What are stablecoins? Understanding the "USD alternative" in the crypto world

What is the most core issue in the current crypto market? Many would say price volatility. Indeed, the prices of mainstream cryptocurrencies like Bitcoin and Ethereum fluctuate dramatically, making it difficult for investors to find a “safe haven” point in the market. It is precisely this problem that has given rise to a large and critical market segment—stablecoins.

According to the latest data, by mid-2025, the global circulating market cap of stablecoins has exceeded $230 billion, and this number continues to grow. From individual investors to top asset management firms like BlackRock and Fidelity, and even to sovereign economies such as the EU and Singapore, all are accelerating their deployment in the stablecoin sector. Circle, the issuer of USDC, has even filed an IPO prospectus with the U.S. SEC, with an estimated valuation of $50-70 billion for a Nasdaq listing. All these developments indicate that stablecoins are no longer just fringe products in the crypto space but are fundamental infrastructure for the entire ecosystem.

The essence of stablecoins: solving the core pain point of the crypto market

The first question to answer is—what exactly are stablecoins?

Simply put, stablecoins are a class of cryptocurrencies that are theoretically able to maintain a specific price over the long term. Their core feature is maintaining a relatively stable value through specific mechanisms. But behind this definition lies rich connotations.

To understand why stablecoins emerged, we must first understand the dilemma of the crypto market. Before stablecoins appeared, the crypto world indeed had many different types of digital assets, but they all faced the same fatal problem: severe price volatility. This meant that investors, after making profits, could not find a stable store of value to preserve their gains. Ultimately, investors could only watch helplessly as their assets shrank due to market fluctuations.

Stablecoins were born to solve this “value storage challenge.” Using a real-world analogy, Bitcoin and Ethereum are like stocks—they are investment assets, while stablecoins are like fiat currency—they serve as settlement tools. Investors enter the crypto market through stablecoins, use stablecoins to buy other crypto assets, and after profits or losses, convert back to stablecoins to lock in their gains or losses. This was the initial and most direct application scenario of stablecoins.

Why are stablecoins so important? The dual drivers of cross-border payments and DeFi

But the importance of stablecoins goes far beyond that. With technological development, stablecoins have begun to undertake missions that traditional financial systems cannot easily achieve.

In the field of cross-border payments, the pain points of traditional banking systems are very obvious. An international transfer requires multiple intermediaries such as correspondent banks and clearinghouses, leading to complex processes and lengthy steps. Typically, cross-border transfers take 2-5 business days, with complex transactions sometimes exceeding 7 days. Costs are even more staggering—in industry research, the average global cost of sending remittances in 2022 was about 6.38%. Additionally, different countries’ capital controls and compliance requirements often cause delays or outright freezing of payments.

Stablecoins are rewriting this landscape. On blockchain networks, transferring stablecoins across borders can usually be completed within 2 minutes, without complex intermediary networks. This means T+0 real-time settlement, greatly reducing capital lock-up costs. Transaction costs are also vastly lower—for example, on the Ethereum network, fees once dropped from an average of 72 gwei in 2024 to 2.7 gwei in March 2025 (about $0.000005). This extremely low-cost feature gives stablecoins a dominant advantage in small-value, high-frequency cross-border payments.

In the DeFi ecosystem, stablecoins have become the cornerstone of operation. As a value medium within DeFi protocols, stablecoins provide stable and sufficient liquidity for various decentralized platforms. Protocols like Compound and Aave use stablecoins as primary collateral assets and as units of account, ensuring the stability of liquidity pools and avoiding liquidation risks caused by sharp crypto asset price swings. In short, without stablecoins, the DeFi ecosystem cannot operate.

Mainstream stablecoins on the market: three development paths

Since stablecoins are so important, it’s essential to understand what stablecoins are available on the market and their respective advantages and disadvantages.

Currently, mainstream stablecoins can be divided into four categories based on their collateral assets: fiat-collateralized stablecoins, crypto-collateralized stablecoins, asset-backed stablecoins, and algorithmic stablecoins. Each has its own logic, advantages, and risks.

