Chapter 1: Overview of Stablecoins
Stablecoin is a type of digital currency pegged to a specific asset (such as legal currency, commodities or other crypto assets). Its core goal is to provide a relatively stable value storage and transaction medium in the high volatility environment of the cryptocurrency market. Compared with mainstream crypto assets such as Bitcoin (BTC) or Ethereum (ETH), the value volatility of stablecoins is greatly reduced, giving them unique advantages in global payments, cross-border transactions, decentralized finance (DeFi) and other fields.
The concept of stablecoins can be traced back to the early days of the cryptocurrency industry. As Bitcoin gradually became the dominant force in the digital asset market, people began to realize that its volatile price seriously hindered its use in daily payments. Bitcoins decentralization and anti-censorship characteristics are important, but due to its rigid supply (upper limit of 21 million coins) and drastic price fluctuations driven by market sentiment, Bitcoin is difficult to serve as a stable value scale. Therefore, the introduction of stablecoins is essentially a correction to Bitcoins limitations in order to provide a stable pricing and trading tool while retaining the advantages of decentralization.
The design mechanism of stablecoins determines their stability and market acceptance. The most common stablecoins are fiat-collateralized stablecoins (such as USDT, USDC, TUSD), whose value is backed by US dollars or other fiat currency reserves, that is, for every stablecoin issued, a corresponding number of US dollars are deposited in bank accounts or other regulated institutions. The advantage of this model is that it is highly transparent, users can more easily verify the adequacy of their reserve assets, and within the legal and regulatory framework, such stablecoins can be widely recognized.
However, there are also some drawbacks to fiat-collateralized stablecoins. First, they still need to rely on the traditional financial system, that is, they need banks or financial institutions as reserve custodians, which weakens the decentralized nature to a certain extent. If regulators decide to block the bank account of a stablecoin, the stability of the stablecoin may be impacted. In addition, this model has high operating costs, requires regular audits, and may lead to liquidity crises in extreme market conditions.
In contrast, crypto-collateralized stablecoins (such as DAI) provide a more decentralized solution. The value of such stablecoins is supported by over-collateralized crypto assets (such as ETH), which usually requires users to deposit assets with a higher value than the issued stablecoin in the smart contract to ensure its stability. For example, if a user wants to mint $100 of DAI, he may need to collateralize $150 of ETH. The advantage of this mechanism is that it does not rely on bank accounts and runs entirely on the blockchain, making it more censorship-resistant. But at the same time, it also has certain risks - if the price of the collateralized asset falls sharply, the smart contract may force the liquidation of some assets to maintain the stability of DAI, resulting in losses to user funds.
In addition to fiat-collateralized and crypto-collateralized stablecoins, there are also algorithmic stablecoins (such as UST, FRAX), which use mathematical models and market regulation mechanisms to maintain currency value stability. For example, some algorithmic stablecoins use a dual-token system, in which one token (such as UST) acts as a stablecoin, while the other token (such as LUNA) is used to absorb market fluctuations. When the price of UST is below $1, users can destroy UST in exchange for LUNA, thereby reducing the supply of UST and pushing up its price; conversely, when the price of UST is above $1, users can exchange LUNA for UST, thereby increasing the supply of UST and lowering the price. However, algorithmic stablecoins are riskier because their stability depends on market confidence. Once there is a large-scale sell-off in the market, it may lead to a death spiral and cause the stablecoin to collapse completely, as demonstrated by the UST crash in 2022.
From the perspective of market size, stablecoins have become an important part of the cryptocurrency market. According to the latest data, the total market value of global stablecoins has reached the level of 100 billion US dollars, among which USDT (Tether) and USDC (Circle) dominate the market. The trading volume of stablecoins has even exceeded that of many mainstream crypto assets, because they are not only used for trading hedging risks, but also widely used in payment, lending, decentralized exchange (DEX) liquidity provision and other fields. The widespread use of stablecoins makes it a lubricant in the crypto economy, driving the development of the entire ecosystem.
