What is a stablecoin? Where does its 'stability' lie?
Stablecoins are a special type of cryptocurrency. The term 'special' refers to the assets they are pegged to, which could be fiat currencies or gold. Of course, fiat currencies can be USD, RMB, HKD, etc., and there are also algorithmically pegged stablecoins. The core design goal of stablecoins is to maintain price stability by pegging to specific assets and employing specific mechanisms, acting as a measure of value and a medium of exchange in the highly volatile cryptocurrency market.
Stablecoins address the issue of extreme price volatility in cryptocurrencies, which is their essence. The price of cryptocurrencies like Bitcoin frequently surges and plummets, sometimes leading to controversy. Stablecoins have developed against this backdrop. We also understand stablecoins as a bridge or link between the centralized real world and the decentralized crypto world.
Where exactly is the stability of stablecoins? I think it mainly manifests in three aspects:
The first aspect is value stability. It maintains a 1:1 ratio with fiat currency; for example, USDC issued by Circle is pegged 1:1. To issue 200,000 stablecoins, the issuer must first deposit $200,000 as reserve assets. Since it is pegged to the USD or US debt, its price remains relatively stable. Of course, stability refers to the corresponding fiat currency or related assets, and the price volatility of fiat itself or bonds, including gold, cannot be controlled by the stablecoin itself.
The second aspect is stability in technology. Because stablecoins operate on public blockchains, transactions realized on the blockchain are immutable and settled in real-time, giving them stable characteristics that are traceable, queryable, and unmodifiable.
The third aspect is stability in regulation. There are regulatory laws and regulations in place, whether in Europe, America, Japan, South Korea, or Hong Kong, some of which have been implemented or are being implemented. With a 100% reserve of cash, bonds, or assets, along with regular audits to maintain transparency, these can ensure the stability and reliability of stablecoins, protecting the interests of investors. Thus, stability is achieved in these areas.
In summary, the stability of stablecoins essentially relies on the collateralization of fiat assets, over-collateralization of crypto assets, or algorithmic adjustments to achieve price pegging, while ensuring the creditworthiness of redemptions within a regulatory framework. Its core value lies in providing a safe haven for the crypto economy or an efficient payment tool.
Stablecoins address the issue of extreme price volatility in cryptocurrencies, which is their essence. The price of cryptocurrencies like Bitcoin frequently surges and plummets, sometimes leading to controversy. Stablecoins have developed against this backdrop. We also understand stablecoins as a bridge or link between the centralized real world and the decentralized crypto world.
Where exactly is the stability of stablecoins? I think it mainly manifests in three aspects:
The first aspect is value stability. It maintains a 1:1 ratio with fiat currency; for example, USDC issued by Circle is pegged 1:1. To issue 200,000 stablecoins, the issuer must first deposit $200,000 as reserve assets. Since it is pegged to the USD or US debt, its price remains relatively stable. Of course, stability refers to the corresponding fiat currency or related assets, and the price volatility of fiat itself or bonds, including gold, cannot be controlled by the stablecoin itself.
The second aspect is stability in technology. Because stablecoins operate on public blockchains, transactions realized on the blockchain are immutable and settled in real-time, giving them stable characteristics that are traceable, queryable, and unmodifiable.
The third aspect is stability in regulation. There are regulatory laws and regulations in place, whether in Europe, America, Japan, South Korea, or Hong Kong, some of which have been implemented or are being implemented. With a 100% reserve of cash, bonds, or assets, along with regular audits to maintain transparency, these can ensure the stability and reliability of stablecoins, protecting the interests of investors. Thus, stability is achieved in these areas.
In summary, the stability of stablecoins essentially relies on the collateralization of fiat assets, over-collateralization of crypto assets, or algorithmic adjustments to achieve price pegging, while ensuring the creditworthiness of redemptions within a regulatory framework. Its core value lies in providing a safe haven for the crypto economy or an efficient payment tool.
In reality, we must be vigilant about issues such as whether the reserve assets are sufficient, whether they are transparent, and the differences in regulation. Investors should certainly pay attention to the qualifications of the issuer and the reserve audit reports.
What functions do stablecoins have?
In fact, stablecoins have been around for over a decade now, and their uses are quite broad, whether in traditional cryptocurrency markets or in real-world usage. They leverage the functions of stablecoins, which include five major functions: a measure of value, means of payment, means of circulation, means of storage, and world currency.
Currently, the most common application is for cross-border payment and settlement functions, with one application scenario being cryptocurrency trading, such as providing a stable haven for trading highly volatile assets like Bitcoin.
Another major use is for cross-border payment settlements. Since stablecoins facilitate peer-to-peer transactions on the blockchain, their costs are low, and efficiency is very high, reducing transfer times from the traditional 3-5 days to a few minutes or even seconds. Regardless of the transfer amount, the transaction fees are generally very low, while traditional fees can be quite high. Thus, their low cost and high efficiency lead to a high turnover rate of funds, especially for large e-commerce companies and banks.
We see many large retailers, including e-commerce companies, rushing into the stablecoin market to apply for stablecoin issuance licenses. Not only that, but now large banks, including credit card companies, are also entering the stablecoin market, even forming joint ventures with stablecoin companies to accelerate their layout. In some high-inflation countries, many small and medium-sized enterprises or individuals are buying stablecoins to hedge against inflation.
Who are the issuers of stablecoins?
There are several major categories of stablecoin issuers:
The largest category is companies that develop stablecoins. For instance, Circle, which issues USDC, seeks to integrate with traditional finance. We saw that on its first day of trading on the NYSE in early June, its stock price rose by 168%. Similarly, Tether, which issues USDT, profits by purchasing US debt; despite having over 100 employees, it achieved a net profit of over $14 billion in 2024, which is quite substantial. Its purpose is to make money through stablecoins, as buyers of stablecoins will pay them the same amount, whether in USD, HKD, or other currencies. They can then invest this money in US debt or other assets for profit. This portion of profit is indeed quite high, allowing them to invest and profit with the cash corresponding to the stablecoins.
The second category includes large e-commerce platforms. Whether they are traditional retailers, modern retailers, or e-commerce, such as JD.com, they have participated in testing stablecoins pegged to the Hong Kong Dollar/USD. Furthermore, traditional large retailers issue stablecoins for the purpose of transactions and settlements, to reduce cross-border payment costs, speed up the receipt of funds, and use stablecoins for investment profits.
The third category includes licensed financial institutions, including but not limited to Standard Chartered Bank in Hong Kong, as well as large banks in Europe and America. They earn revenue from the payment and settlement aspects through the issuance of stablecoins. This revenue is not traditional interest income, but rather income from intermediary services through transfers and settlements, as well as profits from investments. Although their core motivations differ, they all aim to earn returns from reserve assets, expand their share of the payment market, and build decentralized financial infrastructure, among various objectives. Their ultimate goal is, of course, to make money through the issuance of stablecoins and to invest the money earned from selling stablecoins, whether in US debt or other assets, for profit.
