Comprehensive Guide to Stablecoins: From Market Demand to Investment Choices

Why Does the Crypto World Need Stablecoins?

In markets dominated by mainstream cryptocurrencies like Bitcoin and Ethereum, price volatility is the norm. Daily fluctuations exceeding 10% are commonplace, posing significant challenges for merchants and investors wanting to participate in the crypto economy.

Imagine a scenario: you’re a coffee shop owner, earning 2 Bitcoins in the morning as payment for coffee, only to see the price drop 30% by midnight. This rollercoaster-like uncertainty makes business activities extremely difficult. At the same time, high costs and slow settlement speeds of cross-border remittances hinder the practical application of cryptocurrencies.

For this reason, stablecoins emerged. In 2014, Tether launched USDT, ushering in the era of stablecoins; subsequently, MakerDAO’s DAI, Paxos, and Gemini’s PAX/GUSD were launched one after another; in 2020, DeFi exploded, and the stablecoin ecosystem experienced explosive growth.

What Are the Core Values of Stablecoins?

Stablecoins maintain relatively stable prices by anchoring to fiat currencies, crypto assets, or physical commodities. This characteristic grants them three key roles:

The Backbone of Trading and Payments: Within the crypto ecosystem, stablecoins serve as both a measure of value and a medium of exchange. Cross-border transfers can be completed within minutes, with fees far lower than bank remittances, revolutionizing cross-border payments in developing countries.

Risk Hedging Tool: During market volatility, investors can quickly convert assets into stablecoins to lock in gains or avoid risks. This flexible risk management approach is difficult to achieve with traditional finance.

Liquidity Foundation of the DeFi Ecosystem: Leading DeFi protocols like MakerDAO, Aave, and Compound rely on stablecoins as core assets. Users can collateralize digital assets to borrow stablecoins or deposit stablecoins to earn interest. In decentralized exchanges, stablecoins often form the basis of liquidity pools, reducing slippage and providing substantial returns to liquidity providers.

Current State of the Stablecoin Market: Who Dominates?

As of August 5, 2025, the total global market capitalization of stablecoins exceeded $268.18 billion, forming a clear “dual oligopoly” landscape.

USDT and USDC, the two major fiat-backed stablecoins, account for over 85% of the market share. In the segmented market, USD stablecoins dominate entirely, with a market cap of about $267.3 billion, representing 99.6% of the total fiat-backed stablecoins. Euro stablecoins are only about $400 million, and other currencies are even more marginal.

This highly concentrated pattern reflects the current “USD-centric” characteristic of the stablecoin market. Despite central banks worldwide launching digital currencies and regional pilot projects for local stablecoins, the global market remains firmly controlled by USD stablecoins.

The Four Camps of Stablecoins: A Detailed Overview

Based on underlying mechanisms, stablecoins can be divided into four different camps, each with advantages and disadvantages:

First Camp: Fiat-Collateralized Stablecoins

The most common and widely accepted type. Issuers deposit real fiat currency (USD, EUR, HKD, etc.) into bank or trust accounts as reserves, then issue an equivalent amount of crypto tokens on a 1:1 basis. Examples include USDT, USDC, BUSD, TUSD.

Features: high centralization, relatively controllable risk, but also risks of government asset freezes and transaction censorship due to centralization. During the Silicon Valley Bank crisis in 2023, USDC briefly de-pegged to $0.88, though it quickly recovered, exposing potential vulnerabilities of this type.

Second Camp: Crypto-Asset Collateralized Stablecoins

Collateralized by cryptocurrencies like Bitcoin and Ethereum, managed via smart contracts that automatically execute risk management. Examples include DAI, RAI, MIM.

Due to the high volatility of crypto assets, these stablecoins typically require over-collateralization (e.g., 150% or 200%) to ensure stability. If collateral prices plummet, smart contracts automatically liquidate assets to maintain system stability. This decentralized feature avoids centralization risks but introduces liquidation risks and higher technical barriers.

Third Camp: Commodity-Collateralized Stablecoins

Backed by physical assets like gold or silver. Projects like PAXG and XAUT adopt this model, with value linked to the price of the underlying commodity.

Suitable for hedging inflation and geopolitical risks, but liquidity is often less than fiat-backed stablecoins, and market recognition is relatively limited.

Fourth Camp: Algorithmic Stablecoins

Rely solely on algorithms and smart contracts to regulate supply and maintain price, without any collateral. Examples include AMPL and USDD.

