Stablecoin 2023 Status and Regulatory Analysis

The Rise of Stablecoins

A stablecoin is a type of digital currency that is pegged to reserve assets such as fiat currencies and gold. It is also a cryptocurrency that circulates freely, extends on-chain, and is linked to reserve assets.

The original intention of stablecoins is to reduce price volatility. Stablecoins stand in stark contrast to other cryptocurrencies including Bitcoin, as they lack an intrinsic mechanism to reduce volatility. Stablecoins resist severe fluctuations by mimicking currencies such as the US dollar, euro, renminbi, and Swiss franc.

In 2014, the first stablecoin Tether(, also known as USDT or 泰达币), was born, pioneering the peg to the US dollar. For example, 1 Tether should equal 1 dollar. Today, Tether is frequently traded in the cryptocurrency space, and its performance also proves that its original design intention is reliable.

Besides the US dollar, there are other currencies that can be used to measure the value of stablecoins, including fiat currencies ( such as the euro ), fiat currency baskets ( such as the IMF's special drawing rights ), commodities or other tangible assets ( such as gold, real estate ), or economic indicators ( such as the inflation rate ).

Classification of Stablecoins

According to the different stability mechanisms, the stablecoins commonly found in the market can be roughly divided into four categories:

1. Fiat-backed stablecoin
2. Crypto Collateral Stablecoin
3. Algorithmic stablecoin
4. Supported stablecoins

fiat-collateralized stablecoin

The most popular stablecoins are backed by fiat currency at a 1:1 ratio. A central issuer or custodian holds the fiat collateral. It must be proportional to the number of stablecoin tokens in circulation. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the highest market cap fiat-collateralized stablecoins.

This type of stablecoin has the following characteristics:

• Centralized issuing institutions, usually a private company.
• Most stablecoins are pegged to fiat currencies such as the US Dollar, with an exchange rate typically of 1:1, and a simple and clear issuance mechanism.
• Implement a reserve proof mechanism, for every stablecoin issued, a corresponding fiat currency reserve must be added.

( crypto-collateralized stablecoin

Cryptocurrency collateralized stablecoins are supported by another cryptocurrency as collateral. Cryptocurrency collateralized stablecoins do not use custodians to hold the collateral, but instead use smart contracts. The issuance process of stablecoins occurs on-chain, utilizing smart contracts instead of relying on a central issuer to execute. When you want to purchase ) minted ### of these stablecoins, you will lock cryptocurrency in a smart contract to receive an equivalent amount of tokens. Subsequently, you can return the stablecoins to the corresponding smart contract to withdraw the amount of collateral you previously locked. DAI ( is a cryptocurrency collateralized stablecoin ) and is the most prominent stablecoin in this category.

Cryptocurrency-backed stablecoins need to be over-collateralized to buffer the price fluctuations of the required cryptocurrency collateral assets. For example, if you want to purchase DAI stablecoins worth 100 USD, you need to deposit ETH worth 180 USD, which corresponds to a collateralization rate of 180%. If the market price of ETH drops but remains above the set liquidation threshold, the price of DAI can still be stabilized due to the excess collateral. However, if the price of ETH falls below the set threshold (, for instance, by 100%, the originally valued 180 USD ETH is now worth only 90 USD ). In this case, according to the smart contract, the collateral will be forcibly sold for liquidation.

( algorithm stablecoin

Algorithmic stablecoins attempt to maintain a peg to assets like the US dollar by dynamically expanding and contracting the token supply. Algorithmic stablecoins do not use fiat or cryptocurrencies as collateral. Instead, their price stability comes from using specialized algorithms and smart contracts to manage the circulating token supply. When the market price falls below the price of the fiat currency it tracks, an algorithmic stablecoin system will reduce the number of tokens in circulation. Conversely, if the token's price exceeds the price of the fiat currency it tracks, new tokens will enter circulation to downward adjust the value of the stablecoin.

However, algorithmic stablecoins rely on particularly strong algorithms. USTC, which is involved with Luna, is an algorithmic stablecoin, but its underlying algorithm did not take into account some extreme situations, leading to black swan events or sudden incidents, and ultimately decoupling and collapsing.

Algorithmic stablecoins have the following characteristics:

1. Unsecured
2. Partially or fully backed by native assets collateral.
3. Floating Stablecoin

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( The supported stablecoin for the product

The stablecoins supported by commodities are backed by precious metals, oil, and real estate. Gold is the most popular collateral commodity, Tether Gold )XAUT### and PAX Gold (PAXG) are top gold-backed stablecoins. Commodity-backed assets allow investment in assets that may be far from the local area and inject liquidity into illiquid asset classes.

Stablecoin Market Status

( total market value of stablecoin

As of May 12, 2023, the total market value of stablecoins is approximately $131.8 billion.

