Web3 lawyers explain: Are stablecoins necessarily stable? Why are stablecoins so important?

In todays криптовалютаcurrency field, stablecoins have become a key element that cannot be ignored. Its unique value is not only reflected in the medium function of crypto asset transactions, but also shows revolutionary potential in traditional financial scenarios such as cross-border payment and settlement. The latest industry data shows that as of April 9, 2025, the global stablecoin circulation market value has climbed to US$236.7 billion. Top asset management institutions including BlackRock and Fidelity, as well as sovereign economies such as the European Union and Singapore are accelerating the layout of the stablecoin track. Circle, the issuer of USDC stablecoin, has recently officially submitted a prospectus to the US SEC and is expected to land on Nasdaq with a valuation of US$5-7 billion, which has also become a microcosm of the booming industry.

• What exactly is a stablecoin? Why can a stablecoin maintain a stable value?

• What are the differences between stablecoins and other cryptocurrencies?

• What are stablecoins used for? Why do we need them?

• What are the mainstream stablecoins on the market? What are the differences between different stablecoins?

The Crypto Salad team has been deeply involved in the cryptocurrency industry for many years and has rich experience in dealing with complex cross-border compliance issues in the cryptocurrency industry. In this article, we will combine industry research and team practical experience to sort out and answer the above questions from the perspective of professional lawyers.

1. What exactly is a stablecoin?

There is no strict definition of the concept of stablecoin. On the contrary, the extension and connotation of stablecoin are constantly changing with the development of the industry. From a broad perspective, stablecoin refers to a cryptocurrency that can theoretically maintain a certain price for a long time. Its core feature is to maintain the relative stability of the currency value through a specific mechanism.

However, it should be clearly distinguished that the central bank digital currency (CBDC) issued by the monetary authorities of sovereign states does not fall into the category of stablecoins. Specifically, the central bank digital currency maintains a 1:1 equivalent exchange relationship with traditional legal tender and is supported by national credit. It is essentially a digital form innovation of legal tender, such as the digital RMB promoted by my country in a pilot program. In the context of the crypto industry, stablecoins are mostly issued by private entities, and their value anchoring relies on commercial credit, mortgage assets or algorithmic protocols. This essential difference is also clearly reflected in the regulatory frameworks of various countries. When formulating relevant regulatory policies, most jurisdictions clearly divide central bank digital currencies and commercial stablecoins into different regulatory categories to match their respective risk characteristics and policy objectives.

Why do stablecoins appear in the crypto industry? To understand the application scenarios of stablecoins, we must first return to the cryptocurrency market itself.

First of all, before the emergence of stablecoins, there were already many different types of cryptocurrencies on the market. However, there was a huge pain point for investors at this time, that is, the price fluctuations of various cryptocurrencies on the market were very significant. Therefore, investors lacked a stable medium for storing value after taking profits, and the price fluctuations of cryptocurrencies would eventually cause investors to suffer unnecessary losses. Therefore, the core problem solved by the emergence of stablecoins is the value storage problem in the cryptocurrency world.

If we make an analogy with the real world, we can understand cryptocurrencies with significant price fluctuations such as Bitcoin and Ethereum as an investment target, such as stocks. In contrast, the so-called stablecoin is the fiat currency we use in the real world. We can use stablecoins to purchase the cryptocurrencies we want to invest in. After that, after the investment makes a profit or loss, the corresponding cryptocurrency is exchanged back to the stablecoin, thereby locking in the gains or losses of our investment. This is one of the initial application scenarios and usage logics of stablecoins in the cryptocurrency market. Therefore, for investors who want to invest in the cryptocurrency market, the first step is to convert the real-world fiat currency into the stablecoin in the crypto world, and then use the stablecoin to trade other cryptocurrencies.

In addition to the cryptocurrency market, with the further development and expansion of stablecoins, stablecoins are also widely used in various fields such as DeFi (decentralized finance) and cross-border payment settlement.

