The idea of a digital currency that holds its value – a "stablecoin" – emerged as early crypto adopters sought a bridge between the volatility of cryptocurrencies and the stability of traditional assets like the U.S. dollar. In the early days of crypto most assets experienced drastic price fluctuations, which limited their usefulness for everyday transactions. We still see volatility today in the mid second decade of adoption. Stablecoins were conceived as a solution, providing a digital currency pegged to a stable asset, allowing users to move between fiat and crypto seamlessly.
The origins of stablecoins trace back to 2014, when the first-ever attempt at a stable digital currency, BitUSD, was launched on the BitShares blockchain by Dan Larimer and Charles Hoskinson. BitUSD was revolutionary: it aimed to maintain a 1:1 peg with the U.S. dollar through an algorithmic mechanism backed by crypto collateral. However, BitUSD faced technical challenges and struggled with liquidity, ultimately failing to maintain its peg reliably. This early setback underscored the complexity of creating a truly stable digital currency – this did not slow down innovators though.
In 2015, Tether (USDT) emerged, becoming the first widely adopted stablecoin by backing each token 1:1 with actual fiat currency reserves held in bank accounts. Tether’s approach introduced a new level of trust, stability, and usability that earlier stablecoin attempts lacked, sparking a wave of interest and adoption in the crypto ecosystem. Since then, stablecoins have evolved, becoming a vital component of the digital economy, transforming payments, remittances, and decentralized finance.
This introduction to stablecoins will be a great primer into the world of stablecoins, exploring their origins, evolution, and why they are now considered essential in bridging the gap between traditional finance and cryptocurrency.
Types of Stablecoins in 2025
There are many types of stablecoins, each with distinct mechanisms for maintaining their peg to a stable asset like the U.S. dollar. We will now dig into 3 common types of stablecoins. Some of which have been wildly successful to the tune of their issuers being some of the biggest bond holders in the world, while some stablecoins have caused massive financial loss due to their inherent risks.
1. Fiat-Backed Stablecoins
Overview: Fiat-backed stablecoins, the most common type, are pegged to a fiat currency (typically the U.S. dollar) and backed by reserves held in bank accounts. For every stablecoin issued, an equivalent amount of fiat currency is held by the issuer as collateral. Examples include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
How They Maintain Their Peg: These stablecoins maintain their peg by ensuring that each issued token has a matching fiat dollar held in reserve. Users have confidence in these coins because they should be able to redeem them at any time for the corresponding amount in fiat. These reserves are often held in US treasuries and gold.
Benefits:
- Stability: Fiat-backed stablecoins offer high stability as they are backed by a physical currency.
- Liquidity: Due to their popularity and simplicity, fiat-backed stablecoins are widely used and accepted, providing strong market liquidity.
- Ease of Understanding: Their direct 1:1 backing with fiat currency makes them easily understandable and widely trusted.
Risks:
- Centralization: Fiat-backed stablecoins are often managed by centralized entities, which means users must trust that these issuers hold the necessary reserves.
- Regulatory Concerns: Governments and regulators may impose strict rules on issuers, affecting users’ ability to transact freely or redeem their assets.
Value: Fiat-backed stablecoins are highly valuable for trading, payments, and as a stable store of value in the crypto world, particularly when ease of use and broad acceptance are important.
Interesting Note: As of November 1st 2024, Tether now holds more bonds than Germany, Australia, and UAE. Tether currently has over 70% of all stablecoins market capitalization, over $120 billion.
2. Crypto-Collateralized Stablecoins
Overview: Crypto-collateralized stablecoins are backed by other cryptocurrencies rather than fiat. To counter the volatility of crypto assets, these stablecoins are often over-collateralized, meaning that more value in collateral is locked than the stablecoin’s issued value. An example of this type is DAI, which is backed by Ethereum and other assets.
How They Maintain Their Peg: These stablecoins are pegged by locking up a greater amount of collateral (e.g., $1.50 in ETH for each $1 DAI issued) in smart contracts. If the collateral’s value falls, users are required to add more or the system liquidates collateral to maintain the peg.
Benefits:
- Decentralization: Crypto-collateralized stablecoins operate on decentralized protocols, allowing users to avoid centralized trust in a third-party issuer.
- Transparency: Collateral is visible and verifiable on-chain, providing transparency for users.
Risks:
- Volatility in Collateral: Because these stablecoins are backed by volatile assets, sudden price drops can risk the system's stability. (as explained below)
- Complexity: Users must understand the collateralization and liquidation process, which can make these stablecoins less user-friendly.
Value: Crypto-collateralized stablecoins are valuable in the DeFi space, offering a decentralized alternative that aligns with the ethos of crypto by reducing reliance on centralized entities.
