Crypto Compendium - Part X - Stablecoins will eat the world

Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.

TL;DR

• Stablecoins are digital tokens pegged to fiat currencies, offering fast, programmable, and globally accessible payments.
• Most are backed by traditional assets like cash or treasuries, generating billions in profits for issuers like Tether and Circle.
• Crypto-backed and algorithmic stablecoins offer decentralization but carry higher risks and complexity.
• They enable low-cost, 24/7 transfers and financial access in unstable economies, especially in emerging markets.
• Governments increasingly support stablecoins for their potential to strengthen dollar dominance and drive financial innovation.

Compendium – Part X – Stablecoins: Truly Digital Dollars
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Let’s talk about stablecoins. 

Viewed by many as one of the most boring things to come out of crypto, stablecoins are perhaps the single most powerful application of blockchain and tokenization technology to date. Though we have alluded to them at times throughout our past posts, this one will go much deeper into explaining what they are, why they are so powerful and then make clear why they represent a novel and uniquely powerful payment infrastructure that may have far-reaching implications beyond what many might assume today. Stablecoins are near and dear to your author’s heart (formerly worked for the organization overseeing USDC development), so bear with me as this is quite a lengthy and detailed piece.
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If this is the default comparison that comes to mind when someone mentions stablecoins, you are not alone. And to be fair, that is what they sound like: you load your dollars into a digital wallet on a payment platform and then spend from there.  On the surface that sounds like any other payment company or, yes, even a bank account. But that is just about where the similarities end. 

Stablecoins - cryptocurrencies designed to hold a steady value against a specific target asset - have emerged as a pivotal bridge between traditional finance and the digital asset world. They represent more than just another crypto trend or a new spin on a prepaid credit card; they are internet-native dollars that combine the familiarity of fiat currencies, the transparency of a blockchain, and the speed and reach of the internet. 

In this post, we outline how stablecoins work, explore real-world examples (from the largest like Circle’s USDC and Tether’s USDT to DeFi protocol MakerDAO’s crypto-collateralized DAI/USDS), and highlight how innovative projects like Ethena’s USDe are pushing the concept further. We’ll also dive into the compelling benefits (self-custody, programmability, global 24/7 access, transparency, lower costs, financial inclusion) and explain why even regulators and the U.S. Treasury are eyeing stablecoins as a key technology over the next decade. By the end of this (lengthy) post, we hope the reader has a newfound appreciation for just how powerful this technology will prove to be. 
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Onchain Dollars – Not Your Father’s Payment Technology
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What exactly is a stablecoin? Basically, a stablecoin is a type of cryptocurrency that is pegged to the value of an underlying asset, most often a fiat currency like the U.S. dollar or the Euro​. By being linked 1:1 to a relatively stable asset, a stablecoin’s price remains ~stable (1 USDC ≈ 1 USD), hence the creative nomenclature. This phrasing really came about to differentiate these types of assets from others such as Bitcoin or Ethereum because they serve entirely difference purposes. With stablecoins, the core idea is that each stablecoin token is backed by something that preserves its value, be it cash in a bank, government bonds, other crypto assets, or even an algorithmic mechanism. In their earliest days, stablecoins were predominantly used as onchain trading pairs against other digital assets. But today, they are increasingly used as the primary asset in which users transact onchain and across DeFi and increasingly used as gas payment mechanisms in lieu of native network tokens. 

Stablecoins come in multiple flavors but can generally be categorized into three types: fiat-collateralized, crypto-collateralized, and algorithmic. There is also a new, emerging class of USD-referenced assets that anchor initial values to USD but are not directly pegged like traditional stablecoins, so we don’t call those stablecoins per se. Today, fully reserve-backed stablecoins dominate - over 97% of stablecoin value is in tokens backed by traditional financial assets (e.g. cash and government treasuries), while crypto-backed stablecoins like DAI/USDS make up only a few percent of the market, and purely algorithmic ones represent just a tiny fraction.