The success of stablecoins is not accidental, but conforms to the needs of the global payment market. Traditional cross-border payment systems have high fees, slow settlement times and complex intermediary processes, while stablecoins are based on blockchain technology and can achieve low-cost, real-time global transfers. For example, international remittances using the traditional banking system may take days and incur high fees, while the same transfer using stablecoins is almost instant and costs only a few cents. In addition, in regions where fiat currencies are subject to capital controls or the banking system is unstable, stablecoins have become an important hedging tool.
Chapter 2: How Stablecoins Reconstruct the Payment Industry
The rise of stablecoins is profoundly changing the global payment industry. As a bridge between blockchain and the traditional financial system, stablecoins provide an efficient, low-cost, borderless payment method, and are gradually replacing some functions in the traditional payment system, especially in cross-border payments, corporate settlements, e-commerce, remittances, salary payments and other fields. The success of stablecoins is not only due to their technical advantages, but also a precise solution to the pain points of the existing payment system.
2.1 Pain points of traditional payment system
In the traditional payment system, the flow of funds often needs to go through multiple intermediaries, such as banks, payment processors, and clearing institutions. Each layer of intermediaries will charge a certain fee, resulting in a high overall payment cost. For example, credit card payments usually charge a transaction fee of 2% to 3%, while international wire transfer fees may be as high as US$20 to US$50, or even higher. In addition, third-party payment platforms (such as PayPal and Stripe) may charge an additional fee of 2.9% to 4.4% when processing international transactions, plus currency exchange fees, making global payments expensive. On the other hand, cross-border payments usually take days or even a week to complete. This is because the traditional banking system relies on centralized clearing networks such as SWIFT and ACH, which take a lot of time in transaction verification, fund clearing, and compliance review. For example, a cross-border transaction from the United States to Africa may need to go through multiple institutions such as Bank of America, the Bank for International Settlements, and local banks. Each institution needs to conduct KYC (know your customer) and AML (anti-money laundering) audits, which increases transaction time and uncertainty.
Currently, there are still more than 1.5 billion people in the world who do not have access to bank accounts or basic financial services (i.e., the unbanked), mainly in developing countries and remote areas. Due to lack of credit history, geographical restrictions, government policies and other factors, these people have difficulty accessing the international payment system, and are unable to smoothly conduct e-commerce transactions, wage payments or cross-border remittances. International payments require currency exchange, and the instability of exchange rates may lead to increased transaction costs, especially in countries with severe inflation. For example, the legal currencies of countries such as Argentina and Venezuela have depreciated rapidly. When conducting international trade or cross-border payments, companies and individuals often need to pay additional foreign exchange conversion fees and bear the economic losses caused by exchange rate changes.
Traditional payment systems are subject to strict regulatory control by various countries, especially the requirements for Anti-Money Laundering (AML) and Know Your Customer (KYC) policies. For some countries or regions subject to economic sanctions, international payment channels may be completely blocked, making it difficult for companies and individuals to conduct legal transactions. For example, companies in countries such as Iran and North Korea cannot use the SWIFT network, and some countries have also imposed strict regulations on cryptocurrency transactions, all of which restrict the free flow of global funds.
2.2 Payment advantages of stablecoins
Stablecoin payments do not rely on the traditional banking system, but are based on a peer-to-peer network based on blockchain, which can bypass expensive intermediaries and achieve lower-cost transactions. For example, using USDT (TRC-20 version based on Tron chain) for cross-border transfers can have transaction fees as low as $0.1, while traditional bank wire transfers usually cost $30-50 and take several days to arrive. The confirmation time for stablecoin payments is usually between a few seconds and a few minutes, which greatly improves the liquidity of funds.
Another core advantage of stablecoins is financial inclusion. As long as they have an internet connection and a digital wallet, anyone can create a cryptocurrency account and start making global payments. This model greatly reduces the financial entry threshold, allowing people without bank accounts around the world to access payment and deposit services, especially in Africa, Southeast Asia, Latin America and other regions, where stablecoins have become an important tool for people to fight local currency inflation.
Compared with crypto assets such as Bitcoin and Ethereum, stablecoins have minimal price fluctuations because their value is usually pegged 1:1 to the US dollar or other fiat currencies. For example, the price fluctuations of stablecoins such as USDC and USDT usually do not exceed ± 0.5%, which is much lower than highly volatile assets such as Bitcoin. This makes stablecoins a reliable payment medium, and merchants and consumers can safely accept stablecoin payments without worrying about a sudden drop in the value of the currency.
