Introduction
Stablecoins have recently surged in popularity, experiencing explosive growth. Last month alone, over twenty institutions announced plans to launch stablecoins. Participants range from digital asset exchanges and blockchain companies to traditional financial giants like PwC, and even governments and banks that previously rejected cryptocurrencies are now joining the stablecoin race.
But what exactly are stablecoins? Why are they gaining traction now? And how do they maintain stability? This article explores the origins of stablecoins, explains the mechanisms behind their stability, identifies potential risks, and considers future possibilities.
What Are Stablecoins?
Anyone familiar with cryptocurrencies knows their exchange rates against fiat currencies are highly volatile. Even Bitcoin, the most stable cryptocurrency, often fluctuates over 10% daily. This extreme volatility prevents cryptocurrencies from functioning effectively as mediums of exchange. Few people use Bitcoin for everyday transactions, hindering the broader adoption of blockchain technology and limiting non-speculative valuable transactions.
Bitcoin was originally designed to be electronic cash for free circulation and payments. However, its volatility has reduced it to an investment asset. As a store of value, unstable prices can lead to significant asset depreciation. Market participants need tools to hedge against these risks.
Stablecoins have emerged to meet this need. The prolonged bear market since 2018, combined with global financial uncertainty, has made crypto investments riskier. Speculators seek safe havens, and existing stablecoins cannot meet the demand, leading to a proliferation of new offerings. A similar trend occurred during the 2014 Bitcoin winter, with projects like BitShares (featuring BitUSD and BitCNY) gaining prominence.
Stablecoins are cryptocurrencies on blockchain networks designed to maintain a stable value relative to real-world assets. While "stability" typically refers to consistent purchasing power over time, in the stablecoin context, it means a fixed exchange rate with fiat currencies like the US dollar or Chinese yuan. This approach assumes fiat currencies' purchasing power remains stable long-term—a assumption not always valid in reality. The best-case scenario for stablecoins is: if the fiat remains stable, so does the stablecoin; if the fiat fluctuates wildly, the stablecoin fails.
The Critical Role of Stablecoins and Their Fiat Anchors
Some "crypto-standard" proponents oppose stablecoins, arguing that volatility is relative. From a dialectical perspective, the fluctuation between digital and fiat currencies is mutual. For digital currencies to realize their potential, they must break free from fiat standards, much like modern currencies abandoned the gold standard.
While this view has merit, it remains idealistic and impractical. Fiat currencies dominate the current financial system, with digital currencies accounting for less than 1% of global circulation. Fiat's monopoly is unlikely to be颠覆ed globally within the next decade or two.
Blockchain practitioners must balance idealism with reality. Since most transactions are denominated in fiat, using highly volatile cryptocurrencies introduces risks and inconveniences, discouraging many transactions. Moreover, many blockchain tokens possess equity-like characteristics with appreciation potential, making them unsuitable as media of exchange—especially in deflationary designs. Who would use appreciating "shares" to buy bread? Such transactions would imply losses, reduce trading frequency, and potentially lead to economic depression.
Thus, stablecoins are currently essential, with significant demand. Beyond digital realms, they can撬动 real-world economies and impact governments and daily life. Blockchain's anonymity and borderless nature allow individuals in places like Syria or Zimbabwe to protect assets through stablecoins, potentially influencing global monetary systems.
How Do Stablecoins Achieve Stability?
Stablecoins maintain stability through specific operational logics, varying in effectiveness. They can be categorized into three types: fiat-collateralized, crypto-collateralized, and non-collateralized algorithmic stablecoins.
Fiat-Collateralized Stablecoins
The simplest way to achieve stability is pegging 1:1 to a fiat currency. The issuing entity promises this exchange ratio, backed by reserves of fiat currency, gold, silver, or real estate. Tether (USDT) is a prime example: for every USDT issued, Tether Ltd. holds one US dollar in reserve,承诺 redemption at 1:1 and burns USDT upon redemption.
This logic is straightforward and effective. Since its 2015 launch, USDT has not experienced severe depegging events, with circulation exceeding $2.5 billion.
However, the weakest link is trust in the issuer. While pegged to fiat, USDT holders bear more credit risk than dollar depositors. Solving volatility risk sacrifices decentralization—a core crypto value. Tether Ltd., as a centralized custodian, has low作恶 costs, and information asymmetry makes it hard to prevent reserve misuse or excessive issuance.
