The stablecoin market has experienced explosive growth over the past four years. Monthly transaction volumes have surged tenfold, increasing from $100 billion to over $1 trillion. On June 20, 2024, stablecoins accounted for 60.13% of the entire cryptocurrency market's trading volume, approximately $44.71 billion out of a total of $74.391 billion. Among these, Tether (USDT) dominated with a market capitalization of $112.24 billion, representing 69.5% of the total stablecoin value. That day, USDT's trading volume reached $34.84 billion, accounting for 46.85% of all transactions.
Stablecoins are a critical component of the cryptocurrency ecosystem. The Bank for International Settlements defines them as "cryptocurrencies whose value is pegged to fiat currencies or other assets." Designed to maintain a stable value relative to their pegged assets, they function as reliable stores of value and mediums of exchange. Operating on blockchain technology, they inherit its advantages: decentralization, peer-to-peer transactions, elimination of central bank clearing, and immutability.
This report delves into the definition and primary models of stablecoins, analyzes the current market landscape and competitive dynamics, and examines the operational principles, strengths, and weaknesses of fiat-collateralized, crypto-collateralized, and algorithmic stablecoins.
Understanding Stablecoins: Definitions and Models
Core Definition: Pegged to Fiat, Stable in Value
Stablecoins aim to provide price stability in the volatile crypto market. Their primary purpose is to maintain a stable exchange rate with a specific fiat currency, most commonly the US dollar. This is similar to the historical gold standard but executed on a blockchain. This foundation allows them to serve as a digital representation of traditional money within the decentralized financial system.
The key distinction lies in their objective: stablecoins strive for a stable exchange rate parity with a fiat currency, whereas central banks aim for stable purchasing power of their currency over time. In essence, stablecoins seek to anchor themselves within the existing fiat system to achieve stability.
Primary Models: Collateralization and Centralization
The mechanisms for maintaining this peg are primarily defined by the type of collateral backing the stablecoin and the degree of centralization in its issuance.
Stablecoins are broadly categorized into collateralized and non-collateralized (algorithmic) types. Collateralized stablecoins are further divided based on the asset backing them:
- Fiat-Collateralized: Backed by reserves of fiat currency (e.g., USDT, USDC).
- Crypto-Collateralized: Backed by over-collateralized reserves of other cryptocurrencies (e.g., DAI).
- Commodity-Collateralized: Backed by physical assets like gold (e.g., PAXG).
The central question is not the complete elimination of price fluctuations, but how to effectively correct deviations and maintain the value within a stable band around the peg.
The Stablecoin Market: An Overview and Competitive Landscape
The Dominance of the US Dollar Peg
The overwhelming majority of stablecoins are pegged to the US dollar at a 1:1 ratio. While stablecoins pegged to other fiat currencies exist—such as EURT (Euro, ~$38M market cap), GYEN (Yen, ~$14M market cap), and IDRT (Indonesian Rupiah, ~$11M market cap)—their market shares are minuscule. Dollar-pegged stablecoins maintain a market dominance of approximately 99.3%.
Market Share and Capitalization: USDT's Reign and USDC's Challenge
The total supply of stablecoins correlates strongly with overall crypto market cycles. Supply grew consistently but saw a dip during the 2022 market downturn. Current data indicates a resurgence in issuance, aligning with the prevailing bull market.
As of recent data, the market capitalization of all stablecoins exceeds $160 billion. The market share is dominated by USDT at 70.5%, followed by USDC at 21.3%, DAI at 3.39%, FDUSD at 2.5%, and FRAX at 0.41%. USDT's market cap leads significantly at over $110 billion, with USDC a distant second at over $33 billion.
The Top Ten: A Mix of Models
The top ten stablecoins by market cap showcase this variety:
- Centralized Fiat-Backed: USDT, USDC, FDUSD (generally claim >100% collateralization).
- Decentralized Crypto-Backed: DAI.
- Synthetic Dollars: USDe (collateralized by crypto assets).
- Algorithmic: FRAX.
- Commodity-Backed: PAXG (gold).
Holder Analysis: Trust Through Adversity
Analyzing the number of holder addresses for USDT and USDC reveals how trust is built and tested. Both saw address counts plummet following de-pegging events. Most notably, USDC's de-pegging to $0.88 during the March 2023 SVB bank crisis caused a rapid decline in addresses. Although it regained its peg, USDT capitalized on the uncertainty and widened its lead in holder addresses across all tiers (from $1,000 to over $10 million holders).
Mechanisms of Major Stablecoins: How They Work
Fiat-Collateralized Stablecoins (USDT, USDC, FDUSD)
USDT (Tether)
- Operation: Users deposit USD into Tether's bank accounts. Tether then mints an equivalent amount of USDT and credits the user's Tether account. For redemption, users send USDT back to Tether, which destroys the tokens and returns USD. Tether employs a Proof of Reserves (PoR) model, aiming to hold $1 in reserves for every USDT issued.
