liquidation if collateralization ratios fall below thresholds, leading to potential losses.

The 2025 Stablecoin Market Landscape and Regulatory Trends

Market Expansion

As of August 5, 2025, the total global stablecoin market cap exceeds $268.18 billion, increasingly occupying a vital position among crypto assets.

Rapid Development of Global Regulatory Frameworks

Over 50 jurisdictions have introduced or revised crypto regulations, with stablecoins becoming a regulatory priority:

• USA: The 《GENIUS Act》 took effect in July 2025, allowing licensed entities to issue payment stablecoins; non-financial corporations require special approval.
• Hong Kong: The 《Stablecoin Ordinance》 is the world’s first comprehensive legislation targeting fiat-backed stablecoins, requiring issuers to obtain a license from the HKMA.
• EU: The MiCA framework is in transition, with rules gradually being implemented.
• UK: Draft regulations released in April 2025 aim to include stablecoins under the 《Financial Services and Markets Act》.
• Singapore: Digital token service providers must be licensed; stablecoin issuance requires MAS approval.
• Japan and South Korea: Legislation in 2025 permits companies to issue stablecoins, focusing on cross-border payment compliance.
• UAE: Dubai’s VARA establishes a tiered licensing system, attracting compliant issuers.

Structural Challenges Facing Stablecoins Today

Insufficient Decentralization

Mainstream stablecoins like USDT and USDC are issued and managed by specific institutions, risking asset freezes or transaction censorship, contrary to blockchain’s original ethos.

Reserve Transparency Issues

Tether (USDT) has long lacked full third-party audits of its reserves, repeatedly questioned for potential misrepresentation or incomplete backing, undermining market confidence.

Compliance Costs and Legal Uncertainty

Diverse regulatory policies across countries mean issuers must navigate multiple compliance requirements and high costs, leading to fragmentation in the global stablecoin market.

Dollar-Ceged Risks

Over 90% of stablecoins are pegged to the US dollar. For users outside the US, this exposes them to foreign exchange controls, monetary policy impacts, and geopolitical risks, limiting stablecoins’ global usability.

Future Directions: Four Core Trends

Enhanced Regulation and Compliance Competition

As governments accelerate stablecoin regulation design, non-compliant projects will face legal risks or market exclusion. Compliance will become a prerequisite for survival.

Diversification of Application Scenarios

Stablecoins are not limited to trading. In high-inflation or underdeveloped financial markets, they could become more trusted tools for savings and payments, benefiting billions of unbanked individuals.

Emergence of Multi-Currency Stablecoin Ecosystems

The current dominance of USD-pegged stablecoins will be challenged. Hong Kong’s mBridge cross-border CBDC experiments and offshore RMB stablecoin pilots, Japan’s compliant JPY stablecoins (like GYEN), and Latin American countries exploring local currency stablecoins to combat inflation will reshape the landscape. The future stablecoin market will evolve from “USD-centric” to “multi-currency, multi-region, multi-center” structures.

Technological Innovation to Strengthen Trust

Advances in cross-chain interoperability, smart contract upgrades, zero-knowledge proofs, and privacy tech will enhance stablecoins’ credibility and flexibility in applications.

Practical Guide to Stablecoin Investment

Although stablecoins are relatively stable, they still experience minor fluctuations and can be used as trading assets. Comparing BTC and ETH to stocks, trading stablecoins is akin to forex trading—low volatility but with long-term opportunities.

Two Main Profit Paths

Profiting from small fluctuations generally requires: one, increasing principal size; two, leveraging. Currently, there are no mature leverage tools for stablecoin trading pairs, so most trading is spot-based. For example: holding large USDC positions and observing USDT/USDC price drops, you could buy USDT, and sell after price recovery to profit from the spread.

Characteristics of Short-term Trading

Stablecoins rarely experience sharp swings unless a black swan event occurs (e.g., the 2023 Silicon Valley Bank crisis causing USDC de-pegging). Such events are rare and unpredictable. Therefore, stablecoin trading is mainly short-term, not suitable for long-term holding, as it would waste capital allocation opportunities.

A Better Strategy: Yield Farming

Instead of trying to profit from price fluctuations, participating in collateralization or liquidity provision to earn interest is more effective. These opportunities often arise in early stages of new stablecoin projects, where project teams offer high yields to attract users, creating substantial capital return potential.

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