The most popular stablecoins are backed by cash and reserves in bank accounts and short-term US treasuries. By far the largest examples are Tether’s USDT and Circle’s USDC, both pegged to USD. USDT, initially launched in 2014, is the largest stablecoin with a circulating supply of over $140 billion onchain​. It maintains its peg by holding equivalent assets (like dollars and U.S. treasuries) in reserve. Circle similarly holds USDC backing in dollar reserves and has a circulating supply above $50 billion​. Tether manages their reserves offshore but uses major Wall Street banks such as Cantor Fitzgerald to facilitate Treasury purchases. Circle holds their reserves in a dedicated money market fund managed by Blackrock, ticker USDXX. These fiat-backed models are simple: institutional customers of Tether and Circle can mint or redeem USDT or USDC for one USD at any time. This direct convertibility, coupled with active market makers and arbitrageurs, ensure that the 1:1 peg stay constant. These are not ‘hard-pegged’ and in practice float to the tune of +/- 0.25 bps. This model has generally worked well, though it relies on trust in the issuer’s reserves and transparency; there are examples in the past where valid questions arose about reserves, and though it is important to push for the utmost transparency, most top issuers do a solid job with disclosures at this point, and the upcoming stablecoin bill will likely have additional requirements that issuers will have to follow. 
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This model can also be incredibly lucrative for the issuer. In essence, every dollar that a stablecoin issuer receives in exchange for an onchain token is deposited into a money market fund-like vehicle that is invested in treasuries. As such, while those tokens are circulating ($230B combined between just 2, Tether and Circle), those dollars remain invested earning a return. And because the largest stablecoins USDT and USDC do not pass through yield to holders, the issuers receive all interest from those deposits. What does that mean? Well, in 2024, Tether held $113B in treasuries which allowed them - a company of just ~100 employees - to generate net profits of $13B, outpacing financial giants like Goldman Sachs.  
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Crypto-collateralized stablecoins (backed by crypto assets)
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The second most common type uses other digital assets as collateral instead of cash. The leading example here is DAI (recently rebranded to ‘USDS’), issued by DeFi protocol MakerDAO. Currently, there is an aggregate supply of ~$10B of USDS and USDS circulating, generating $300-400M in annual revenue for the protocol, and frequently profits of $50-100M. Value is returned to token holders via regular token buybacks on the open market. In models like this, everything is permissionlessly and automatically managed by smart contracts and the stablecoin USDS is issued against a basket of various digital assets. Users can deposit more volatile crypto (most often ETH) as collateral and borrow USDS against it at any time. Usually, the system requires over-collateralization (e.g. $150 of ETH backing $100 of borrowed USDS) to absorb price swings. There are multiple implementations that follow this model such as Liquity USD (LUSD) and Frax, which use their own custom mechanisms to maintain their peg. These models appeal to those who prefer on-chain crypto collateral over trusting a bank or centralized issuer, but they can be capital-inefficient (requiring excess collateral) and introduce complexity and additional smart contract risk for users. These are generally viewed as more ‘crypto aligned’ given their entirely onchain nature and issuance via decentralized protocols. 
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Algorithmic and hybrid stablecoins
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The third type are algorithmic stablecoins, which aren’t fully backed by collateral but use algorithms and secondary tokens (typically their own native protocol tokens) to absorb volatility. To many, these are the holy grail for stablecoins as they theoretically separate the asset from any offchain traditional finance ties but have proven very difficult to implement safely, and the list of failed attempts is long and expensive. This model gained notoriety with TerraUSD (UST and Luna), an algorithmic stablecoin that collapsed in 2022 and erased nearly $40 billion from the market after breaking its peg. Purely algorithmic designs (which aim to maintain $1 value via mint-and-burn mechanics with a volatile sister token or through programmatic rebasing) have largely fallen out of favor after Terra’s failure. However, hybrid models still exist. For instance, USDD (on Tron) is an algorithmic-leaning stablecoin that is over-collateralized with crypto reserves. Frax began as partially-collateralized algorithmic implementation (hence the name derived from fractional) but later moved to fully backed reserves in the wake of UST’s collapse.
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In a reductive sense, one can think of USDT and USDC as digital IOUs for actual dollars held with a bank, making them roughly as stable as the dollars in those accounts. By contrast, USDS/DAI is like a digital dollar backed by crypto collateral and its stability comes from the fact that even if the collateral’s price moves, the protocol has more than enough buffer to keep the stablecoin redeemable for $1 worth of assets at any time. Models like Terra’s collapsed UST, which tried to act like a stable dollar without full backing and backing only within an endogenous token (somewhat like a bank that guarantees only a portion of deposits and with its own equity), have to date proven unsustainable due to the endogenous feedback cycle built into the system design. 

The general takeaway here is that not all stablecoins are created equal, but the successful ones to date have found ways to credibly answer the question: “Why should 1 token be worth $1?”