Key drawbacks include:
- Off-chain assets are invisible on blockchain, requiring frequent audits—costly and uncertain.
- Over-reliance on central trust is "anti-blockchain"; issuer misconduct can damage value.
- Invisible collateral is vulnerable to rumors and negative sentiment; multi-layer redemption processes can trigger bank runs.
Transparency isn't always better; increasing作恶 costs is key.
The main controversy around USDT concerns collateral transparency. Critics suspect USDT isn't fully backed by dollars but by riskier assets like securities and cryptocurrencies. They demand full audits. However, excessive transparency could reduce liquidity and robustness. Partial, effective disclosure—such as third-party audits—is preferable. Simultaneously, tying issuer收益 to stability—e.g., negative fees for instability, excess reserves, or penalties for failed redemptions—can raise作恶 costs. Currently, issuers fall short here, representing a significant risk.
Risks: Strict 1:1 pegging makes these stablecoins good safe havens and exchange media. However, USDT often trades slightly above $1 due to redemption fees and processes. Buying USDT from other investors and redeeming with Tether incurs slight premium losses. USDT is also subject to supply and demand dynamics.
The biggest risk is fraudulent issuance of "fake USDT" without reserves. Though stablecoins are a small part of the crypto economy, their impact is massive. Fraudulent issuance creates net inflows into crypto markets. With hundreds of interoperable currencies and leverage, these inflows can multiply total market capitalization. Thus, fraudulent issuance can cause:
- Illegal issuance → net inflows → multiplied market cap surge → Bitcoin and other cryptos rally → more speculation → higher USDT demand → more issuance → positive cycle → growing reserve gap → mature speculators redeem dollars → reserve gap exposed → market panic → capital flight → bank run → black swan event → stablecoin depegging → worthless → crypto market crash → rapid contraction → exchanges and projects bankrupt → assets evaporated.
Crypto-Collateralized Stablecoins
To address trust issues in fiat-collateralized stablecoins, some projects use blockchain-based digital assets (e.g., Bitcoin, Ethereum) as collateral. Smart contracts enable users to generate stablecoins "self-service" by locking crypto assets, decentralizing issuance.
This solves centralized trust crises: collateral is on-chain and verifiable; issuance rules are auditable in smart contracts, making reserve fraud difficult. However, building stablecoins on volatile assets is counterintuitive. Given crypto's wild swings, 1:1 backing is insufficient; over-collateralization is necessary.
For example, generating $1 of stablecoin might require $2 of Ethereum collateral. If ETH drops 50%, the excess collateral absorbs the shock, maintaining the stablecoin's $1 value. If collateral value nears $1, the system liquidates it at a discount to buy back stablecoins, reducing supply and boosting value.
Even with over-collateralization, collateral value declines can cause stablecoin fluctuations due to supply-demand dynamics and risk cost changes—as seen with BitUSD's depegging within a week of launch. Adjusting collateral ratios—similar to central banks adjusting interest rates—can help stabilize values. This is known as the "Target Rate Feedback Mechanism" (TRFM).
Key drawbacks include:
- Reliance on smart contracts, which have security vulnerabilities.
- Over-collateralization locks up crypto assets, reducing capital efficiency and causing higher premiums.
- Effective in rising markets but vulnerable in sustained crashes; liquidations can accelerate collateral decline, creating death spirals.
Multi-Logic Response to Volatility
Learning from past failures (e.g., BitShares), modern crypto-collateralized stablecoins like MakerDAO's DAI incorporate additional rules. DAI uses TRFM and a MKR token-based committee to backstop risks. It has shown strong stability despite its modest market cap.
- When collateral rises: ETH appreciation strengthens collateral, but DAI generation cost rises, pushing DAI above $1. Smart contracts adjust rates to make generating DAI more profitable, increasing supply and pulling price back to $1.
- When collateral gently falls: ETH decline reduces DAI generation cost, pushing DAI below $1. Contracts adjust rates to make redeeming ETH with DAI profitable, reducing DAI supply and raising its value.
- When collateral crashes: If ETH plunges rapidly, feedback mechanisms may be too slow. Contracts automatically liquidate ETH collateral via market sales using DAI, quickly reducing supply and stabilizing value.
- During black swan events: If ETH crashes catastrophically, breaching collateralization ratios, DAI could depeg. MKR holders act as lenders of last resort, covering shortfalls by issuing new MKR tokens. This transfers risk from users to governance participants.