In the field of traditional cross-border payments, the flow of funds is still highly dependent on the banking system. This payment and settlement model that relies on the traditional financial system brings multiple challenges. First, cross-border payments need to be processed through multiple levels of institutions such as agent banks and clearing banks, resulting in cumbersome processes and lengthy links. Generally speaking, conventional cross-border transfers take an average of 2-5 working days, and some complex transactions may even be delayed for more than 7 days. Secondly, the cost of cross-border payments is significantly higher than that of domestic transfers. Relevant industry research shows that the global average cost of sending remittances is about 6.38% as of 2022.

In addition, cross-border payments in the traditional banking system also face institutional bottlenecks . For example, differences in capital controls, text requirements, and other compliance processes in different countries may lead to payment delays; foreign exchange control policies in some emerging market countries may directly lead to payment instructions being intercepted or frozen. These structural problems make it difficult for the traditional cross-border payment system to meet the needs of the digital economy era for efficient, low-cost, and instant settlement, leaving huge room for innovation for new payment solutions.

The Crypto Salad team found that the emergence of stablecoins is reshaping the landscape and ecology of the cross-border payment industry. Compared with the traditional banking system, stablecoin payments show significant efficiency and cost advantages. Taking the current mainstream stablecoins as an example, a cross-border transfer can usually be completed within 2 minutes , and the entire process does not rely on a complex network of correspondent banks or clearing institutions. Stablecoin payments achieve T+0 instant settlement, thereby significantly reducing the cost of capital occupation in cross-border payments.

More importantly, the transaction cost of stablecoin payments is much lower than that of the traditional banking system. Taking the Ethereum network as an example, according to YCharts data, the average gas fee of Ethereum has dropped from 72 gwei in 2024 to only 2.7 gwei (about 0.000005 USD) on March 12, 2025. This low-cost feature significantly reduces the wear and tear of cross-border payment settlements, giving stablecoins a clear advantage in small-amount, high-frequency cross-border payment scenarios.

The efficiency leap mentioned above is derived from three technological empowerments: first, distributed ledger technology ensures that payment information is uploaded to the chain in real time. The feature of synchronous verification of all nodes not only eliminates the traditional reconciliation link, but also builds a new trust mechanism through traceable and transparent ledgers; secondly, smart contracts automatically execute clearing logic, avoiding process delays caused by human intervention; more importantly, the blockchain network can run uninterruptedly 24 hours a day, 7 days a week , completely breaking the liquidity shackles of the banking system that are restricted by business hours.

(The above picture is a comparison between traditional banks and stablecoins in the field of cross-border payments, for reference)

In the field of децентрализованные финансы (DeFi) , stablecoins have become the cornerstone asset of its ecological operation. As an important value medium in the DeFi protocol, stablecoins not only provide stable and sufficient liquidity support for various decentralized platforms, but also further optimize the economic model of transactions and lending on the DeFi platform through their low volatility characteristics. Taking Compound, Aave and other lending protocols as examples, stablecoins, as the main collateral assets and pricing units, can ensure the stability of the capital pool and avoid liquidation risks caused by drastic fluctuations in the prices of crypto assets.

2. What are the main stablecoins on the market and what are the differences between different stablecoins?

The mainstream stablecoins on the market can be divided into the following categories according to the types of physical assets they are collateralized by: stablecoins collateralized by legal currency, stablecoins collateralized by cryptocurrencies, stablecoins collateralized by physical assets, and stablecoins based on algorithms. Next, the author will analyze each mainstream stablecoin from three perspectives: market value, currency stabilization mechanism, and compliance level.

The above picture shows a comparison of several different types of stablecoins.

1. Fiat currency-pegged stablecoins

Fiat currency-pegged stablecoins refer to stablecoins that are backed by fiat currency or corresponding cash equivalents. Among the stablecoins currently in circulation, USDC and USDT have occupied the vast majority of the market share, and their combined circulation market value has exceeded US$200 billion, exceeding 85% of the total circulating market value of stablecoins.

1. USDC

• Basic information: The issuer and operator of USDC is Circle. As of now, the circulating market value of this stablecoin is about 60 billion US dollars.

