Stablecoin Analysis: Value, Mechanism, and Regulation

In the field of cryptocurrency, stablecoins have become an indispensable key element. Their unique value is not only reflected in the medium function of trading crypto assets but also demonstrates revolutionary potential in traditional financial scenarios such as cross-border payment settlements. The latest data shows that the global market capitalization of stablecoins has reached $236.7 billion. Some top asset management institutions, as well as sovereign economies like the European Union and Singapore, are accelerating their layout in the stablecoin field. A certain stablecoin issuer has recently officially submitted a prospectus to the U.S. SEC, expecting to go public with a valuation of $5-7 billion, becoming a microcosm of the industry's vigorous development.

1. Definition and Application Scenarios 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 maintenance of the coin's value stability through specific mechanisms. It is important to clearly distinguish that central bank digital currencies issued by the monetary authorities of sovereign countries do not fall under the category of stablecoins.

The emergence of stablecoins mainly addresses the issue of value storage in the cryptocurrency world. Investors can use stablecoins to purchase the cryptocurrencies they wish to invest in, and after realizing profits or losses, exchange the corresponding cryptocurrencies back to stablecoins, thereby locking in gains or losses.

In addition to the cryptocurrency market, stablecoins are also widely used in DeFi( decentralized finance), cross-border payment settlement, and other fields. In the traditional cross-border payment sector, the flow of funds still heavily relies on the banking system, facing issues such as complicated processes, high costs, and long settlement times. The emergence of stablecoins is reshaping the landscape and ecology of the cross-border payment industry, demonstrating significant efficiency and cost advantages.

In the decentralized finance ( DeFi ) field, stablecoins have become the cornerstone assets for its ecosystem operations. As an important value medium in DeFi protocols, stablecoins provide stable and ample liquidity support for various decentralized platforms, and further optimize the economic models of trading and lending on DeFi platforms through their low volatility characteristics.

2. Analysis of Mainstream Stablecoins

The mainstream stablecoins in the market can be classified according to the type of collateralized physical assets into: fiat-collateralized stablecoins, crypto-collateralized stablecoins, physical asset-collateralized stablecoins, and algorithm-based stablecoins.

( a ) fiat currency pegged stablecoin

1. USDC

   • The issuer and operator is a certain company, with a circulating market value of approximately 60 billion USD.
   • Support the stability of the coin value through excess reserves of cash in USD and assets such as short-term U.S. Treasury bonds.
   • Licensed remittance institutions regulated by state laws in the United States, holding remittance licenses in multiple states.
   • Obtain issuance license under the EU MiCA regulation

2. USDT

   • The issuer and operator is a certain company, with a circulating market value of approximately 60 billion USD.
   • Maintain the stability of the coin value through a 1:1 reserve of cash and non-cash assets such as U.S. Treasury bonds and commercial paper.
   • Compliance is often questioned, and has been fined by regulatory agencies for lack of transparency in reserves.
   • Not obtained the issuance license from the EU MiCA, facing the risk of being delisted from European exchanges.

Although USDT has shortcomings in compliance and audit transparency, it still maintains a high circulating market value, mainly due to the complete ecosystem and network effects it has built within the crypto ecosystem. The dual penetration capability of USDT in legitimate trading scenarios and non-traditional application scenarios, as well as the user stickiness brought by its first-mover advantage, make it currently difficult to be easily replaced.

( two ) stablecoins pegged to crypto assets

1. DAI
   • Issued by a decentralized autonomous organization, with a circulating market value of approximately $3.1 billion.
   • Achieve coin value stability through the over-collateralization mechanism of encrypted assets.
   • Based on decentralized design, lacking a clear legal entity, its compliance is difficult to assess through traditional financial regulatory frameworks.

( three ) physical asset-backed stablecoin

1. PAXG
   • A gold stablecoin issued by a certain company, with a market value of approximately $1.87 billion.
   • Backed by physical gold reserves, one PAXG token is equivalent to one troy ounce of London Good Delivery gold.
   • Approved and regulated by the New York State Department of Financial Services

In addition, the BUIDL token issued by a large asset management company is also an emerging physical asset-backed stablecoin, with underlying assets including U.S. Treasury bills, bonds, and other short-term securities.

( four ) algorithm-based stablecoin

Algorithmic stablecoins maintain their value pegged to a reference currency through complex smart contract algorithms. However, their stability is overly reliant on algorithm design and market conditions, making them vulnerable to losing their value peg in extreme situations. The collapse of a certain algorithmic stablecoin in May 2022 exposed the fatal flaws of such stablecoins, leading to a collapse of the trust foundation in algorithmic stablecoins across the entire market.

3. Risks and Prospects of Stablecoins

The value foundation of stablecoins is built on dual support: first, physical or digital assets as underlying guarantees, and second, liquidity and trust mechanisms driven by market consensus. Consensus determines the scope and liquidity of the stablecoin's use, while the adequacy of reserve assets is directly related to its risk resistance capability.

However, the "stability" attribute of stablecoins is not absolute. When there are cracks in market consensus or reserve assets face systemic risks, stablecoins may face the risk of price fluctuations or even de-pegging. To cope with potential extreme risks and protect the legitimate rights and interests of stablecoin holders, relevant regulatory frameworks and technical assurance mechanisms still need further development and improvement.