Stablecoins are based on blockchain smart contracts and can achieve automated payments and programmable fund management. For example, companies can use stablecoins for smart contract salary payments, so that salaries are automatically paid to employees on a monthly basis; cross-border trading companies can set conditions to automatically trigger payments after goods are delivered. The characteristics of programmable payments make stablecoins have great potential in areas such as supply chain finance and smart settlement.
2.3 Main application scenarios
Cross-border remittances: Global migrants and overseas workers remit more than $600 billion to their hometowns each year, and traditional remittance channels (such as Western Union and MoneyGram) often charge fees as high as 5%-10%. Stablecoins provide a cheaper and faster alternative. For example, a Filipino worker working in the United States can transfer money to his family in the Philippines in a few minutes using USDT or USDC, with a fee of only a few cents.
International payments and settlements for enterprises: Global enterprises need to make frequent international payments, while traditional bank settlements take a long time, are cumbersome, and costly. With stablecoins, enterprises can bypass the banking system, conduct B2B settlements directly, and improve cash flow management efficiency. For example, a Chinese manufacturer can use USDC to pay a US supplier without going through foreign exchange conversion and bank transfers, thereby reducing settlement costs and time.
E-commerce and digital payments: As e-commerce develops globally, stablecoins are becoming a popular choice for cross-border e-commerce payments. For example, a European online store can accept USDT payments, thereby avoiding high credit card fees while providing a convenient payment method for consumers from all over the world. More and more e-commerce platforms, subscription services, and gaming platforms are beginning to support stablecoin payments to attract global customers.
Freelance and remote worker salary payments: The global freelance economy is booming, but traditional salary payment methods have high fees and settlement delays. Using stablecoins to pay salaries, remote workers can receive payments instantly and freely convert them into their own currency or spend them directly. For example, a freelance designer working in India can receive a salary from a US employer directly in USDT without worrying about bank fees or exchange rate losses.
Travel and consumer payments: In the tourism industry, stablecoins are becoming a new payment method. For example, some merchants in Dubai, Thailand, Japan, and other places have begun to accept USDT and USDC payments, enabling tourists to use stablecoins for seamless payments and avoid currency conversion fees for traditional credit cards. In the future, as more merchants accept crypto payments, stablecoins may become a standard option for international travel payments.
Decentralized Finance (DeFi) and Smart Payments: Stablecoins are also an important part of the decentralized finance (DeFi) ecosystem. Users can use stablecoins for deposits, lending, liquidity mining, etc. In addition, the DeFi protocol can also provide automated payment solutions, such as regular payments based on smart contracts, insurance compensation, etc., to further promote the development of the payment industry.
As blockchain technology matures and stablecoins become more popular, they are reshaping the global payment industry, providing individuals and businesses with faster, cheaper, and fairer payment methods. In the future, stablecoins are expected to become an important part of the global payment system and promote the further development of digital finance.
Chapter 3: Compliance Challenges and Policy Evolution of Stablecoins
As an important innovation in the blockchain field, stablecoins have not only had a profound impact on the fields of payment and financial services, but their technical architecture, innovation and compliance challenges have always been topics of great concern to the market and regulators. The core value of stablecoins lies in their ability to maintain price stability and provide users with convenient means of payment. However, achieving this goal is not easy, as it involves a complex technical system, innovative mechanisms and an ever-changing regulatory environment. Therefore, the success of stablecoins not only depends on the continuous evolution of technology, but also needs to meet the compliance requirements of various countries regulators.
The technical architecture of stablecoins mainly covers multiple aspects, including asset mortgage mechanism, smart contracts, decentralized governance, etc. Different types of stablecoins differ in design and implementation. As the stablecoin market continues to expand, governments and financial regulators have begun to lay out the supervision of stablecoins. The compliance issues of stablecoins mainly focus on anti-money laundering (AML) and know your customer (KYC) requirements, transparency, cross-border payments, financial stability, etc. The different regulatory attitudes of various countries pose a considerable challenge to the cross-border application and global development of stablecoins.