Dollar-referenced “stable” tokens
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As discussed, most stablecoins achieve their peg with straightforward backing (fiat or crypto reserves) and guaranteed redeemability. New implementations, such as Ethena’s USDe, are developing novel approaches that stand out from traditional stablecoins, even though they are also pegged to the U.S. dollar. What makes USDe different? Simply, USDe is a crypto-backed “synthetic” dollar that uses hedging and basis trade strategies to remain stable against USD​. Instead of holding $1 in a bank for each token, USDe is fully backed by assets like ETH and BTC, but crucially, it neutralizes their volatility by taking offsetting short positions in the market via perpetual swaps. Though these are theoretically backed by adequate assets, we caution readers against viewing them in the same way they would simple models like USDT and USDC. That is, USDe should be thought of more as a dollar-referenced tokenized basis trade asset, rather than as a stablecoin in the traditional sense, though by and large they can serve the same purpose. The underlying risks and stability mechanisms associated with perpetual swaps, hedging and counterparty reliance across multiple custodians and exchanges are quite different from simply having $12-trillion AUM Blackrock manage short term US treasuries custodied with $53-trillion custodian BNY Mellon. But on the flip side, the crypto-native nature of models like this allows users to earn 5-18% on their ‘cash’ position depending on market state. 

Wait, 18% on cash? How does that work?

The flow itself is relatively simple. A user deposits e.g. 1 ETH into Ethena’s contracts (worth ~$1,800) to permissionlessly mint some amount of USDe. If Ethena did nothing else, the value of that backing would fluctuate with ETH’s price (e.g. not stable at all). To keep the value steady in dollar terms, Ethena immediately opens a short position on ETH of equal size. If ETH’s price drops, the collateral loses value but the short position gains value, balancing it out; if ETH’s price rises, the collateral gains are offset by losses on the short. This is referred to as a delta-neutral hedge, meaning the portfolio’s net value stays at $1,800 no matter how ETH’s price moves​. This means that the protocol can mint roughly $1,800 worth of USDe, and that backing will remain roughly $1,800 in value regardless of crypto market swings. By continuously adjusting these hedges (e.g. using automated algorithms and derivatives on major exchanges), USDe maintains its peg without ever holding an actual dollar. In essence, it behaves like a stable $1 token that’s 100% on-chain, supported by crypto and trading strategies instead of a bank account. To date, it has worked flawlessly, but the complexity of the implementation naturally introduces additional risks that holders should be aware of. Note that this is a very common strategy that many hedge funds adopt; Ethena just took the step to tokenize the yield generation of this trade and make it accessible to anybody that wants to buy it. This highlights the power of tokenization and shows how it can extend to somewhat fuzzy and intangible concepts like a basis trade. 
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So why does this matter? We mentioned earlier that stablecoins that are separate from the traditional financial system are the ‘holy grail’ for stablecoins. While not purely algorithmic, models like USDe are a step closer in that direction. For one, USDe doesn’t rely on traditional banks or trust in a centralized issuer’s reserves; its backing assets (ETH, BTC and the associated derivative contracts) are mostly managed on-chain or with transparent custody, and it has relatively less reliance on traditional finance infrastructure​. This means USDe aims to be censorship-resistant and scalable in a way fiat-backed stablecoins aren’t (Circle and Tether can freeze funds, for example). It also enables Ethena to introduce a yield-generating model. Because of the way crypto markets work, the act of shorting volatile assets often earns interest (funding) payments. In risk-on bull markets, funding rates have historically pushed yields well above 10%. 

Ethena’s USDe is an experiment in creating a ‘stablecoin’ like instrument that’s much more crypto-native, attempting to combine the stability of a $1 peg with the decentralization of crypto. The tokenization of these basis trades is a great representation of the composability and innovation possible within DeFi. 

Why Stablecoins Will Eat the World
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Why is stablecoin use growing so rapidly? Simply, they combine the trust and familiarity of the USD with the speed and reach of the internet over blockchain rails. What that means in practice is incredibly powerful:

