Overview

Last updated 10 days ago

Overview

Industry Background

Stablecoins are digital assets pegged to the price of stable assets (e.g., the US dollar). They act as a bridge between the cryptocurrency and fiat worlds, aiding mainstream adoption by enabling traditional businesses (retailers, payment processors, banks, etc.) to accept crypto payments. Stablecoins address crypto volatility and are categorized by collateral/issuance mechanisms:

Fiat-Backed Stablecoins ○ Pegged to fiat currencies (e.g., USD/EUR) at a 1:1 ratio.
Crypto-Backed Stablecoins ○ Collateralized by other cryptocurrencies.
Commodity-Backed Stablecoins ○ Pegged to commodities (e.g., gold).
Algorithmic Stablecoins ○ Decentralized, trustless stablecoins algorithmically pegged to the USD.
Derivative-Backed Stablecoins ○ Hedging tools to mitigate price volatility and inflation risks.
Sovereign Stablecoins ○ Issued by central banks or regulators.

Paxos’s USDP, regulated by the NYDFS, exemplifies compliance and transparency. Key users include banks, payment processors, multinational corporations, crypto exchanges, and remittance firms.

Market Trends

Rapid Market Growth: DeFi TVL surged 72.8% from 54.4Bto54.4Bto94.1B in 2024, with users growing from 4.9M to 8.9M.
Rise of Decentralized Stablecoins: USDC leads as collateral in DeFi protocols (MakerDAO, Compound, Aave, Curve, etc.) due to its compliance and transparency.
Diversified Use Cases: Stablecoins are used for currency substitution (69%), payments (39%), and cross-border transactions (39%).
Technological Innovation: With the maturation of the DeFi ecosystem, new stablecoin models continue to emerge, including hybrid models (partial collateral + partial algorithm) and stablecoins pegged to real-world assets (RWA), aiming to improve stability and capital efficiency.

Market Challenges

Low Capital Efficiency: Decentralized stablecoins typically use over-collateralization to mitigate risks from crypto asset price volatility. For example, MakerDAO’s DAI requires users to collateralize more than 100% of the crypto assets, meaning users need to lock up more assets than the stablecoins they generate. This over-collateralization reduces capital efficiency and limits the effective use of funds. In contrast, centralized stablecoins like USDT and USDC, backed directly by fiat, have higher capital efficiency and are more attractive in the market.
Liquidation Risks: In decentralized stablecoin protocols, fluctuations in the value of collateral assets may cause the collateral ratio to fall below the protocol’s minimum threshold, triggering liquidation. This means users’ collateral assets may be forcibly sold to ensure protocol stability. Such liquidation risks require users to carefully manage their collateral, increasing complexity and risk.
Limited Use Cases and Liquidity: Although decentralized stablecoins play an important role in the DeFi ecosystem, their application scenarios and liquidity remain limited. According to DeFiLlama, as of September 2024, the total market capitalization of stablecoins is approximately $1.25 trillion, with nearly 87% held by USDT and USDC. This indicates that decentralized stablecoins account for a relatively small share of the overall market, limiting their adoption in broader use cases.
Regulatory Uncertainty: With the widespread adoption of stablecoins, regulators worldwide are beginning to focus on their potential systemic risks and impact on financial stability. However, the regulatory framework for decentralized stablecoins remains unclear, posing compliance challenges for projects. For example, yield-bearing stablecoin protocols may conflict with existing financial regulations in terms of profit distribution models and decentralization features, increasing operational uncertainty.
Market Trust and Acceptance: The complex mechanisms and potential risks of decentralized stablecoins may lead to insufficient user trust. In contrast, centralized stablecoins, with their straightforward structure and backing by real entities, are often more trusted by users. This trust gap limits the widespread adoption of decentralized stablecoins.

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Last updated 10 days ago

Industry Background

Fiat-Backed Stablecoins ○ Pegged to fiat currencies (e.g., USD/EUR) at a 1:1 ratio.
Crypto-Backed Stablecoins ○ Collateralized by other cryptocurrencies.
Commodity-Backed Stablecoins ○ Pegged to commodities (e.g., gold).
Algorithmic Stablecoins ○ Decentralized, trustless stablecoins algorithmically pegged to the USD.
Derivative-Backed Stablecoins ○ Hedging tools to mitigate price volatility and inflation risks.
Sovereign Stablecoins ○ Issued by central banks or regulators.

Paxos’s USDP, regulated by the NYDFS, exemplifies compliance and transparency. Key users include banks, payment processors, multinational corporations, crypto exchanges, and remittance firms.

Market Trends

Rapid Market Growth: DeFi TVL surged 72.8% from 54.4Bto54.4Bto94.1B in 2024, with users growing from 4.9M to 8.9M.
Rise of Decentralized Stablecoins: USDC leads as collateral in DeFi protocols (MakerDAO, Compound, Aave, Curve, etc.) due to its compliance and transparency.
Diversified Use Cases: Stablecoins are used for currency substitution (69%), payments (39%), and cross-border transactions (39%).
Technological Innovation: With the maturation of the DeFi ecosystem, new stablecoin models continue to emerge, including hybrid models (partial collateral + partial algorithm) and stablecoins pegged to real-world assets (RWA), aiming to improve stability and capital efficiency.

Market Challenges

Low Capital Efficiency: Decentralized stablecoins typically use over-collateralization to mitigate risks from crypto asset price volatility. For example, MakerDAO’s DAI requires users to collateralize more than 100% of the crypto assets, meaning users need to lock up more assets than the stablecoins they generate. This over-collateralization reduces capital efficiency and limits the effective use of funds. In contrast, centralized stablecoins like USDT and USDC, backed directly by fiat, have higher capital efficiency and are more attractive in the market.
Liquidation Risks: In decentralized stablecoin protocols, fluctuations in the value of collateral assets may cause the collateral ratio to fall below the protocol’s minimum threshold, triggering liquidation. This means users’ collateral assets may be forcibly sold to ensure protocol stability. Such liquidation risks require users to carefully manage their collateral, increasing complexity and risk.
Limited Use Cases and Liquidity: Although decentralized stablecoins play an important role in the DeFi ecosystem, their application scenarios and liquidity remain limited. According to DeFiLlama, as of September 2024, the total market capitalization of stablecoins is approximately $1.25 trillion, with nearly 87% held by USDT and USDC. This indicates that decentralized stablecoins account for a relatively small share of the overall market, limiting their adoption in broader use cases.
Regulatory Uncertainty: With the widespread adoption of stablecoins, regulators worldwide are beginning to focus on their potential systemic risks and impact on financial stability. However, the regulatory framework for decentralized stablecoins remains unclear, posing compliance challenges for projects. For example, yield-bearing stablecoin protocols may conflict with existing financial regulations in terms of profit distribution models and decentralization features, increasing operational uncertainty.
Market Trust and Acceptance: The complex mechanisms and potential risks of decentralized stablecoins may lead to insufficient user trust. In contrast, centralized stablecoins, with their straightforward structure and backing by real entities, are often more trusted by users. This trust gap limits the widespread adoption of decentralized stablecoins.