First, the anonymity of stablecoins makes them a potential compliance risk in cross-border payments. Although the decentralized nature of stablecoins makes them highly privacy-protective, it also makes them vulnerable to illegal activities such as money laundering and terrorist financing. In response to this problem, regulators in various countries require stablecoin issuers to comply with strict KYC/AML policies to ensure the authenticity and compliance of their user identity information. For example, the Financial Crimes Enforcement Network (FinCEN) in the United States requires stablecoin issuers to register as money service businesses (MSBs) and fulfill relevant anti-money laundering obligations.
Secondly, the transparency of stablecoins has always been a focus of regulators. This is especially true for fiat-collateralized stablecoins. Since the value of these stablecoins is supported by custodial fiat reserves, stablecoin issuers must conduct regular financial audits, disclose the details of their reserves, and ensure that each stablecoin is backed by an equal amount of fiat currency. Otherwise, the market credibility of stablecoins will be questioned, which may lead to market instability. In response to this issue, some stablecoin issuers have taken positive measures, such as USDC’s cooperation with Circle to regularly publish reserve certificates to enhance transparency.
Thirdly, stablecoins also face huge challenges in international regulation. Since each country has different regulatory requirements for stablecoins, the cross-border flow and application of stablecoins may be subject to different legal frameworks. For example, China has completely banned the issuance of private cryptocurrencies, but is promoting central bank digital currencies (CBDCs) as an alternative to legal stablecoins. The United States is actively promoting the construction of a stablecoin regulatory framework and promoting the introduction of the Stablecoin Transparency Act. Europe has adopted the Markets in Crypto-Assets Regulation (MiCA) to require the disclosure of stablecoin reserves and conduct EU-level supervision. The different attitudes of different countries and regions towards stablecoins also pose many challenges to the global application of stablecoins.
In terms of compliance, stablecoin issuers also face the problem of adapting to the regulatory framework. Policy differences between countries around the world require stablecoin issuers to maintain operational flexibility and market competitiveness while meeting local legal requirements. In order to meet these challenges, stablecoin issuers usually choose to cooperate with traditional financial institutions, leveraging their existing compliance experience and infrastructure to reduce compliance risks.
In the future, the technology and compliance path of stablecoins may undergo profound changes. With the continuous advancement of technology, the continuous development of decentralized finance (DeFi) and privacy protection technology, the application of stablecoins will be more extensive, and security and efficiency will be further improved. At the same time, the coordination and cooperation of countries around the world in compliance will also be the key to the sustainable development of stablecoins. In order to achieve widespread global application, stablecoins need to rely not only on technological innovation, but also on global regulatory coordination to ensure their compliance under different legal frameworks.
Chapter 4: Future Development Trends
With the rapid development of blockchain technology and stablecoin applications, stablecoins will play an increasingly important role in payments, financial services and many other industries in the future. From technological advancement to changes in market demand, the future development trend of stablecoins presents a diversified pattern. The following will explore in depth the main development trends of stablecoins in the future.
First, with the increasing demand for global payments and cross-border transactions, the application of stablecoins in the field of international payments will be further expanded. Traditional payment systems, especially cross-border payments, have long had pain points such as high costs, long time, and poor transparency. As a low-cost, efficient, and decentralized payment tool, stablecoins can effectively make up for these shortcomings. In the future, with the improvement of stablecoin infrastructure and the participation of more financial institutions, stablecoins will play a key role in cross-border payments. Through stablecoins, users can bypass traditional banks and clearing systems and directly make payments and transactions around the world. In addition, the advantages of stablecoins in cross-border payments are not only reflected in speed and cost, but also in their transparency and security, which can effectively reduce the risks of financial fraud and money laundering.
Secondly, the application of stablecoins in the field of decentralized finance (DeFi) will continue to expand. As an innovative application of blockchain technology, DeFi provides various financial services through decentralized protocols, including lending, trading, insurance, etc. Stablecoins, as core assets in DeFi platforms, can provide a stable value basis and reduce the risks brought by market fluctuations. As the DeFi market continues to grow, stablecoins will play an increasingly important role in it. In the future, stablecoins will further integrate with decentralized financial protocols to promote the popularization and development of DeFi. For example, in decentralized lending platforms, stablecoins can be used as collateral, and users can lend stablecoins or use stablecoins for mortgage loans, thereby providing liquidity and stability for the decentralized lending market.