• Self-Custody and User Control: Stablecoins allow individuals and businesses to hold dollars in a self-custodial way, without needing a bank account or intermediary. If you have a stablecoin in a digital wallet, you effectively hold a dollar-value asset that you can access 24/7 (think ‘internet cash’). This is revolutionary for anyone who has dealt with custodial risk or bank restrictions. For instance, a company can hold significant cash reserves in stablecoins and manage them programmatically (e.g. automated computer code), or an individual in an unstable economy can keep their savings in USD stablecoins on their phone, out of reach from local bank or government crises. For individuals in emerging markets where the stability of local currencies is rarely taken for granted (we explored this in depth in a prior post), the value of having access to USD to protect wealth cannot be understated. For an individual in the US, this is taken for granted. But for someone in a hyperinflationary emerging market, this is potentially the best possible way to protect wealth from being severely eroded. 
• Programmable Money: Unlike regular fiat in the traditional banking system, stablecoins are native to the internet and programmable by code (we went deep into exploring the concept of programmable money here). This means money can move according to predefined rules or triggers (e.g. smart contracts) and other computer code. For example, a stablecoin payment can be made conditional on delivery of goods (automatically releasing from escrow via a blockchain contract), split among stakeholders instantly upon receipt, or used to make streaming micropayments for hourly or gig-economy workers. In short, stablecoins turn money into software, which can be integrated into any application or workflow, streamlining the way businesses move and manage assets. For example, businesses can use stablecoins for automated treasury operations while seamlessly accessing DeFi yields on idle cash up until the very second they need to make a payment, maximizing yield on holdings. DeFi platforms already use stablecoins as their lifeblood, enabling lending, borrowing, and trading with instantaneous settlement and programmatic distribution. Offchain businesses can benefit just as much. For example, if a company issues a dividend as a stablecoin, it could programmatically distribute fractions of cents to thousands of shareholders at once and at essentially zero cost, which would be essentially impossible via traditional rails. Though tough to imagine for current companies today, this is already table stakes for hundreds of DeFi protocols. 
• Global Access, Instant Settlement (24/7): Stablecoins move at the speed of the internet. They can be sent globally within seconds at any time, regardless of whether it’s a weekday, weekend, or holiday. There are no banking hours or 4pm cut-off times. Anyone with an internet connection can receive or send stablecoins at any time, making them a powerful tool for cross-border payments and remittances. For example, a freelancer in India can be paid by a client in the U.S. in USDC on Saturday midnight just as easily as a Tuesday noon, with confirmation in less than 1 second and for fractions of a cent. Compare that to waiting days for an international wire and the associated hefty fees. The speed and always-on nature of stablecoin transactions also reduces counterparty risk in financial trades (no need to wait for wire transfers to clear) and frees up capital from being tied up in transit. Tron, a blockchain heavily used in Asia, South America and Africa, has over $70B in USDT on its network, largely used for every day payments and increasingly in commerce.
• Transparency and Auditability: Every stablecoin transaction on a public blockchain is transparent and traceable in real-time. This is a stark contrast to opaque banking networks. Anyone can verify transfers, track large movements, or programmatically audit flows in real time (the infrastructure to do this is rapidly improving). This transparency can help build trust. For example, a charity can show every donor exactly how funds are disbursed via stablecoin transactions on-chain, or government aid to foreign countries can be traced to ensure it is being used as intended (e.g. what USAID has shown interest in doing). On the reserve side, major fiat-backed stablecoin issuers have moved toward greater transparency with regular attestations and reports. Circle, for instance, publishes monthly reports of its reserves audited by Deloitte. Even Tether, after past controversies about its reserves including criminal suits, now discloses its reserve breakdown with assurance from BDO. Tether has significantly shifted its reserves toward safer assets since 2022 (reducing riskier holdings like commercial paper)​ and holds the vast majority of its reserves in cash and treasuries. In fact, Tether is now one of the world’s largest buyers of U.S. treasuries, outpacing all but a few countries (over $110B worth). Such transparency - both on-chain and via disclosures - means stablecoins can be more observable and auditable than traditional bank or payment platform money. Auditors or even regulators can inspect transactions on the network, and users have insight into supply and movements that are simply not possible with physical cash or bank deposits. This openness ultimately can reduce fraud, enable real-time compliance checks, and increase confidence that the system is solvent and fair.