However, many failures have occurred in this category. The most famous is the 2022 collapse of TerraUSD (UST), which caused huge losses for investors. Algorithmic stablecoins carry the highest risks, mainly attractive due to their theoretical decentralization and high efficiency, but are often difficult to sustain in practice.

The Double-Edged Nature of Stablecoins: Advantages and Concerns

Core Advantages:

Stablecoins bridge the worlds of crypto and fiat. Their relatively stable prices make risk management feasible, and blockchain technology ensures fast, low-cost cross-border payments—an almost unimaginable combination in traditional finance.

Potential Risks:

Long-term lack of third-party verification of reserves’ authenticity and sufficiency. Take USDT as an example: despite Tether’s repeated transparency commitments, doubts about its reserve assets have never ceased.

Centralized issuers face single points of failure. If regulations tighten or black swan events occur, centralized stablecoins may face freezing or rapid devaluation. The US SEC halting BUSD is a real-world example.

While automated liquidation mechanisms in crypto-collateralized stablecoins are efficient, they can trigger chain reactions in extreme market conditions. During the “Black Thursday” in 2020, DeFi liquidations caused market chaos.

Multi-currency stablecoins lack competitiveness. Although stablecoins in other currencies like EUR and JPY exist, market demand is far less than for USD stablecoins, leading to liquidity shortages.

Global Regulatory Frameworks Accelerate Formation

The rapid development of stablecoins has attracted close attention from regulators worldwide. Recent milestones include:

United States: The GENIUS Act took effect in July 2025, allowing licensed financial institutions to issue payment stablecoins. Non-listed companies require approval from a special committee, revealing the US’s intent to control stablecoin issuance.

Hong Kong: Released the “Stablecoin Regulations,” becoming the first comprehensive regulatory framework targeting fiat-backed stablecoins, requiring issuers to obtain a license from the Hong Kong Monetary Authority. This move enhances legal compliance and attracts many institutions to apply for licenses in Hong Kong.

European Union: The MiCA framework is in transition, soon establishing unified standards for stablecoins and crypto assets.

UK, Japan, South Korea, Singapore, and others are also rolling out or revising stablecoin regulations in 2025, emphasizing licensed issuance and compliance.

UAE: Dubai’s VARA has established a tiered licensing system, attracting global compliant stablecoin projects.

Five Key Future Trends

Regulatory Compliance as a Competitive Barrier: Stablecoin projects that do not meet local regulations will gradually be marginalized. Only those with multiple licenses can truly achieve global liquidity.

Expansion of Application Scenarios: From simple trading media, stablecoins are expanding into cross-border payments, DeFi infrastructure, and real-world asset tokenization (RWA). In high-inflation countries and emerging markets, stablecoins may evolve into more trusted savings tools.

Rise of Multi-Currency Systems: As countries emphasize financial sovereignty, pilot projects for local currency stablecoins like RMB, JPY, and EUR are increasing. Projects like Hong Kong’s mBridge cross-border CBDC, Japan’s GYEN, and stablecoin explorations in Brazil and Argentina indicate a future of “multi-currency, multi-center” ecosystems.

Technological Upgrades: Innovations such as multi-chain deployment, zero-knowledge proofs, and cross-chain interoperability protocols will enhance stability and privacy.

Decentralization and Compliance Coexist: Future stablecoins may pursue a path of “compliant decentralization,” balancing technological innovation with regulatory acceptance.

Investment Opportunities and Strategies in Stablecoins

Although stablecoins are known for price stability, they still have minor fluctuations. Comparing Bitcoin and Ethereum to high-risk, high-reward stocks, stablecoin investments are more akin to low-risk forex trading.

Trading Opportunities: Arbitrage between different stablecoins. For example, when USDT/USDC prices diverge, buying undervalued and selling overvalued tokens can profit from price convergence. This requires sufficient capital and market sensitivity, and usually, market moves are not drastic unless extreme events occur (e.g., Silicon Valley Bank crisis).

Yield Opportunities: More feasible is earning returns through collateralization or liquidity provision. During initial launches of new stablecoins, issuers often offer high incentives to attract users and liquidity, providing attractive yields. Depositing stablecoins into mature DeFi protocols can also generate steady interest.

Overall, stablecoin investing emphasizes stability—suitable for risk-averse users seeking slightly higher yields. Instead of frequent trading, long-term investment in high-quality stablecoin projects, enjoying DeFi yields or waiting for major applications to land, is a common strategy.