Fiat-collateralized stablecoins: market duopoly

Among the stablecoins in circulation, USDC and USDT account for over 85% of the market share, with a combined market cap exceeding $200 billion. These two “duopolists” not only dominate the stablecoin market but also profoundly influence the entire crypto ecosystem.

USDC’s advantages lie in transparency and compliance. Circle supports USDC with over-collateralized reserves of USD cash and short-term U.S. Treasuries, maintaining a stable peg. “Over-collateralized” means Circle holds reserves valued higher than the circulating USDC, further ensuring safety margins. Monthly, third-party auditor Deloitte issues reports disclosing reserve status.

On the compliance front, Circle is a licensed remittance provider in the U.S., registered with FinCEN, and holds multiple state money transfer licenses. In 2024, Circle’s regulated subsidiary became the first stablecoin issuer committed to complying with Canadian securities regulations. The same year, USDC and EURC received issuance licenses under the EU’s MiCA regulation, becoming the first major stablecoins to meet EU MiCA standards. These initiatives demonstrate that USDC is establishing industry-leading compliance standards.

USDT is the oldest and most established stablecoin, with a market position that remains difficult to challenge. Tether issues USDT backed by 1:1 reserves of cash, U.S. Treasuries, commercial paper, money market funds, and other non-cash assets. However, unlike USDC, Tether’s transparency and regulatory compliance have notable shortcomings.

In 2021, Tether was fined $41 million by the CFTC for reserve opacity. Since then, it has not fully disclosed reserves transparently. In 2024, Tether was under investigation by OFAC for providing stablecoin wallet services to sanctioned entities and for potential money laundering activities. Ultimately, Tether compromised by freezing $835 million related to illegal activities. To date, Tether has not obtained EU MiCA issuance approval and faces the risk of delisting from European exchanges.

Why does USDT still maintain such a large market share? The key lies in its comprehensive ecosystem and network effects. USDT dominates major global exchanges, with the most trading pairs and deepest liquidity, serving as the main bridge between crypto assets and fiat currencies. In OTC markets, USDT is also a key tool for institutions and individuals to move large sums.

More critically, USDT’s widespread use in non-traditional scenarios gives it unique resilience. Despite ongoing regulatory controversies, USDT’s anonymity and decentralized features make it the preferred choice for some capital flows. According to UN reports, USDT and other cryptocurrencies have become important components of underground banking and money laundering infrastructure in East Asia and Southeast Asia. While this reflects some negative phenomena, it also demonstrates the strength of USDT’s network effects.

In summary, USDC represents the direction of compliant stablecoin development, while USDT maintains market dominance. Although USDC has clear advantages in transparency and compliance, fully replacing USDT remains challenging due to user migration costs and ecosystem stickiness.

Exploring decentralized stablecoins: how DAI breaks trust barriers

Unlike USDC and USDT issued by private companies, there is another type of fully decentralized stablecoin—DAI.

DAI is issued by MakerDAO, with a circulating market cap of about $3.1 billion as of now. Its most unique aspect is the perspective of what stablecoins are—DAI does not rely on any centralized institution’s credit backing but achieves stability through an over-collateralization mechanism of crypto assets.

The specific mechanism is as follows: users lock ETH, BTC, and other crypto assets into MakerDAO’s smart contracts at collateralization ratios of 150%-300%, generating DAI tokens. Why over-collateralize? Because the collateral assets are highly volatile, over-collateralization reduces the risk of DAI decoupling from USD due to price swings. When collateral values decline, the system automatically triggers liquidation, using stability fees and liquidation penalties to maintain the peg.

DAI’s clever design lies in: it preserves the decentralized nature of crypto assets while solving the traditional stablecoin’s centralized trust issue through mathematical models. However, this design also introduces unique regulatory challenges. MakerDAO, built on Ethereum, is a decentralized autonomous organization (DAO) lacking a clear legal entity, making compliance difficult to assess under traditional financial regulations. DAI’s transparency relies more on technical audits and governance rather than external legal constraints.

Asset-backed stablecoins: from gold to short-term government bonds

As the industry develops, stablecoins are increasingly linked to real-world assets, opening new possibilities.