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• Cheaper and Faster Transactions: Stablecoin transactions can be significantly cheaper than traditional payment methods, especially for cross-border transfers or small payments. For example, sending a bank wire abroad might cost $30–$50 and a few percent in currency conversion, while sending a stablecoin on a low-cost blockchain (like Base or Solana) can cost a fraction of a cent. And as onchain protocols like Aerodrome are further developed, onchain FX swaps can be done programmatically (one can already permissionlessly swap between small amounts of EURC and USDC on Aerodrome for just 5 bps). A sizable share of payment costs comes from compliance overheard, but as we discussed in the previous section, stablecoins present the opportunity to greatly reduce the frictions associated with regulatory adherence due to the open and traceable nature. The implications for remittances are huge. Sending $200 through traditional remittance services costs roughly 6–7% in fees on average​, resulting in billions of fees paid to middlemen (around $54 billion annually in aggregate fees​). Stablecoins can cut that fee significantly by eliminating the multiple 3rd parties involved. For businesses, stablecoins also reduce costs by eliminating multiple intermediaries (and their fees) in the payment chain. 
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Take credit card networks for example - merchants often pay 2-3% per transaction which they either have to absorb themselves or is passed on into the prices consumers pay. A stablecoin payment could be received for a tiny fraction of that cost, which is why companies like Visa and Mastercard are actively using stablecoins for settlement themselves. For example, Visa uses stablecoin (USDC) payments on Solana to speed up merchant settlements, allowing acquirers to settle in USDC instead of waiting on bank wires. All of this points to leaner, faster, and cheaper financial operations when using stablecoins as the medium of exchange (we detailed how complex and burdensome this process actually is in an earlier post). If the largest payment networks in the world are adopting stablecoins, one has to imagine there is something there. 
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• Dollar Access For the World: Perhaps the most profound benefit is the democratization of access to a stable currency. Billions of people live in countries with unstable currencies or poor banking infrastructure. Stablecoins (especially USD-pegged versions) provide a lifeline by giving anyone with a smartphone the ability to store and transact in a stable value asset (more people have phones than bank accounts around the world). In places like Argentina, Nigeria, Turkey, and Venezuela, people turn to stablecoins to escape hyperinflation and strict capital controls. Stablecoin adoption is surging in high-inflation economies. For example, Turkey saw over $63 billion in stablecoin transaction volume in 2024 (one of the highest in the world), and purchases of stablecoins reached an estimated 3.7% of Turkey’s GDP​ as people sought to protect their wealth against the rapidly-depreciating lira. In Argentina, demand is so strong that buyers at times reportedly paid a 20-30% premium to acquire USDT when access was scarce​, underscoring how valued digital dollars are in the face of a collapsing currency. This phenomenon of “stablecoin premium” in emerging markets highlights the real need for accessible, stable USD in an unstable financial environment. Stablecoins meet that need in a way physical cash or bank accounts simply cannot given they’re accessible to all (just download a wallet app), easy to transfer globally, and not subject to local bank failures or other restrictions. It’s telling that USDT (Tether) has been described as a lifeline for many of the estimated 200 million people around the world that have used it. By reinforcing the availability of USD globally, stablecoins also indirectly contribute to financial empowerment. Entrepreneurs in developing countries can engage in global commerce with stablecoins, families can receive remittances more efficiently, and savings can be kept in a stable form without needing a U.S. bank. 
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Each of the above advantages on its own is compelling enough. But combined, they explain why stablecoins will be so transformative (and why they deserve their own long-form piece in our series). They essentially turbo-charge the dollar, providing user control, programmability, global reach, low friction and permissionless access. For financial use cases, these properties mean stablecoins can be integrated into financial products to unlock new efficiencies and markets, whether it’s faster settlement in capital markets, new payment solutions for clients, or simply better treasury management for small businesses.  

The Numbers Can’t Be Ignored
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Stablecoins aren’t just a niche curiosity anymore, they’ve grown into a hundreds-of-billions market and are handling transaction volumes on par with, or exceeding, major payment networks. The below snapshot is from Visa’s own stablecoin tracking dashboard. Yes, you are reading that right: stablecoins facilitated $33 trillion in transaction volume over the past 12 months, exceeding the volumes of Mastercard, Visa and Paypal, combined. Notably, Visa provides a filter here to exclude intra-exchange transactions and bots to get an ‘adjusted’ volume, which still outpaces Mastercard and Paypal. But here is the thing: the programmability of stablecoins means that bot volumes are real volumes, automated and running autonomously onchain. Are these transactions user-initiated like a regular credit card payment? No, and that is exactly the point. These systems are automatic and programmatic, something traditional rails simply are unable to be. High frequency, low-cost, automated, potentially streaming, payments conducted without humans in the loop at any point. When we talk about programmable internet-native value transfer, this is exactly what we are talking about. 
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These numbers are mind-boggling if one stops to appreciate them: a less than 10-year-old grassroots financial system built by the public around the world - with zero support from world governments, and often even antagonistic push back - is already moving more money annually than the world’s largest credit card networks that have been around for decades. It speaks to how quickly stablecoins have become integral, especially for large crypto trading flows, remittances, and cross-border transfers. And the US doesn’t even have a bill regulating these yet. But that is coming (likely this year), and financial giants such as Fidelity and Bank of America have already indicated they will get into the stablecoin game once the legal framework is finalized. Paypal already has their own, PYUSD, that is integrated into DeFi lending protocols on Solana such as Kamino. Retail trading platform Robinhood is also supporting a new consortium-based stablecoin USDG (along with e.g. Visa, Worldpay, Standard Chartered and Dreyfus). Mastercard and Stripe both recently announced major additional pushes into stablecoins, including a $1.1B acquisition of stablecoin service provider Bridge by Stripe. 
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The key point here is that by transaction value, stablecoins are already a major player in the global payments landscape, already outpacing all but the largest government-built systems such as ACH and Fedwire, and that the world’s biggest payments players are only now entering the game.
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All of this is to say, stablecoin supply has grown by several orders of magnitude in just a few years, usage volumes are in the tens of trillions of dollars annually, and stablecoins have embedded themselves into the financial fabric worldwide across many use cases, from major exchange markets to simple family remittances. And we’re still early, adoption is about to go parabolic. Wall Street analysts (Bernstein, Standard Chartered, Citi, countless others) expect stablecoins to reach $2-4 trillion in the next few years as more financial platforms integrate them​. It is becoming abundantly clear that stablecoins are not a temporary phenomenon but rather a fundamental innovation in how value can be stored and moved in an internet-native way. 

