The Revolutionary Product Accidentally Created by Crypto Assets: Stablecoin

In the past year, three major events have pushed stablecoins into the mainstream:

1. Tether generated nearly $13 billion in profit with less than 200 employees.

2. Trump's Inauguration and the Shift in the U.S. Regulatory Attitude Towards Digital Assets

3. Stripe acquired the stablecoin infrastructure company Bridge for $1.1 billion.

As a thriving ecosystem starts to profit, regulation also gradually becomes clearer.

This guide aims to help stablecoin issuers and users understand the current state of the industry. We have gathered unique insights from industry leaders, so let's get started!

Definition of stablecoin

Stablecoins are typically dollar-denominated liabilities, backed by reserves of assets with equivalent or higher market value.

Mainly divided into two categories:

• Fiat Currency Support: Fully backed by bank deposits, cash, or low-risk cash equivalents ( such as government bonds ) as collateral.

• Collateralized debt position ( CDP ): Mainly over-collateralized by native Crypto Assets ( such as ETH or BTC ).

The key to the utility of stablecoins lies in their "peg" to the US dollar. This peg is maintained through two mechanisms: primary redemption and secondary markets. First, is it possible to immediately redeem for an equivalent reserve? If not, is there a deep and persistent secondary market where trading can occur at the pegged exchange rate?

First-level redemption is a more stable pegging mechanism. Additionally, there are some low-collateral or algorithmic stablecoins attempts, but this guide will not discuss them.

It is important to note that stablecoins do not come out of nowhere. They rely on blockchain to provide core functions similar to those of banks.

Definition of Blockchain

Blockchain is a global "accounting system" that includes personal assets, transaction records, and transaction rules.

Taking Circle's USDC as an example, it is issued based on the ERC-20 standard, which defines the rules for token transfers. These rules, combined with the blockchain consensus mechanism, ensure that users cannot double spend. In short, the blockchain is an append-only database that records every transaction in the network.

Blockchain assets are held by Ethereum accounts or smart contracts. Account ownership is achieved through a public-private key encryption scheme. Smart contracts hold and trade assets according to predefined logic.

Trust in the system originates from the execution and consensus mechanisms of the underlying blockchain. Accuracy can be verified through publicly auditable transaction histories. Transaction settlements are managed by a global network of nodes 24/7, breaking through the time constraints of traditional banks.

These definitions provide a foundation for the reader. Let's take a look at the development of stablecoins.

Stablecoin History

Tether: The Birth of a King

In 2013, Crypto Assets were still in the Wild West era. Exchanges were advised to only accept deposits and withdrawals in Crypto Assets, which hindered widespread adoption. Traders needed to hedge but didn’t want to leave the "casino".

Phil Potter saw the market bottleneck. His solution was to create a "stablecoin": a 1 dollar crypto liability backed by 1 dollar reserves. In 2014, he partnered with BitFinex to create Tether, an independent entity responsible for reserve management and fiat transactions.

Tether issues USD-denominated liabilities ( USDT ), only entities with KYC certification can directly mint and redeem. However, USDT circulates freely on permissionless blockchains.

In two years, this concept seemed to have failed. Until 2017, Phil discovered that the adoption rate of USDT in Southeast Asia was rising. Export companies regarded it as a faster and cheaper alternative to the US dollar payment network. At the same time, encryption natives began to use USDT for cross-exchange arbitrage.

The flywheel begins to spin. As issuance and redemption fall within regulatory scope, while tokens circulate freely on the blockchain, USDT has reached escape velocity. Each new user enhances its network effect.

Currently, the circulation of USDT is nearly 150 billion USD, far exceeding USDC's 61 billion USD. Many people call Tether the company with the highest per capita profit in the world.

DAI: the first decentralized stablecoin

Rune Christensen was introduced to Bitcoin early on and viewed it as an opportunity to break free from the unfair financial order. After the Bitcoin surge in 2013, Rune realized the need to manage volatility.

In 2015, Rune collaborated with Nikolai Mushegian to design a dollar-pegged stablecoin. The emergence of Ethereum provided them with a platform. Could they utilize ETH to issue a stablecoin based on it? How to maintain solvency in the face of ETH fluctuations?

Their solution is the MakerDAO protocol, which was launched in December 2017. Users can deposit $100 worth of ETH to obtain $50 worth of DAI, creating over-collateralized ETH to support the stablecoin. To ensure solvency, a liquidation threshold is set, allowing third-party liquidators to sell the underlying ETH.

This CDP stablecoin model has sparked numerous imitators. The key lies in the programmability and transparency of Ethereum: all reserves, liabilities, and logic are visible to all participants.

With the circulation of DAI( and USDS) exceeding $7 billion, the creation of Rune has become a pillar of DeFi. However, under competition, MakerDAO began transitioning to traditional reserve assets in 2021 and shifted towards BlackRock's tokenized money market fund in 2025. During this period, MakerDAO( has now established its position as a key liquidity provider for tokenized assets through multiple projects via Sky).

stablecoin: Current Products

The fundamental promise of stablecoins is that holders can exchange them for US dollars at a 1:1 ratio at any time, without discounts and with low friction. Achieving this promise requires sound asset management, reserve transparency, excellent operations, liquidity, custodial integration, developer accessibility, and regulatory approval.