Interesting Note: DAI has been a success story in the space proving over collateralized models can work. During several market crashes DAI has maintained its peg. A few nightmare scenarios like Black Thursday on March 12, 2020, ETH dropped by almost 50% in a single day, many DAI holders faced liquidations and this sudden crash overwhelmed the MakerDAO system,and some auctions to cover bad debt attracted zero bids due to network congestion and high gas fees, leading to significant losses for some users. In response, MakerDAO had to issue additional MKR tokens (its governance token) to cover the protocol’s losses, slightly diluting MKR holders’ shares. This event revealed potential vulnerabilities in relying on Ethereum's network stability and high gas fees in a crisis.
3. Algorithmic Stablecoins
Overview: Algorithmic stablecoins maintain their peg without any physical collateral, instead using algorithms and smart contracts to balance supply and demand. These coins adjust their supply to match demand, increasing or decreasing the number of tokens to maintain a target price. Examples include UST (Terra) (now defunct) and Ampleforth (AMPL) which is supposed to be an elastic, non-dilutive crypto.
How They Maintain Their Peg: When the stablecoin’s price rises above $1, new tokens are issued to reduce the price. If it drops below $1, tokens are removed from circulation to increase the price, theoretically stabilizing it at $1.
Benefits:
- Full Decentralization: Without collateral, algorithmic stablecoins avoid reliance on any reserve or third-party, aligning with decentralized principles.
- Scalability: Theoretically, these coins can expand and contract supply indefinitely, offering flexibility in dynamic markets.
Risks:
- Market Instability: Algorithmic stablecoins have often struggled to maintain their peg reliably, as market panics or surges can overpower the supply adjustment mechanisms.
- Lack of Trust: High-profile failures, such as Terra’s UST collapse, have eroded user confidence in algorithmic models.
Value: Due to their inherent instability, algorithmic stablecoins currently have limited practical use and trust, though they represent a compelling experiment in decentralized currency control.
Interesting Note: Algorithmic stablecoins work without any real-world backing, using algorithms to balance supply and demand instead. It’s a bold idea because it means there’s no need for reserves. But the downside is huge—when things go wrong, they can go really wrong, like with Terra’s UST, where a sudden loss of confidence created a "death spiral," wiping out billions. These coins can be confusing for everyday users and risky, especially without any safety net if the peg breaks.
Stablecoin Use Cases Globally
Once considered a niche asset, stablecoins have become an essential part of the global financial system, bridging the gap between traditional finance and digital assets. Their unique combination of stability, efficiency, and accessibility has driven widespread adoption, particularly among individuals and businesses in regions with limited access to stable fiat currencies like the U.S. dollar.
Stablecoins offer a lifeline for those in need of secure, near-instant payments and a reliable way to move money across borders with minimal friction. Next we will dig into four of the most impactful use cases for stablecoins, showcasing how they are reshaping financial access and flexibility around the world.
Remittances and Cross-Border Payments
Stablecoins have revolutionized cross-border payments, offering a low-cost, fast alternative to traditional remittance channels that often involve high fees and lengthy processing times. For individuals, stablecoins are a valuable tool for migrant workers and families in countries with limited financial infrastructure, enabling them to send and receive remittances efficiently.
On the business side, cross-border e-commerce companies and international suppliers benefit from stablecoins by avoiding costly foreign exchange fees, enabling near-instant payments, and reducing their reliance on traditional banking networks.
For example, using stablecoins, a payment from the U.S. to the Philippines can be settled in minutes at a fraction of the cost of conventional remittance services, such as Western Union. Through these benefits, stablecoins lower remittance costs, accelerate transaction times, and enhance financial inclusion, particularly for underserved populations.
Decentralized Finance (DeFi)
In the DeFi ecosystem, stablecoins serve as the foundational asset, allowing users to participate in activities like borrowing, lending, and earning interest without traditional intermediaries. Individuals benefit from stablecoins in DeFi because they offer a way to earn passive income through lending assets, creating a stable savings option that isn’t reliant on banks.
For businesses, stablecoins provide an efficient means of accessing liquidity, conducting operations, and managing cash flows within DeFi protocols. For example, DeFi platforms like Aave and Compound enable users to lend stablecoins and earn interest, giving both individuals and businesses a way to generate returns without the volatility associated with other crypto assets. Through stablecoins, DeFi users can access liquidity, participate in financial markets, and take advantage of decentralized finance opportunities without exposure to market fluctuations.