Governments are Increasingly Embracing Stablecoins
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Given the disruptive nature of stablecoins, one might assume governments - especially the U.S. Treasury - see them as a threat. After all, stablecoins create a pseudo-parallel dollar-based banking system outside traditional control, and the interplay there with monetary policy is difficult to predict (e.g. is policy transmission as efficient? What happens to lending rates?). However, there’s actually a very compelling case to be made that U.S. policymakers want to encourage the growth of stablecoins (provided they are properly regulated), and signs are starting to suggest this is true:

• Reinforcing U.S. Dollar Dominance: Stablecoins are almost entirely denominated in USD, and as such, as they grow in prominence, they are effectively dollarizing the internet. Every time someone in an emerging market opts to use USDT or USDC instead of a local currency, they are strengthening the USD’s role as the world’s preferred currency. This is why former House Speaker Paul Ryan argued that stablecoins may help preserve the dollar’s global reserve currency status​ and why current U.S. House Committee Chairman French Hill recently stated that “a properly regulated stablecoin market can strengthen the U.S. dollar’s dominance” in the world​. From the Treasury’s perspective, every stablecoin in circulation is essentially another dollar out there in the world, often in markets where physical dollars or U.S. bank accounts are historically harder to access. This extends the dollar’s reach and use, which is a strategic advantage (especially as countries like China push their pseudo-CBDC digital yuan). In short, stablecoins can be seen as extensions of the U.S. dollar onto the internet, promoting dollarization without official government effort and the necessary infrastructure and frictions that arise through traditional systems. 

• Demand for U.S. Debt and Financial Stability: The irony of this one is not lost on your author. Whereas crypto (e.g. Bitcoin) was created to escape from and protect against the traditional system, stablecoins may help bail it out. As we mentioned earlier, large issuers such as Tether have become significant purchasers of US treasuries and now purchase more than most countries around the world. In 2024, Tether estimated it could rank among the top 10 global holders of U.S. Treasuries as its reserves grow​, and should stablecoins reach the $3 trillion that some analysts expect, this prominence is only increasing. Circle similarly holds tens of billions in T-bills and one can expect Paypal, Robinhood, and every other new issuer coming to market to similarly be massive new buyers. This is effectively the private sector (and then indirectly often overseas holders) funding the U.S. government by buying its debt via stablecoin usage. The Treasury benefits from this additional demand for its bonds, potentially at higher volumes and lower yields than they would otherwise. Moreover, because these reserves are typically very high quality and liquid, a well-regulated stablecoin network could enhance systemic stability rather than harm it as these issuers are akin to narrow banks that hold only safe assets. Some have compared stablecoins to money market funds (MMFs). During stress events, there have been “runs” from riskier stablecoins to safer ones similar to how investors move funds between MMFs​. But with appropriate oversight and regulation (e.g., requiring issuers to hold only cash and T-bills), stablecoins could be as safe as, or even safer than, traditional bank deposits which are fractionally lent out. In essence, the Treasury likely prefers global users to hold dollars via fully backed stablecoins (which prop up demand for USD assets) rather than hold other currencies or unbacked crypto. This is why the European Central Bank is reportedly nervous about the current US administration’s embrace of cryptocurrencies: the expanding reach of the dollar could destabilize the Euro-based financial system.
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Another interesting use case is if the US increasingly funds its foreign aid via stablecoin rails. While the first-order impacts are clear (e.g. lower cost, faster, traceable), it is the second-order impacts that are fascinating. With the current model, the US sends funds overseas, but that is really the end of the direct monetary benefit; the US receives little direct compensation in return. However, should they make those payments in stablecoins instead, they are simultaneously turning every single US aid recipient into a vector through which they can increase US treasury buyers. How so? Well, for every stablecoin minted, that represents a nearly 1:1 increase in demand for US debt. So, if the US government sends $100M in aid to a foreign country, that also represents a $100M increase in private, long-term, foreign-held US debt, just by putting those aid payments on stablecoin rails. 
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• Innovation and Competitiveness: The U.S. has a strategic interest in being the world leader in innovation of all kinds, from AI to financial technology. If stablecoins are the future of money movement, the U.S. likely wants that innovation to happen under its watch rather than being driven entirely offshore. Encouraging stablecoin development and incentivizing issuers (e.g. Tether) to reshore to the US could ensure that dollar-based innovations outpace potential competitors like a digital euro or digital yuan. This is why former Acting Comptroller of the Currency Brian Brooks argued that stablecoins can keep the dollar the world’s reserve currency. There’s also the more practical reason of supporting a rapidly growing industry around stablecoins, from blockchain networks to fintech startups, that the U.S. could benefit from economically. This is why the industry is so excited about the upcoming stablecoin legislation expected to be passed in the coming months. Should the final bill ultimately create a sensible regulatory framework, the U.S. can do what it does best and let the private sector innovate. However, if regulation is too heavy-handed or hostile (some aspects of the House’s bill seem to be leaning in favor of big banks; the Senate’s is more pro-innovation), users might migrate to non-USD stablecoins or systems out of U.S. reach, which in the long run could weaken dollar usage. The administration has signaled a keen awareness of this potential, and appointments such as Paul Atkins, David Sacks, Hester Pierce and Howard Lutnick suggest policy will be pro-innovation in the US.
  

