The Rise of Stablecoins: A Key Component of the Encryption Industry

In today's cryptocurrency sector, stablecoins have become an indispensable and important component. Their unique value is not only reflected in the medium function of cryptocurrency asset trading but also shows revolutionary potential in traditional financial scenarios such as cross-border payment settlements. The latest industry data shows that as of April 9, 2025, the global circulating market value of stablecoins has reached $236.7 billion. Top asset management institutions and major economies are accelerating their layout in this field. A well-known stablecoin issuer has recently officially submitted a prospectus to the U.S. SEC, expecting to go public with a valuation of $5-7 billion, which reflects the flourishing development of the industry.

1. The Essence and Application of Stablecoins

A stablecoin is a type of cryptocurrency that theoretically can maintain a specific price over the long term, with its core feature being the relative stability of its value through specific mechanisms. It is important to clearly distinguish that central bank digital currencies do not fall under the category of stablecoins. Central bank digital currencies maintain a 1:1 exchange relationship with traditional fiat currencies and are essentially an innovation in the digital form of legal tender. In the context of the encryption industry, stablecoins are often issued by private entities, and their value anchoring relies on commercial credit, collateralized assets, or algorithmic protocols.

The emergence of stablecoins has solved the value storage problem in the world of encryption. Investors can purchase other coins using stablecoins, and then exchange them back for stablecoins after investing, thereby locking in profits or losses. This is one of the initial application scenarios of stablecoins in the cryptocurrency market.

In addition to the cryptocurrency market, stablecoins are also widely used in areas such as DeFi and cross-border payment settlements. In the traditional cross-border payment sector, the flow of funds still heavily relies on the banking system, facing challenges such as cumbersome processes and high costs. In contrast, stablecoin payments demonstrate significant advantages in efficiency and cost. A cross-border transfer can usually be completed within 2 minutes, achieving T+0 instant settlement. Transaction costs are also far lower than those of the traditional banking system.

In the field of decentralized finance ( DeFi ), stablecoins have become the cornerstone assets for its ecosystem operation. As an important value medium in DeFi protocols, stablecoins provide stable and ample liquidity support for various decentralized platforms, optimizing the economic models of trading and lending.

2. Main Types and Characteristics of Stablecoins

Currently, the mainstream stablecoins in the market can be divided into: fiat currency collateralized, cryptocurrency collateralized, physical asset collateralized, and algorithm-based stablecoins.

( a ) fiat currency pegged stablecoin

1. USDC

• The issuer and operator is Circle, with a circulating market value of approximately 60 billion USD.
• Support currency value stability through excessive reserves of US dollar cash and short-term US Treasury bonds and other assets.
• Monthly audit reports issued by a third-party auditing firm
• Licensed remittance institutions regulated by US state laws have obtained issuance permission under the EU MiCA legislation.

2. USDT

• The issuer and operator is Tether, with a circulating market value of approximately $60 billion.
• Maintain coin value stability through a 1:1 reserve of cash and non-cash assets.
• A quarterly reserve report issued by a third-party auditing firm.
• There are compliance disputes, previously fined for lack of transparency in reserves, and has not yet obtained EU MiCA approval.

Despite the shortcomings of USDT in terms of compliance, its complete network effect built within the encryption ecosystem allows it to maintain a high market value. The dual penetration capability of USDT in legitimate trading scenarios and non-traditional applications is key to its success.

( two ) encryption assets pegged stablecoin

DAI

• Issued by MakerDAO, with a circulating market value of approximately 3.1 billion USD.
• Achieve coin value stability through the over-collateralization mechanism of encryption assets.
• Based on the operation of the decentralized autonomous organization (DAO), there is a lack of clear legal entity.

( three ) physical asset-linked stablecoin

PAXG

• Gold stablecoin issued by Paxos, with a market value of approximately $1.87 billion.
• Gold reserves are held by Paxos Trust Company and stored in professional vaults.
• Regulated by the New York State Department of Financial Services, achieving complete segregation of gold reserves and issuer assets.

( four ) algorithm-based stablecoin

Algorithm stablecoins maintain their coin value stability through smart contract algorithms, without relying on physical reserves. However, due to excessive dependence on algorithm design, they can easily lose price anchoring under extreme market conditions. The 2022 UST collapse exposed the fatal flaws of algorithm stablecoins, leading to a prolonged slump for such projects.

3. The Value Basis and Risks of Stablecoins

The value foundation of stablecoins is built on dual support: one is the anchored physical or digital assets as underlying guarantees, and the other is the liquidity and trust mechanism driven by market consensus. Consensus determines the scope of use and liquidity, while the adequacy of reserve assets is directly related to risk resistance capability. The dynamic balance of the two constitutes the core stability of the stablecoin system.

However, the "stability" attribute of stablecoins is not absolute. When there are cracks in market consensus or when reserve assets encounter systemic risks, there is a high likelihood of facing price volatility or even decoupling risks. To address potential extreme risks and protect the rights of holders, the relevant regulatory framework and technical security mechanisms still need to be further improved.