In the stablecoin market, the top nine stablecoins account for over 97% of the market share. The top five stablecoins account for more than 96%, namely Tether USDT, USD Coin USDC, Binance USD BUSD, DAI, and TrueUSD TUSD. The aforementioned three stablecoins occupy over 90% of the entire stablecoin market. In terms of stablecoin types, USDT, USDC, and BUSD are all centralized stablecoins, issued with real assets as collateral; in addition, there are decentralized stablecoins, such as the well-known DAI issued by MakerDAO, which has a market value of $4.86 billion, accounting for only 3.73%.

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( Major stablecoin comparison

)# Tether USDT

In October 2014, Tether###, a subsidiary of iFinex###, launched USDT. USDT is currently the largest stablecoin in the market, with a market value of over 82.7 billion dollars.

USDT operating mechanism:

1. Users deposit US dollars into Tether's bank account.

2. Tether creates individual Tether accounts for users and deposits digital currency corresponding to the US dollars they deposit into the accounts.

3. Users can trade USDT through exchanges or over-the-counter markets.

4. The user returns USDT to Tether and redeems it for fiat currency.

5. Tether destroys USDT and returns the US dollars to the user's bank account. In addition, once USDT enters circulation, any investor can buy and trade USDT from other investors or exchanges. This forms a complete cycle of issuance, trading, circulation, and redemption.

(# USD Coin )USDC###

In July 2018, USDC was issued as a dollar stablecoin by Circle and Coinbase exchange. Currently, USDC has a market capitalization of approximately $30.1 billion, ranking second in the stablecoin market, about half the size of USDT. At its peak on July 1, 2022, USDC's market capitalization exceeded $56 billion, nearing the $66 billion level of USDT.

USDC Operating Mechanism:

Through the stablecoin entry (, customers joining a web application created and maintained by licensed CENTER token issuing members can transfer fiat funds into the CENTER issuer's account. The issuer uses the CENTER network to execute a series of commands to verify, mint, and validate the fiat tokens pegged to the value of these deposited funds. Then, customers can transfer these tokens elsewhere to use them.

Redemption follows the opposite order: when customers access the exit, the fiat tokens will be burned, such as those maintained by licensed CENTER issuing members in a web application. After successful verification and validation, funds from the underlying fiat reserve will be transferred to the customer's external bank.

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)# Binance USD (BUSD)

In September 2019, Paxos###, the issuer(, collaborated with Binance to launch BUSD, which is a fiat-backed stablecoin pegged to the US dollar, allowing for purchases and redemptions at a rate of 1 BUSD to 1 dollar. It is currently the seventh largest cryptocurrency by market capitalization and the third largest stablecoin.

BUSD operating mechanism:

In order to maintain its value of 1 dollar, the amount of dollars held by Paxos is equal to the total supply of BUSD. BUSD and USD can be exchanged at any time through Paxos.

1. Users send US dollars to Paxos' bank reserve account.

2. The issuer )Paxos( creates an equivalent amount of BUSD on Ethereum.

3. The newly minted BUSD is delivered to the users, while the US dollars are kept in the bank reserve account.

4. This mechanism also works in reverse. Users can use Paxos to burn BUSD and receive 1 dollar in return.

By using smart contracts to burn/mint BUSD, this mechanism can maintain the supply and reserve ratio at a constant 1:1.

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)# TrueUSD (TUSD)

In March 2018, Archblock### issuer ( launched TrueUSD, which was listed on the Bittrex exchange. TrueUSD )TUSD( is a fully collateralized, legally protected, and transparently verified ERC-20 token. It is pegged to the US dollar and maintains a 1:1 ratio. Furthermore, it is the first crypto asset built on the TrustToken platform. It aims to be a simple, transparent, and reliable stablecoin. Therefore, it does not use hidden bank accounts or any special algorithms.

TUSD Operating Mechanism:

The USD holdings of TrueUSD are distributed across various bank accounts belonging to different trust companies. Relevant parties have signed agreements to disclose the collateral assets daily and conduct monthly audits. The token uses multiple custodial accounts to reduce counterparty risk and provide legal protection for holders against theft.

TrustToken uses publicly audited smart contracts to limit its own issuance of tokens. This money has never even touched the hands of the TrustToken team. When the custodial account receives dollars, new TUSD will be automatically generated. Whenever a user redeems dollars, an equivalent amount of TUSD is immediately destroyed. In this way, TrustToken ensures a 1:1 ratio of dollars to TUSD between the funds in the custodial account and the TUSD in circulation.

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) decentralized stablecoin

(# MakerDAO )DAI###

In December 2017, MakerDAO launched DAI. Unlike USTD, DAI exists entirely on the blockchain, avoiding the credit risks that may arise from third-party trust intermediaries.

DAI Operating Mechanism:

DAI Generation, Access and Usage Portal