Naturally, any new technology presents novel risks, and officials have often pointed to risks and the need for regulation. But the stance in recent years has very much shifted from “let’s stop stablecoins” to “let’s supervise and foster stablecoin development.” As mentioned above, one concrete sign is that legislation is moving through Congress that will set standards for reserves, audits, and redemption rights for stablecoin issuers. The endgame for the US Treasury may end up being a world where regulated stablecoin issuers operate somewhat like banks or money funds in a public-private partnership, with strict oversight, but are allowed (or even encouraged) to innovate and expand. In that scenario, the U.S. government gets the benefits of dollar proliferation and tech competitiveness, while reducing the odds of a bad actor causing a meltdown. This is likely the one reason that major crypto companies like Coinbase are actively pursuing federal banking charters in the US (Circle has previously tried but appears to be more focused on a state licensing approach now). 
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Valid Criticisms Remain
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We would be dishonest to discuss stablecoins without addressing the risks and criticisms, of which there are many. While the promise is real, so too are the potential downsides and their collective history definitely leaves much to be desired.  

• Reserve Transparency and Trust: Critics point out that users of fiat-backed stablecoins must trust the issuer to hold adequate reserves. In the past, this trust has been difficult to give. Tether was fined by the NY Attorney General in 2021 for misleading statements about its reserves and not being fully backed at certain times and the industry was generally pretty suspicious of its claims​. This highlights the risk that, unlike crypto native assets like Bitcoin, there is still a tremendous amount of trust involved with stablecoins. Without strict audits, a stablecoin could theoretically issue more tokens than it has in reserves, which would open them up to a run and a collapse of the peg. As we highlighted earlier, most stablecoin issuers now undergo regular attestations by accounting firms (such as Deloitte and BDO), regularly publish reserve breakdowns, and in some cases are pursuing formal oversight. For example, Circle has tried to get a federal banking charter in the past and Paxos (technically the issuer of Paypal’s PYUSD) is regulated by NYDFS. Audited proof-of-reserves will be the norm, and once the technology is fully developed, real-time proof-of-reserve attestation via oracles like Chainlink will likely be standard practice. 

• Run Risk: A classic worry is a “bank run” scenario where many users try to redeem stablecoins at the same time. And to be fair, this is valid. Although reserves are held in high-quality assets, there are still frictions associated with liquidating $50B US treasuries. It simply cannot happen instantly. The industry actually saw a mini stress test of this exact scenario in March 2023 (readers may remember the acute banking crisis when Silicon Valley Bank, Silvergate and Signature all failed or were forced to liquidate). When SVB went down due to the fallout from problems in the treasury market (a wholly separate issue from anything crypto-related) Circle was caught in the mix. Roughly $3.3B of USDC’s cash reserves were stuck in the bank, causing USDC to temporarily de-peg to ~$0.88 as people worried USDC would no longer be fully backed by adequate reserves. 
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Circle ultimately honored all redemptions and USDC quickly bounced back to parity once the government guaranteed SVB deposits, but it was nonetheless a lesson that even cash-equivalent reserves at one of the largest and most reputable banks in the US can pose risk if not diversified. As a result, issuers are spreading reserves across multiple institutions and relying even more on short-duration U.S. Treasuries (which can be sold or matured quickly for cash). This is just for fiat-backed stablecoins. Crypto-backed stablecoins handle runs differently and are at higher risk should they come under high amounts of stress. To protect against runs, they typically institute programmatic liquidations. That is, if deposited collateral falls far enough in value, the protocols automatically liquidate some or all of the collateral to maintain full backing. This has historically worked for MakerDAO’s DAI/USDS, but algorithmic ones like Terra quickly blew up once the death spiral began. While novel mechanisms are attractive and may present huge potential in the future, they definitely come with associated risks any holder must be aware of. 