Relatedly, stablecoins will play an important role in smart contracts, decentralized autonomous organizations (DAOs), and other decentralized applications (DApps). The operation of smart contracts and DAOs requires stable units of value to ensure fairness in the execution of the agreement and the governance process. Stablecoins provide a safe, reliable, and easy-to-use payment medium for these decentralized applications. For example, DAO organizations can use stablecoins to pay members rewards and compensation, while using the value stability of stablecoins to prevent governance instability caused by market fluctuations. In smart contracts, stablecoins will serve as a margin for counterparties or a payment method in contract execution to ensure the smooth performance of the contract.
Third, the application prospects of stablecoins in traditional financial markets cannot be ignored. In the future, as the regulatory framework becomes clearer and compliance becomes more stringent, stablecoins will be more connected to traditional financial markets, bringing more innovation opportunities to traditional financial markets. First, stablecoins will play a role in digital asset management, fund investment and other fields. Through stablecoins, investors can achieve more efficient and lower-cost digital asset transactions and use stablecoins for cross-border flows of funds. For example, stablecoins can be used as a risk management tool to help investors maintain a certain value stability in their digital asset portfolios.
Secondly, the relationship between stablecoins and central bank digital currencies (CBDCs) will also become an important development trend in the future. As a legal digital currency issued by central banks of various countries, central bank digital currencies (CBDCs) are gradually entering the research and development stage and are expected to become an important part of the financial market in the next few years. The competition and synergy between stablecoins and CBDCs will have a profound impact on the financial market. Although CBDCs are legal tender issued by the state, the decentralized nature and cross-border application advantages of stablecoins make them complementary to CBDCs in certain scenarios. For example, in cross-border payments, stablecoins may become a preferred payment tool due to their lower costs and higher efficiency. In other areas, the cooperation between stablecoins and CBDCs will help enhance the interoperability of digital currencies and promote reform and innovation in the global payment system.
Fourth, with the continuous advancement of privacy protection technology, the privacy and security of stablecoins will become an important direction for future development. At present, stablecoins still face certain challenges in privacy protection, especially in the privacy protection of user identity and transaction data. With the continuous development of privacy protection technologies such as zero-knowledge proof (ZKP) and homomorphic encryption, future stablecoins will be able to provide a higher level of privacy protection, thereby attracting more users to participate. At the same time, as privacy protection technology matures further, decentralized stablecoins will also be able to provide stronger user data privacy protection while maintaining transparency and compliance, thereby enhancing users trust in stablecoins.
Fifth, the popularization of stablecoins will be closely linked to the construction and management of digital identities. The construction of digital identities is an important direction in the application of blockchain technology, and the application of stablecoins will promote the gradual improvement of the digital identity management system. In the future, every transaction conducted by users through stablecoins may be linked to digital identities, thereby achieving transparency and reliability in identity authentication and transaction tracking. In this process, digital identities will serve as the infrastructure for stablecoin circulation, payment, investment and other applications, providing users with a more efficient and convenient digital financial experience.
Finally, as stablecoin technology and application scenarios continue to develop, new market opportunities will emerge. For example, stablecoins may play a role in new asset classes, such as real estate, art, and even carbon credits. As blockchain technology becomes more popular, stablecoins will become the payment and transaction medium for these emerging assets, further promoting the development of the global digital economy.
Chapter 5: Conclusion
In summary, the future development trend of stablecoins is diversified, which will not only continue to promote the innovation of payment systems and financial services, but also bring profound changes in decentralized applications, digital asset management, cross-border payments, privacy protection and global supervision. With the continuous evolution of technology, market demand and policies, stablecoins will play an increasingly important role in the global economic and financial system. Stablecoins are rapidly subverting the traditional payment industry and providing global users with more efficient, low-cost and borderless payment methods. However, factors such as supervision, privacy protection and technological innovation will still determine its future development direction. As more financial institutions and technology companies enter this field, stablecoins are expected to become an important part of the global payment network and promote the further digitization and decentralization of the financial system.