Payments and Everyday Transactions
Stablecoins are indeed transforming digital payments in regions where traditional financial infrastructure is limited or unreliable. For individuals in emerging markets like Venezuela, Argentina, and several African countries, they provide an accessible and stable financial tool, helping people navigate challenges like hyperinflation, restricted banking access, and limited availability of foreign currency. Here’s a closer look at how stablecoins are making a difference in these areas:
- Venezuela: Faced with hyperinflation, many Venezuelans are turning to stablecoins like Tether (USDT) as a hedge against the devaluation of the bolívar. Platforms such as Reserve and Airtm facilitate these transactions by allowing Venezuelans to save, spend, and receive payments in stablecoins pegged to the U.S. dollar. This is particularly helpful for remote workers and freelancers receiving international payments, allowing them to bypass currency volatility and receive payments in a more stable digital dollar.
- Argentina: In Argentina, where annual inflation is high and foreign currency restrictions are in place, stablecoins have become a lifeline. Many Argentinians use USDC and USDT to protect their earnings against inflation and bypass capital controls on dollars. According to Chainalysis, Argentina ranks highly for crypto adoption, with stablecoins representing a significant portion of the digital currency ecosystem. Local exchanges like Buenbit and Lemon Cash facilitate stablecoin transactions, allowing people to pay bills, transfer money, and make purchases—all in a currency that retains its value.
- Africa: In regions like sub-Saharan Africa, where banking access is limited, mobile phones are essential financial tools, and stablecoins are adding a new layer of utility. Countries like Nigeria and Kenya have seen significant stablecoin adoption through platforms like Binance’s P2P service and the Celo platform, where users can hold and transfer stablecoins with minimal fees. Stablecoins enable users to bypass high remittance costs and access global markets from their mobile phones, providing a secure and stable currency for daily transactions and international payments.
By making stable, digital dollars accessible through mobile devices, stablecoins empower individuals and businesses alike, fostering financial inclusion and creating more resilient local economies.
Trading and Corporate Treasury Management
In the crypto trading world, stablecoins serve as a “safe haven” during volatile market periods, providing a stable asset for trading pairs and enabling users to protect their value without exiting the crypto ecosystem. Traders frequently shift funds into stablecoins, like USDT or USDC, to hedge against market swings, while crypto exchanges and trading platforms rely on stablecoins as liquidity anchors, facilitating high-frequency trading and maintaining market stability. Additionally, stablecoins have proven valuable for corporate treasury and cash management. Freelancers and contractors, especially those working internationally, can receive payments in stablecoins to avoid cross-border fees and access funds faster. Corporations with global operations use stablecoins for payroll, internal fund transfers, and cash management, reducing reliance on traditional banking and the costs of international wires. Stablecoins streamline business operations by simplifying treasury management, enabling efficient cross-border payments, and reducing the need for traditional banking infrastructure.
Stablecoins’ Regulatory Landscape and Future Challenges
As stablecoins have become more essential in the global economy, they have drawn increasing attention from regulators worldwide. Different regions, including the U.S., EMEA, APAC, and LATAM, have approached stablecoin regulation with varying priorities, reflecting local concerns over financial stability, transparency, and market integrity.
Below, we’ll explore the regulatory approaches in key regions and the specific challenges and opportunities that businesses face within each landscape.
The United States: Focus on Transparency and Consumer Protection
In the U.S., regulators are primarily concerned with reserve transparency, financial stability, and consumer protection. The collapse of high-profile algorithmic stablecoins like Terra, has spurred discussions among lawmakers and federal agencies regarding the need for a regulatory framework that ensures stablecoins are fully backed by high-quality, liquid assets. Stablecoin issuers, such as Tether (USDT) and Circle (USDC), have been pressured to demonstrate transparency in their reserves, ensuring that each issued coin is backed 1:1 by a fiat equivalent.
The Stablecoin TRUST Act and STABLE Act are among the legislative efforts proposed in Congress, aiming to introduce requirements for reserve audits, issuance approvals, and compliance with anti-money laundering (AML) regulations. The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have also been debating jurisdiction over stablecoin oversight, contributing to a regulatory uncertainty that impacts businesses. While these discussions can create challenges for stablecoin issuers, recent regulatory momentum in favor of a stablecoin framework suggests a clearer path forward, which would ultimately benefit U.S. firms by providing operational certainty.
Business Impact: For businesses operating in the U.S., regulatory scrutiny means a heightened need for compliance measures, transparent reserve reporting, and possibly higher operating costs to meet compliance standards. On the positive side, the U.S. government’s movement towards establishing clear guidelines could ultimately strengthen the market by instilling confidence in U.S.-backed stablecoins, attracting more institutional adoption.