When Could It Collapse?
DAI's logic seems robust, but it relies on assumptions—specifically, that market participants believe dips are temporary and worth buying. In a true black swan event, with ETH, DAI, and MKR all crashing and capital fleeing, liquidations could worsen the spiral. If no one believes in future appreciation, assets won't be bought, leading to total collapse:
Black swan → capital flight → sell-off → bank run → ETH, DAI, MKR crash → liquidations → intensified sell-off → collateral value plummets → DAI depegging → liquidation sales further depress prices → vicious cycle → loss of faith → no buyers → system collapse.
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Non-Collateralized Algorithmic Stablecoins
To avoid collateral volatility, some projects mimic central banking using algorithms to regulate supply and demand, sans collateral. This Keynesian approach relies on market psychology and arbitrage.
The logic is simple: the issuer proclaims the stablecoin worth $1, setting a psychological anchor. If market price rises above $1, the system issues more coins to increase supply and lower price. If it falls below $1, the system buys back coins to reduce supply. But buybacks require capital—which isn't infinite.
To solve this, when price is below $1, the system issues bonds redeemable for one coin later. These bonds are bought with stablecoins, reducing supply. The promise of future redemption (via smart contracts) encourages arbitrage, pushing price back to $1.
Key drawbacks include:
- No collateral makes feedback loops slow and systems fragile.
- Continuous capital inflow must exceed outflow to sustain bond yields; otherwise, depegging occurs.
Sounds Like a Ponzi Scheme?
Algorithmic stablecoins appear fair and avoid collateral risks, but they aren't central banks. Their bonds rely on future asset inflows to realize profits. For example, Basecoin (raising $133 million) issues "base shares" and "base bonds." Shares pay dividends when stablecoin is above $1; bonds are sold when below $1, redeemable later for $1.
Profits for shareholders and bondholders aren't generated organically but through network growth and new participant inflows. This resembles a Ponzi scheme: continuous expansion is needed to pay earlier participants. When inflows dry up, bonds won't be profitable, leading to depegging and collapse.
Conclusion
Current stablecoins fall into the three categories above. Each seems reasonable initially but reveals flaws upon scrutiny. In calm markets, weaknesses stay hidden, but a crypto market downturn will expose them. For now, transparent, multi-mechanism stablecoins like DAI are most credible, with very low collapse probability.
All stablecoins ultimately aim to peg to centrally issued and managed fiat currencies. Is that their only ambition? Is fiat truly stable? From this perspective, all stablecoins have fatal flaws—because they aren't governments or powerful entities.
Their fancy designs are crude imitations of banking systems, destined for replacement. The only reason they persist is governmental hesitation toward blockchain-based digital fiat. However, if we acknowledge fiat's stability, the ultimate form of stablecoins will likely be central bank digital currencies (CBDCs).
Stablecoins will become crypto economic infrastructure. Thus, fiat currencies and their governing governments remain the ultimate winners. The utopia of believers may prove illusory. Pegging to centralized currencies under the banner of decentralization may end tragically.
How can we achieve optimal stability? Can cryptocurrencies跳出 the banking system to stabilize purchasing power directly? These questions remain for us to ponder.
Frequently Asked Questions
What is a stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging to a reserve asset like a fiat currency or through algorithmic mechanisms. This stability makes it suitable for everyday transactions and value storage.
How do crypto-collateralized stablecoins maintain their peg?
They use over-collateralization with volatile assets like ETH. Smart contracts automatically adjust supply via mechanisms like liquidation and feedback rates. For instance, if the value drops, the system buys back tokens to reduce supply and raise the price.
What are the risks of algorithmic stablecoins?
They rely on continuous market growth and new capital inflows to sustain their mechanisms. If demand declines, the system may fail to maintain the peg, leading to a collapse similar to a Ponzi scheme.
Can stablecoins completely replace traditional fiat currencies?
Not in the near future. They currently depend on fiat for stability and trust. Widespread adoption would require解决 issues like regulatory approval, scalability, and universal acceptance.
Why are stablecoins important for the crypto economy?
They provide a stable medium of exchange and store of value, reducing volatility risks. This enables practical uses like payments, remittances, and decentralized finance (DeFi) applications.
What is the future of stablecoins?
The trend points toward central bank digital currencies (CBDCs) as governments explore blockchain-based fiat. Existing stablecoins may evolve or be replaced by official digital currencies offering better security and compliance.