- Reserves: Tether's reserves, exceeding $110 billion, are primarily comprised of cash and cash equivalents (83%). A large portion is held in short-term U.S. Treasury bills (~80% of cash equivalents), with the rest in overnight reverse repurchase agreements, money market funds, cash, and corporate bonds. A smaller fraction includes Bitcoin and other assets.
- Revenue Model: Tether generates revenue from KYC/service fees, minting/redemption fees, and importantly, the interest earned on its reserve assets. Its profitability is remarkably high relative to its employee count.
USDC (USD Coin)
- Operation: Similar to USDT, USDC is minted 1:1 against USD deposits. However, its operation is more integrated within a U.S. regulatory framework. Circle, its issuer, is a licensed Money Services Business (MSB). Its reserves are held in segregated accounts, offering potential bankruptcy remoteness.
- Reserves & Transparency: USDC is known for its high transparency, publishing monthly attestations and undergoing annual audits. Its reserves are heavily concentrated in short-duration U.S. Treasuries (all within 3 months maturity) and cash, held primarily in the BlackRock-managed Circle Reserve Fund. This makes its assets highly liquid.
- Access: Unlike USDT, direct minting and redemption with Circle are typically reserved for institutional partners (Class A users like exchanges). Retail users (Class B) must use third-party platforms like Coinbase.
FDUSD (First Digital USD)
- Operation: Launched in June 2023 by First Digital Labs (part of Hong Kong-based First Digital Trust), FDUSD's model mirrors USDT and USDC. Its rise was catalyzed by Binance's decision to adopt it as a primary stablecoin after halting support for BUSD.
- Reserves & Transparency: FDUSD also provides monthly attestations. Its reserves, managed by a Hong Kong trust company, are held in institutions with a minimum S&P A-2 credit rating. Reserves consist largely of short-term Treasuries and fixed deposits, ensuring high liquidity.
Success Factors for Fiat-Backed Stablecoins
The success of these stablecoins hinges on several interconnected factors:
- Regulatory Compliance: Trust is built through transparency and operating within regulatory guidelines (e.g., USDC, FDUSD).
- Exchange Integration and Liquidity: Widespread adoption by major cryptocurrency exchanges is crucial for providing liquidity and utility (critical for USDT, USDC, and FDUSD).
- Use Cases and Yield: Integrating into specific, high-demand scenarios drives adoption. FDUSD's growth was fueled by its use in Binance's Launchpool, offering users high yield opportunities.
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Crypto-Collateralized Stablecoins (DAI, USDe)
DAI (MakerDAO)
- Operation: DAI is a decentralized stablecoin generated through over-collateralized loans on the Maker protocol. Users lock crypto assets (e.g., ETH, wBTC) into "Vaults" to borrow DAI against them. To reclaim their collateral, users must repay the borrowed DAI plus a stability fee.
Stability Mechanisms: DAI maintains its peg through a combination of:
- Adjustable Rates: The Stability Fee (borrowing cost) and DAI Savings Rate (DSR - reward for holding DAI) are adjusted by MKR token holders to manage supply and demand.
- Liquidation: If a vault's collateral value falls below a predefined threshold, it is automatically liquidated to ensure the protocol remains solvent.
- Peg Stability Module (PSM): Allows direct 1:1 swaps between USDC and DAI, using the deeply liquid fiat-backed stablecoin as a price anchor.
- Revenue: MakerDAO earns revenue from stability fees, liquidation penalties, and yields generated from investing reserve assets (including Real-World Assets - RWA).
USDe (Ethena Labs)
- Operation: USDe is a "synthetic dollar" built on a delta-neutral hedging strategy. When a user mints USDe by depositing staked ETH (stETH), the protocol simultaneously opens a short position of equivalent value on ETH perpetual futures contracts. This hedges the protocol's exposure to ETH's price volatility.
- Yield Generation ("Internet Bond"): The protocol generates yield from two sources: the staking yield on the underlying stETH and the funding rate paid by perpetual contract traders (typically positive in bull markets). This yield is distributed to users who stake their USDe (sUSDe), creating a compelling native yield.
- Risks: Key risks include the potential de-pegging of stETH from ETH (as seen during the 3AC collapse), the scalability limit of perpetual futures markets, counterparty risk with custodians and exchanges, and the sustainability of high yields in different market conditions.
Success Factors for Crypto-Backed Stablecoins
Wealth generation through native yield is the primary driver for these stablecoins. Their ability to offer a base return, unlike simple holding of USDT or USDC, attracts capital, especially in bullish market conditions. Transparency in operations and governance is also critical for building trust in these decentralized models.
Algorithmic Stablecoins (FRAX)
Algorithmic stablecoins aim to maintain their peg without being fully backed by collateral, instead relying on algorithmic market operations and seigniorage shares. The collapse of UST (Terra) highlighted the extreme risks of certain models.