• Currency stabilization mechanism: Circle supports the stability of USDC by over-reserving USD cash and short-term U.S. Treasury bonds. The so-called excess reserves means that the value of Circles reserve assets for USDC will be slightly higher than the circulating market value of USDC, further ensuring currency stability. In addition, the relevant stablecoin reserves are subject to monthly audit reports issued by the third-party auditing agency Deloitte, disclosing the corresponding reserve status during the period.

(The above picture is a diagram of the reserve situation disclosed on Circle鈥檚 official website)

• Compliance Framework: Circle, the issuer of USDC, is a licensed remittance institution regulated by U.S. state law. The company has completed relevant registrations with FinCEN (Financial Crimes Enforcement Network) and has money transmission licenses (MTL) in multiple U.S. states.

  Circle鈥檚 regulated subsidiary became the first stablecoin issuer to commit to complying with the Value-Related Crypto Assets (VRCA) requirements issued by the Ontario Securities Commission (OSC) and the Canadian Securities Administrators (CSA) in 2024. This allows Circle鈥檚 stablecoin USDC to be publicly traded on Canadian crypto asset trading platforms.

  In 2024, Circle, as a leading digital payment platform, obtained the issuance license of its stablecoins USDC and EURC under the EU MiCA Act. This also makes USDC the first mainstream stablecoin that meets the compliance requirements of the EU MiCA Act.

2. USDT

• Basic information: The issuing and operating entity of USDT is Tether. As of now, the circulating market value of this stablecoin is about 60 billion US dollars.

• Currency stabilization mechanism: Tether maintains the stability of USDT by reserving cash and non-cash assets such as US Treasury bonds, commercial paper, and money market funds at a 1:1 ratio. The specific mechanism is similar to that of USDC. At the same time, a third-party auditing agency, BDO Italia, publishes a quarterly reserve report instead of a monthly reserve report.

(The above picture is a diagram of the reserve situation disclosed on Tether鈥檚 official website)

• Compliance framework: USDTs compliance is often questioned. Tether, the issuer of USDT, was fined $41 million by the CFTC (Commodity Futures Trading Commission) in 2021 for opaque reserves. Even though it was fined for this, USDTs current reserve disclosure is still not completely transparent.

  В 2024 году Tether was investigated by OFAC for allegedly violating OFAC sanctions by providing stablecoin wallet services to OFAC (Office of Foreign Assets Control) sanctioned entities and suspected money laundering. In the end, Tether compromised with OFAC and froze 835 million US dollars in assets related to illegal activities.

  At the same time, as of now, Tether has not yet obtained the issuance license from the EU MiCA, so it faces the risk of being delisted from European exchanges.

USDC and USDT are both mainstream legal tender-collateralized stablecoins in the market. However, it is not difficult to see from the above analysis that the audit transparency and regulatory compliance of USDT are actually significantly inferior to those of USDC. So why does UDST still occupy such a high share of the circulating market value?

The CryptoSalty team believes that despite the obvious shortcomings of USDT in terms of compliance and audit transparency, it can still maintain a circulation market value of over 100 billion US dollars, thanks to the complete ecology and network effect it has built in the crypto ecosystem. The success of USDT is not accidental, but the result of the combined effect of multiple factors, the core of which lies in its dual penetration capabilities in legal and non-traditional application scenarios.

First, USDTs widespread use in legal scenarios has established its key position. As the worlds largest stablecoin, USDT dominates cryptocurrency exchanges. Almost all mainstream exchanges offer trading pairs between USDT and other cryptocurrencies, and its liquidity depth and trading volume far exceed other stablecoins. This makes USDT the main bridge connecting crypto assets and fiat currencies. In addition, USDT also plays a core role in the over-the-counter (OTC) market. Its convenience and broad usage scenarios make it one of the key tools for institutions and individuals to conduct large amounts of capital in and out.