EMEA: Emphasis on Financial Stability and Consumer Protection
In Europe, stablecoin regulation is advancing through the Markets in Crypto-Assets (MiCA) Regulation, a comprehensive framework designed to bring stablecoins and other crypto assets under regulatory oversight across the European Union. MiCA, which is expected to take effect in 2024, aims to protect consumers, ensure financial stability, and foster innovation within a secure framework. Under MiCA, stablecoin issuers must provide detailed documentation on reserve management, liquidity provisions, and operational transparency.
The European Central Bank (ECB) has voiced concerns over stablecoins potentially destabilizing traditional currencies if they reach significant adoption. As a result, MiCA places particular emphasis on reserve quality and consumer rights. Non-EU issuers wishing to operate within Europe may be required to meet stringent EU standards or partner with regulated EU entities, which could influence market participation. The UK, now outside the EU, is developing a parallel stablecoin framework that mirrors MiCA’s consumer protections and stability-focused approach.
Business Impact: For stablecoin issuers and related businesses, Europe’s regulatory framework offers an advantage by providing regulatory clarity and uniformity across member states. However, the costs of meeting MiCA’s requirements, including regular audits and adherence to liquidity standards, may pose operational challenges, especially for smaller issuers. Nevertheless, MiCA’s pro-innovation stance signals potential for growth, especially as Europe positions itself as a leader in crypto asset regulation.
APAC: Rapid Growth Amid Varied Regulatory Approaches
The APAC region, home to some of the world’s most dynamic crypto markets, has shown a mix of supportive and cautious regulatory approaches to stablecoins. Japan has emerged as a leader in crypto regulation, recently legalizing stablecoins under a clear framework that allows issuers to operate under specific banking or trust licenses, ensuring high standards for reserves and consumer protection. Singapore, known for its pro-innovation environment, has regulated stablecoins under the Payment Services Act, requiring licensing for payment token services, with additional regulatory proposals for stablecoin issuers expected.
China, on the other hand, has restricted the use of stablecoins alongside other crypto activities, reflecting its cautious approach toward crypto assets in general. However, Chinese consumers and businesses have still shown demand for stablecoins, often using offshore platforms. South Korea is also moving towards more stringent stablecoin rules, particularly following high-profile collapses like Terra’s UST.
Business Impact: APAC’s varied regulatory environment offers both challenges and opportunities. In markets like Japan and Singapore, businesses enjoy clear regulatory support for stablecoin issuance, which encourages growth and adoption. However, restrictive policies in regions like China limits market access, necessitating creative solutions for companies seeking exposure to these massive markets.
LATAM: Demand-Driven Growth with Minimal Regulation
Latin America has seen significant stablecoin adoption, primarily driven by consumer demand for alternatives to local currencies, which are often affected by high inflation. However, regulatory oversight is still in its infancy. Countries like Argentina and Venezuela have high stablecoin usage rates due to currency devaluation, with citizens using stablecoins as a reliable store of value and payment method. Brazil has recently begun discussions on a regulatory framework for digital assets, and Mexico is moving in a similar direction.
The absence of regulatory clarity in many LATAM countries allows for rapid adoption but also raises risks, such as lack of consumer protections and potential misuse of funds. As stablecoins become more popular in LATAM, governments may be forced to address regulatory issues to protect consumers and prevent financial instability.
Business Impact: For stablecoin issuers and businesses, LATAM offers a vast market with high demand for stable assets. However, without robust regulatory frameworks, businesses face the dual risks of unpredictable policy changes and potential misuse by bad actors, which could impact the market’s sustainability.
Conclusion: The Future of Stablecoins is Bright on Bitcoin
The future of stablecoins is looking great, and Bitcoin has proven to be the most trustworthy and legitimate crypto asset it will act as the foundation that stablecoins have been waiting for. Until now, stablecoins have mostly operated on networks like Ethereum, but with the advancements of Taproot and the Lightning Network, Bitcoin is now positioned to support stablecoins in a powerful way.
So, why does this matter? Taproot, an upgrade to Bitcoin, brings new flexibility for how assets like stablecoins can be created and transferred. Combined with the Lightning Network, which enables nearly instant transactions at extremely low costs, Bitcoin can now offer something unique: a fast, cost-effective, and secure way to move stablecoins without the congestion and high fees that often come with other networks.
For businesses, stablecoins on Bitcoin mean a reliable solution for efficient global transactions and a way to minimize dependency on centralized platforms. For everyday users, it offers a secure way to store and move money on the world’s most trusted and decentralized network. This opens up huge opportunities—from cross-border payments to everyday transactions—making Bitcoin-based stablecoins a solid choice for the future.
In short, stablecoins on Bitcoin combine stability, speed, and security in a way that’s hard to match. As we look forward, the integration of stablecoins on Bitcoin is setting the stage for a more accessible and resilient financial system that’s ready for the demands of a digital world.