FRAX pioneered a hybrid model combining collateral and algorithm.
- Operation: Initially, FRAX was fully collateralized by USDC. Its algorithm adjusts the collateral ratio based on market demand. If demand is high, the ratio can decrease, meaning new FRAX can be minted with less USDC and more of its native governance token, FXS, which is burned. Arbitrage mechanisms are designed to keep the price stable.
- AMOs: Algorithmic Market Operations (AMOs) allow the protocol to deploy its USDC collateral into other DeFi protocols to generate yield without compromising the 1:1 redeemability.
- Bottleneck: The main challenge for algorithmic and hybrid stablecoins is expanding their utility and adoption beyond their native ecosystems to achieve significant scale.
Future Outlook and Hong Kong's Stablecoin Landscape
Comparative Analysis of Stablecoin Types
Each model presents a unique trade-off between decentralization, capital efficiency, and stability assurance. Fiat-backed stablecoins offer high stability but are centralized. Crypto-backed variants are more decentralized but require over-collateralization, reducing capital efficiency. Algorithmic models promise high efficiency but carry greater stability risks.
Key Success Factors for New Stablecoins
The path to success in the crowded stablecoin market is becoming clearer:
- For Fiat-Backed: Regulatory compliance and integration with major exchanges/payment platforms are non-negotiable for generating initial trust and utility.
- For Crypto-Backed & Algorithmic: Providing a compelling native yield and expanding into diverse DeFi and payment applications are essential for attracting and retaining users.
The Hong Kong Opportunity
For Hong Kong, launching stablecoins pegged to the Hong Kong Dollar (HKD) or offshore Chinese Yuan (CNH) presents a significant regulatory and market opportunity. The core challenge is not issuance but creating robust use cases.
For an HKD Stablecoin:
- Yield Integration: Differentiate by sharing revenue generated from reserve assets with holders.
- Payment Utility: Focus on promoting its use for local and cross-border settlements, especially in trade finance.
For a CNH Stablecoin:
- Institutional Backing: Collaboration with a key institution like Bank of China (Hong Kong), the offshore CNY clearing bank, would provide immense trust.
- Cross-Border Trade: The most promising application lies in facilitating payments and settlements for cross-border trade, particularly within Belt and Road Initiative countries, improving the efficiency of offshore CNY usage.
- RWA Integration: Exploring the tokenization of high-quality real-world assets (e.g., offshore bonds) could provide a foundation for yield generation and deeper financial utility.
Ultimately, success for any Hong Kong-led stablecoin initiative will depend on crafting a compelling value proposition centered around specific use cases and yield opportunities, moving beyond simply being a trading pair on exchanges.
Frequently Asked Questions
What is the primary purpose of a stablecoin?
Stablecoins are designed to provide price stability within the volatile cryptocurrency market. They act as a digital representation of fiat currency, enabling seamless trading, serving as a safe haven for assets, and facilitating payments and remittances without the price risk associated with tokens like Bitcoin or Ethereum.
What is the difference between USDT and USDC?
The main differences lie in transparency, regulatory approach, and reserve composition. USDT, issued by Tether, has historically been less transparent but holds a larger share of its reserves in assets like short-term Treasuries. USDC, issued by Circle, emphasizes regulatory compliance, provides monthly attestations, and holds its reserves predominantly in ultra-short-term Treasuries and cash, making it highly liquid. USDT is more widely integrated across global exchanges, while USDC is deeply embedded in the U.S.-regulated and DeFi ecosystems.
How do decentralized stablecoins like DAI maintain their peg?
DAI maintains its peg through a combination of algorithmic mechanisms and collateral backing. It uses over-collateralization of crypto assets, adjustable stability fees (interest rates on loans), and a liquidation system to manage risk. Furthermore, its Peg Stability Module (PSM) allows for direct arbitrage with USDC, providing a strong soft peg to the dollar through the deeply liquid USDC market.
Are stablecoins considered safe investments?
"Safe" is relative. While they are designed to be stable, risks remain. These include counterparty risk (the issuer failing or mis managing reserves), regulatory risk (changing government policies), and technological risk (smart contract bugs). It's crucial to research the issuer's transparency, reserve audits, and regulatory standing before holding significant amounts of any stablecoin.
What is the potential role for a Hong Kong dollar stablecoin?
A HKD stablecoin could streamline digital payments and settlements within Hong Kong's financial ecosystem. Its success would likely depend on offering features beyond a simple peg, such as integration with digital asset services or providing a yield to holders, to compete with the established network effects of USD-based stablecoins.
Can algorithmic stablecoins ever be truly stable?
The track record for purely algorithmic models is poor, as demonstrated by the collapse of UST. Hybrid models like FRAX that combine algorithms with collateral have shown more resilience. However, achieving and maintaining stability without significant collateral backing remains a formidable challenge due to the need for continuous market demand and the vulnerability to market-wide panic and liquidity crises.