However, the real uniqueness of USDT lies in its wide application in non-traditional scenarios. Despite the constant controversy over its compliance, USDTs anonymity, decentralization and significant first-mover advantage make it the preferred tool for capital flows in some black and gray areas. For example, according to relevant reports from the United Nations, cryptocurrencies led by USDT have become an important part of the underground money houses and money laundering infrastructure in East Asia and Southeast Asia, facilitating local transnational organized crime. As mentioned above, USDT was investigated by OFAC for being used to transfer transactions to US sanctioned entities, which also indirectly confirms this feature.

In summary, the first-mover advantage brought by USDTs early entry into the market has formed a self-reinforcing cycle in terms of counterparty trust, liquidity depth, and usage scenario coverage. Although stablecoins such as USDC have significant advantages in audit transparency and compliance, in order to shake USDTs current ecological position in the crypto world, it still needs to overcome the two obstacles of user migration costs and ecological stickiness.

2. Stablecoins pegged to crypto assets

1. DAI

• Basic information: DAI stablecoin is issued by MakerDAO. As of now, the circulating market value of DAI is about 3.1 billion US dollars.

• Currency stabilization mechanism: The stability of DAI does not rely on real-world fiat currency or cash equivalents, but is achieved through an over-collateralization mechanism of crypto assets. The core logic of this decentralized stablecoin is to convert volatile assets into a stable value carrier anchored to the US dollar, that is, DAI. It is essentially a dynamic collateral system based on crypto assets.

  Specifically, users need to lock crypto assets (such as ETH, BTC, etc.) in excess proportion to the smart contract in the MakerDAO protocol – Maker Vault. Specifically, the value of the pledged crypto assets is generally 150%-300% of the value of DAI. The reason why users need to over-collateralize is that the price of crypto assets used as collateral is highly volatile, and over-collateralization can reduce the risk of DAIs currency value being decoupled due to drastic changes in the collateral price. When the value of the collateral drops due to market fluctuations, the system will automatically trigger the liquidation procedure according to the smart contract, and maintain the anchor relationship between DAI and the US dollar through stability fees and liquidation penalties.

  The subtlety of this over-collateralization mechanism lies in that it not only retains the decentralized nature of crypto assets, but also solves the centralized trust problem of traditional stablecoins through mathematical models, and ultimately realizes the decentralized issuance of stablecoins.

• Compliance framework: After research, the Crypto Salad team found that, unlike the Circle and Tether companies mentioned above, MakerDAO is not a commercial entity in the traditional sense, but a decentralized autonomous organization (DAO) built on the Ethereum blockchain. The stability of DAIs currency value does not rely on the credit endorsement of centralized institutions, but is mainly maintained through an algorithm-driven dynamic mortgage system and community consensus. Although this design realizes the ideal of decentralization at the technical level, it also brings unique regulatory challenges. Due to the lack of a clear legal entity , DAIs compliance is difficult to evaluate through the regulatory framework of the traditional financial system, and its transparency relies more on technical audits and internal governance rather than external legal constraints.

3. Stablecoins pegged to physical assets

1. PAXG

• Basic information: PAXG is a gold stablecoin issued by Paxos. As of March 2025, PAXGs market value is approximately US$1.87 billion, accounting for 76% of the gold stablecoin market.

• Currency stabilization mechanism: PAXGs physical gold reserves are held in trust by Paxos Trust Company. These gold bars are safely stored in vaults such as Brink . Third-party auditing companies review and disclose the gold reserves in the vaults every month to verify that its gold reserves match the supply of tokens. In addition, PAXG holders can redeem a certain number of tokens for a corresponding amount of physical gold. Through the above legal structure design, Paxos can ensure that one PAXG token is equivalent to one troy ounce of London standard delivery gold bar , and its value is directly linked to the real-time market gold price. Токен holders can enter their Ethereum wallet address in the PAXG query tool to view their physical gold serial number, value and other physical characteristics.

  In essence, the PAXG token is a RWA (Real World Asset) project based on physical gold assets. Unlike mainstream stablecoins, the price volatility of its underlying asset, gold, is higher than the anchor objects of mainstream stablecoins such as cash or short-term government bonds, so there is a certain difference in the positioning of the two. However, since the long-term value of gold as a safe-haven asset has always been recognized by the market in economic uncertainty, the characteristics of its underlying assets make PAXG have certain stablecoin attributes in terms of function, so it is included in the discussion of stablecoins.

