In recent years, stablecoins have entered a phase of rapid growth, drawing widespread international attention. Major corporations and financial institutions are accelerating their entry into the stablecoin market. But what exactly are stablecoins? How do they maintain stability? Who issues them, and what role do they play in the global financial system?
To answer these questions, we turn to Liu Ying, a researcher at the Chongyang Institute for Financial Studies at Renmin University of China, for an in-depth analysis.
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What Is a Stablecoin? Where Does Its Stability Come From?
A stablecoin is a type of cryptocurrency specifically designed to minimize price volatility by being pegged to a reserve asset. Unlike Bitcoin or Ethereum, which can experience dramatic price swings, stablecoins aim to maintain a consistent value—typically tied to fiat currencies like the U.S. dollar, euro, or Hong Kong dollar, and sometimes to commodities like gold. There are also algorithmic stablecoins that use smart contracts and supply adjustments to maintain price equilibrium.
The core purpose of stablecoins is to solve one of the biggest challenges in the crypto space: volatility. In a market where digital assets can surge or plummet by double-digit percentages in hours, stablecoins offer a reliable unit of account and medium of exchange. They act as a bridge between the centralized traditional financial world and the decentralized blockchain ecosystem.
But where does this "stability" actually come from? According to Liu Ying, it stems from three key areas:
1. Value Stability Through Asset Backing
The most fundamental source of stability is asset collateralization. Most major stablecoins, such as USDC issued by Circle, operate on a 1:1 reserve model. This means that for every stablecoin issued, there must be an equivalent amount of fiat currency—or highly liquid assets like U.S. Treasury bonds—held in reserve.
For example, if a company wants to issue 200,000 USDC tokens, it must deposit $200,000 into a regulated financial institution. This backing ensures that users can redeem each token for its face value at any time. While the value of the underlying asset (like the dollar or gold) may fluctuate over time due to macroeconomic factors, the stablecoin itself remains tightly pegged through this mechanism.
2. Technological Stability via Blockchain Infrastructure
Stablecoins run on public blockchains, which provide immutability, transparency, and real-time settlement. Every transaction is recorded on a distributed ledger, making it tamper-proof and easily auditable. This technological foundation ensures trustless verification—anyone can check the transaction history or verify reserves through on-chain data.
Moreover, because transfers occur directly between parties (peer-to-peer), they bypass traditional banking intermediaries. As a result, transactions are faster, cheaper, and more efficient than conventional wire transfers.
3. Regulatory Oversight and Transparency
Increasingly, governments and regulatory bodies around the world—including in the U.S., EU, Japan, South Korea, and Hong Kong—are establishing frameworks to govern stablecoin operations. These regulations often require full reserve backing, regular third-party audits, and disclosure of reserve compositions.
Such oversight helps protect investors and maintain systemic stability. For instance, knowing that a stablecoin issuer undergoes monthly attestation reports from reputable accounting firms adds confidence in its reliability.
“The essence of stability lies in asset-backed collateralization, algorithmic controls, or over-collateralized crypto assets—all operating within a transparent and regulated environment,” says Liu Ying.
While stablecoins offer significant advantages, users should remain cautious about potential risks—such as insufficient reserves, lack of transparency, or jurisdictional regulatory differences. Evaluating the issuer's credibility and reviewing audit reports are essential steps for any investor.
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Key Functions and Real-World Applications of Stablecoins
Stablecoins have evolved beyond niche crypto tools—they now serve critical roles across both digital and traditional economies.
1. Safe Haven in Volatile Markets
In cryptocurrency trading, stablecoins act as a safe harbor during periods of market turbulence. Traders often convert volatile assets like Bitcoin into stablecoins during downturns to preserve capital without exiting the crypto ecosystem entirely.
2. Efficient Cross-Border Payments
One of the most transformative uses of stablecoins is in international remittances and cross-border payments. Traditional systems can take 3–5 business days and involve high fees due to intermediary banks. Stablecoin transfers, by contrast, settle in seconds or minutes with minimal costs—regardless of transaction size.
This efficiency benefits e-commerce platforms, multinational corporations, and even individuals sending money abroad. For businesses operating globally, faster settlement translates into improved cash flow and reduced operational friction.
3. Inflation Hedging in High-Risk Economies
In countries experiencing hyperinflation or currency devaluation—such as Argentina, Turkey, or parts of Africa—individuals and small businesses increasingly adopt dollar-pegged stablecoins to protect their savings. By converting local currency into USD-backed tokens, they gain access to a more stable store of value without relying on physical dollars.
4. Integration into Decentralized Finance (DeFi)
Stablecoins are the backbone of DeFi applications, enabling lending, borrowing, yield farming, and liquidity provision without centralized intermediaries. Protocols like Aave and Compound use stablecoins to allow users to earn interest or take out loans against collateral—all executed via smart contracts.
Who Issues Stablecoins?
Stablecoin issuance has expanded beyond early crypto-native firms to include major players across industries:
1. Dedicated Crypto Companies
Firms like Circle (USDC) and Tether (USDT) are pioneers in the space. Circle went public on the New York Stock Exchange in June 2025, with its stock surging 168% on the first day—a testament to growing institutional confidence.
Tether, issuer of the largest stablecoin by market cap (USDT), generates substantial profits by investing its vast reserves in U.S. Treasuries and other short-term instruments. With over $14 billion in net profit reported in 2024 alone, it demonstrates how stablecoin operations can be highly lucrative when scaled.
2. Major E-Commerce and Retail Giants
Large retailers and tech companies are exploring stablecoins to streamline payments and reduce costs. For example, JD.com has participated in trials for Hong Kong dollar- and U.S. dollar-pegged stablecoins. These initiatives aim to enhance cross-border transaction efficiency and open new revenue streams through financial services integration.
3. Licensed Financial Institutions
Banks like Standard Chartered in Hong Kong and major European institutions are launching their own stablecoins under regulatory supervision. These tokens facilitate faster interbank settlements, improve liquidity management, and support tokenized asset markets.
Unlike traditional interest-based banking models, these institutions earn revenue through payment processing fees and reserve investment returns—effectively turning stablecoin issuance into a scalable fintech business line.
Frequently Asked Questions (FAQs)
Q: Are stablecoins completely risk-free?
A: No investment is entirely risk-free. While stablecoins are designed to be low-volatility assets, risks include reserve insolvency, regulatory changes, or smart contract vulnerabilities. Always assess the issuer’s transparency and audit practices.
Q: Can I earn interest on stablecoins?
A: Yes. Many platforms offer yield-generating opportunities through lending or liquidity pools in DeFi protocols. However, higher returns often come with increased risk—conduct thorough research before participating.
Q: How do I know if a stablecoin is fully backed?
A: Reputable issuers publish regular attestation reports from independent auditors (e.g., Grant Thornton or BDO). Check official websites or blockchain explorers for real-time reserve verification.
Q: Is my money safe if I hold stablecoins?
A: Safety depends on the platform and custody method. Holding stablecoins on regulated exchanges or self-custodied wallets offers varying levels of protection. Avoid unregulated platforms with unclear reserve policies.
Q: Can governments ban stablecoins?
A: Yes—several countries have imposed restrictions or outright bans on private stablecoins due to monetary sovereignty concerns. However, regulated issuers operating within compliance frameworks are more likely to coexist with central bank digital currencies (CBDCs).
Q: Will stablecoins replace traditional banking?
A: Not entirely—but they will transform it. Stablecoins complement existing systems by enhancing speed and accessibility while reducing costs. Collaboration between banks and blockchain networks is becoming the norm rather than disruption.
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