The success of early issuers has made current competition more intense. There are currently at least 200 stablecoins, and there could be thousands more in the future. To compete effectively, new strategies need to be developed from the outset and cohesive products provided. For fiat-backed stablecoins, the success factors include:

• Professional reserve management: Maintaining the peg depends on solvency, professional management is the minimum requirement for large fiat-backed stablecoin. Smaller issuers may prefer to start with existing tokenized money market funds.

• Custody coverage: Institutions will custody digital assets with providers such as Coinbase, BitGo, etc. Listing may require technical and operational audits, compliance reviews, and risk committee approvals. Listing fees can be as high as six to seven figures.

• Standardizing Cross-Chain Deployment: As blockchain surges and interoperability improves, multi-chain native deployment will become a necessary condition for a smooth user experience.

Infrastructure providers like Paxos offer white-label stablecoin services for high-end clients. Emerging stablecoin-as-a-service providers like Brale and MO also provide out-of-the-box core functionalities. These may change the "buy vs build" trade-off, but the responsibility for designing practical products and promoting them effectively still lies with the issuer.

stablecoin utility function

The US dollar stablecoin was originally created as a savings tool. However, the functions that fiat currency provides to users go far beyond saving. Any operations users perform with stablecoins will enhance their utility. The higher the utility, the higher the retention rate and floating yield.

Different users have different criteria for measuring utility, and the product-market fit requires that the functions of the stablecoin align with customer expectations. While some believe that the design space is limitless, others think it is extremely narrow, but recent cases provide insights into today's market landscape.

Trading: Conquering Centralized Exchanges ( CEX )

The establishment of Tether and the close cooperation between Circle, Coinbase, and Binance is no coincidence: the essence of Crypto Assets is speculation, and CEX remains the first choice for most users. The trading volume in 2024 is approximately $19 trillion.

Within the exchange, stablecoins that can be used as margin collateral or form the base currency pair are more useful for traders seeking seamless entry and exit from the market. Acquiring these customers is not easy; for example, Circle established a distribution partnership with Binance, paying $60 million in fees and sharing floating profits. New issuers must achieve differentiation in a whole new dimension to overcome user switching costs.

Except for the main participants, the most successful CEX transformation belongs to Ethena and its (, which is not entirely ) stablecoin USDe.

Ethena smells an opportunity and reaches a win-win agreement among traders, CEX, and itself.

1. Tokenize the high-yield delta-neutral strategy into synthetic USD (USDe), allowing holders to sometimes earn an annualized yield of 25%.

2. Collaborate with CEXs like Bybit: allow USDe to be used as margin collateral and share part of the underlying returns.

3. Bybit will transfer the basic USDe earnings to traders. As of March 2025, Bybit traders using USDe as margin will receive an annualized return of 9% while ( USDC is at 0% ).

The advantages of using USDe as collateral are obvious, coupled with frictionless distribution through CEX, driving its circulation to $5 billion. This reflects traders' preference for capital efficiency, even when the underlying asset carries higher credit risk. Ethena's path is bold, and new regulations in certain jurisdictions may close off this particular strategy. However, its rapid growth demonstrates the leverage effect of successful CEX integration.

( Profit: Decentralized Finance ) DeFi ### Integration

From an economic perspective, a brand is the ability of a company or product to achieve higher profits than its competitors. USDC and USDT have undeniable brand value. With first-mover advantage and network effects, they can achieve higher floating yields. In this context, fully-backed fiat-supported stablecoin ( such as MO and Agora ) have turned to directly sharing the underlying yields with users or B2B distribution partners.

However, short-term interest rate expectations are declining, making profit sharing difficult to be a differentiating factor. Forward-looking issuers are seeking to enhance the utility of stablecoins through DeFi integration. One of the core integrations is the listing of on-chain money markets promoted by protocols like AAVE and Morpho.

These protocols will coordinate the lending parties into over-collateralized repurchase transactions similar to Maker CDP; the main difference is that users can borrow almost any asset, the parameters are more flexible, and there are more types of collateral assets.

On-chain money markets enable holders to leverage their assets. The demand for leverage drives borrowing demand, and stablecoin holders earn returns through lending. Returns depend on market borrowing willingness.

This encourages well-funded issuers to create incentive programs to increase the actual returns for borrowers. PayPal increased the circulation of PYUSD on Solana from $0 to $665 million within 4 months in 2024, investing millions of dollars to incentivize the PYUSD market Kamino. Although it later fell back to $150 million, issuers like Ripple continue to use this strategy, while resource-constrained issuers use tokens as incentives.

It is reiterated that retention rates depend on the perceived utility of stablecoins. To this end, permissionless blockchains are both a driver of growth and a potential limiting factor for market share dominance. An increasing number of new issuers are creating DEX markets with USDC, enhancing utility through interchangeability. However, this faces challenges from potential inefficiencies in on-chain USDC capital and high IRR thresholds of (>35%); unless providers with lower capital costs participate, achieving true large-scale interchangeability is difficult.

( Payment: Self-Bootstrapping Distribution

If Crypto Assets are a casino, stablecoins are chips, and players ultimately need to cash out. However, cashing out is harmful to the issuers of stablecoins, which primarily will monetize floating funds. To address this situation, stablecoins must become practical. Circle's payment network is an attempt to create additional functionality around USDC. However, the dream of stablecoins and blockchain becoming payment networks faces strong resistance from existing enterprises. In the meantime, entrepreneurs are increasingly bridging stablecoins to existing credit card networks, allowing users to use them seamlessly.