  

(The above picture is a screenshot of the gold reserve query page on the Paxos official website)

• Compliance Framework: The issuance of PAXG is approved and regulated by the New York State Department of Financial Services. The issuer Paxos holds gold reserves through a trust company, thereby achieving complete isolation of gold reserves and issuer assets, thereby ensuring the independence and adequacy of the corresponding gold reserves.

  In addition to PAXG tokens, BUIDL (BlackRock USD Institutional Digital Liquidity Fund), issued by BlackRock, the worlds largest asset management company, has performed particularly well in recent years. As of now, the total market value of BUIDL tokens has exceeded US$2.4 billion, making it an important member of the stablecoin market. Through innovative tokenized fund design, BUIDL provides institutional and individual investors with a digital asset that is both liquid and profitable.

  The underlying assets of the token include U.S. Treasury bills, bonds, and other short-term securities guaranteed by the U.S. Treasury, thus ensuring the stability of the token value. The project has also designed a relatively complete compliance framework. Among them, Bank of New York Mellon, as the custodian and administrator of the funds underlying assets, ensures the security and transparency of the underlying assets; PwC, as the auditor of the fund, audits the funds financial status and operations, enhancing the funds transparency and credibility.

(IV) Algorithm-based stablecoins

An algorithmic stablecoin is a stablecoin that maintains its value pegged to a reference currency (usually the U.S. dollar) through a complex smart contract algorithm. Unlike traditional collateral stablecoins, algorithmic stablecoins do not rely on reserves of fiat currencies or cryptocurrencies, but rather achieve price stability by simply adjusting their supply and demand through algorithms.

Since the currency stability of algorithmic stablecoins is overly dependent on the design of the algorithm and market conditions, once extreme market fluctuations occur or the stabilization algorithm is maliciously attacked, it is likely to cause it to lose its currency peg to the reference currency. In May 2022, in the infamous UST, Luna Thunderbolt Incident, the price of the algorithmic stablecoin UST was de-anchored due to malicious attacks on the stabilization algorithm, and the coin price plummeted to zero. This black swan event not only caused tens of billions of dollars of crypto assets to be wiped out, but also exposed the fatal flaws of algorithmic stablecoins in algorithmic mechanism loopholes, market liquidity dependence, and risk isolation mechanisms, and even led to the complete collapse of the entire crypto markets trust in algorithmic stablecoins. In the post-crisis era, regulators have listed such projects as high-risk areas, and investors have generally avoided related cryptocurrencies, which has directly led to a long-term silence in the algorithmic stablecoin track.

3. Interpretation of Salad

The Crypto Salad team believes that the value foundation of stablecoins is based on dual support:

• First, anchored physical or digital assets serve as the underlying guarantee.

• Second, liquidity and trust mechanism driven by market consensus

Consensus determines the scope of use and liquidity of stablecoins, while the adequacy of reserve assets is directly related to the risk resistance of the stablecoin. The dynamic balance between the two constitutes the core stability of the stablecoin system.

Однако, the stability attribute of stablecoins is not absolute. The stability of stablecoins is essentially the result of dynamic balance, not a static absolute guarantee. When there is a crack in the consensus of the stablecoin market or the reserve assets encounter systemic risks, there is a high probability of currency price fluctuations or even decoupling risks. The recent incidents of stablecoin price decoupling also confirm this view. In order to avoid extreme risks that stablecoins may encounter and protect the legitimate rights and interests of stablecoin holders, the relevant regulatory framework and technical guarantee mechanism still need to be further developed and improved.

The Crypto Salad team will continue to update the introduction and analysis of the stablecoin regulatory frameworks of various countries in the world, so stay tuned.

Special statement: This article only represents the personal views of the author and does not constitute legal advice or legal opinion on specific matters.

This article is sourced from the internet: Web3 lawyers explain: Are stablecoins necessarily stable? Why are stablecoins so important?

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