PAXG, issued by Paxos, is a gold-backed stablecoin with a market cap of about $1.87 billion as of March 2025, accounting for 76% of the gold stablecoin market. Its logic is straightforward: each PAXG token corresponds to one troy ounce of London Good Delivery gold, held in trust by Paxos and stored in vaults like Brink.

Third-party auditors verify monthly that the gold reserves match the token supply. PAXG holders can even check their specific gold serial numbers, values, and other details via query tools. Essentially, PAXG is a real-world asset (RWA) project backed by physical gold, with its value directly pegged to the market’s real-time gold price.

It’s worth noting that gold’s volatility is higher than cash or short-term government bonds, so its positioning differs somewhat. However, gold’s long-term value as a hedge asset is recognized by the market, giving PAXG a stable-coin-like function.

BUIDL represents another direction for asset-backed stablecoins. Issued by the world’s largest asset manager, BlackRock, BUIDL (BlackRock USD Institutional Digital Liquidity Fund) had a total market cap exceeding $2.4 billion at that time. Its underlying assets include U.S. Treasuries, bonds, and other short-term securities guaranteed by the U.S. government, ensuring the stability of the token’s value.

BUIDL’s compliance framework is also robust. BNY Mellon acts as custodian and fund administrator, ensuring asset safety and transparency; PwC conducts audits of financials and operations, enhancing credibility. The emergence of BUIDL indicates that traditional financial institutions are entering the crypto asset space through innovative means.

Algorithmic stablecoins: lessons from the 2022 crisis

Not all stablecoin development paths have been successful. Algorithmic stablecoins, once seen as the ultimate solution, faced a turning point in 2022.

Algorithmic stablecoins attempt to maintain a peg to USD through complex smart contract algorithms, without any collateral—adjusting supply based on demand. This sounds elegant, but fatal flaws are evident.

In May 2022, the infamous “Luna and UST collapse” occurred. UST, an algorithmic stablecoin, lost its peg due to an attack on its stabilization algorithm, causing its price to plummet to zero. This black swan event wiped out hundreds of billions of dollars in assets and exposed the critical flaw of algorithmic stablecoins—over-reliance on algorithm design and market liquidity, which can collapse under extreme volatility or malicious attacks.

Post-incident, regulators classified such projects as high-risk areas, and investors generally avoided them. To this day, the algorithmic stablecoin sector remains in long-term stagnation, serving as a negative textbook for the industry.

How stable is “stability”? Risks and future outlook

From the above analysis, we can derive a core understanding: what exactly is the nature of stability in stablecoins?

Industry observers generally believe that the value stability of stablecoins is built on dual support. One is the backing of real or digital assets as the underlying guarantee; the other is market consensus-driven liquidity and trust mechanisms. Consensus determines the scope of stablecoin use and liquidity, while the sufficiency and stability of reserves directly relate to risk resistance. The dynamic balance of these factors constitutes the core stability of the stablecoin system.

But there is an often overlooked point: the “stability” of stablecoins is not absolute but relative and dynamic. The stability of stablecoins is essentially the result of multiple factors in flux, not a static guarantee. When market consensus fractures or reserves face systemic risks, stablecoins may experience price fluctuations or even de-peg. Recent incidents of stablecoin de-pegging confirm this.

This implies that, to address potential extreme risks faced by stablecoins and to protect the legitimate rights of holders, regulatory frameworks and technical safeguards need further development and refinement. The industry has already seen USDC establish compliance standards first, MakerDAO innovate through technology to achieve decentralization, and asset-backed stablecoins introduce traditional financial institutions—these are signs of industry maturation.

Stablecoins are a key step toward the maturity of the crypto world. They not only solve the value storage problem in crypto markets but also bring new possibilities to traditional finance. Understanding what stablecoins are and how they operate is essential for anyone involved in the crypto space. In the future, with clearer regulation and more mature technology, stablecoins will further penetrate cross-border payments, DeFi, enterprise settlements, and broader application scenarios, becoming a bridge connecting traditional finance and the crypto world.