• Algorithmic Failure – The Classic Death Spiral: Terra’s collapse in 2022 is often cited as evidence that “stablecoins can be unstable.” And undoubtedly in that case, that is a totally fair criticism to level. With Terra, the protocol had its own native token (LUNA) against which users could mint and redeem UST. Through this mechanism, as long as there was more LUNA outstanding than UST, the backing was secure. However, this feedback loop works in both directions, and as soon as faith in UST - and thus LUNA - was lost, the mechanism’s ability to maintain a peg broke and the death spiral began. Thankfully, there are far fewer protocols attempting to use purely algorithmic or endogenously backed stablecoins today. But novel implementations still happen (such as Ethena’s USDe) that can be immensely successful. However, even with something like USDe, the industry’s immune response was triggered, and it took the team many months and a tremendous amount of communication, documentation and education to get most comfortable with their model.
  

• Regulatory and Legal Risks: Stablecoins exist in an admittedly gray zone in many jurisdictions. Though the outlook is improving (as mentioned above), there still remains a risk that governments may crack down on the technology as they have done at times in the past. For example, in 2021, the U.S. SEC threatened action against Facebook’s Diem (which ultimately caused it to shut down), and in 2023, New York regulators ordered Paxos to stop issuing Binance’s BUSD. At the time, BUSD had almost $25B onchain. But all signs point to regulators being more accommodative to stablecoins going forward. The EU passed MiCA (Markets in Crypto-Assets regulation) which includes stablecoin provisions in 2024, and the UK is looking to regulate stablecoins for payments as well. In the U.S., as noted, Congress is actively working on laws to formalize a federal framework for stablecoins. In the near term, there still remains regulatory risk (especially for those that operate outside proposed guidelines and for algorithmic implementations), but in the long run this is a healthy and much anticipated step along the maturation process. 

• Technology and Security Risks: Stablecoins are crypto, and that means they naturally come with technical risks. Smart contract bugs, hacks and blockchain outages, though exceedingly rare, can pose problems. For instance, if a stablecoin is only on one blockchain and that network halts (as happened to Solana in its earlier days), users can’t transfer it until the network is functioning again. This is typically just a few minutes to a few hours (and would still be faster than traditional payment systems!) but is important to keep in mind for anything programmatic. Importantly, the stablecoin smart contracts themselves are usually simple and are quite battle tested at this point, so the direct risks of holding and sending them are actually fairly low. However, as we pointed out in a post a few weeks ago, the risks associated with DeFi protocols and exchanges are very real. This risk naturally presents a headwind to stablecoin adoption, and for good reason. This is why operational security, audits of smart contracts, and sound custodial practices are so important for anyone interacting with crypto. Beyond the crypto-native risks, stablecoins obviously share the same cybersecurity challenges of any other digital financial product. 

• Monetary Policy Impact: We alluded to this earlier, but it is fair to argue that if stablecoins get too large, they could potentially create complications for monetary policy or bank funding. For example, if billions of dollars leave bank deposits into stablecoins, that could reduce deposits in the banking system, potentially raising funding costs for banks (and thus industry) or altering credit creation (fractionalized banking roughly means that every $1 that leaves results in $9 of fewer loans originated). However, at their current scale (~$250B), stablecoins are still quite small relative to U.S. money supply (US M2 is ~$22 trillion, so about 1%, versus $6.4 trillion in US MMFs). Stablecoin proponents argue that increased use of stablecoins might actually force banks to offer better services by creating competition for the marginal deposit. As well, given that most stablecoin reserves are held in US treasuries, the money isn’t exactly “leaving” the economy, it’s just shifting where it is held (e.g. from a deposit at Bank of America to a Blackrock-managed money market fund), but then actually put to productive use in the onchain economy (unlike a MMF deposit). This is undoubtedly a dynamic to watch as regardless of the benefits that stablecoins might provide, the Fed will want to ensure it can still effectively manage liquidity in the system.

One easy pushback to much of this criticism is that it is simply a story of maturation. Stablecoins have undoubtedly come a long way from their crypto-native roots, and now that they are reaching the size of potential systemic importance, guardrails are going up. Stability and trust are literally in the name “stablecoin”, and issuers are keenly aware that one major failure can destroy the trust they have been able to build to date. 

All of this is to say that despite the risks (many valid) the major stablecoins today are far more robust, transparent, and closely watched than they were just a few years ago. With better regulation around the world, the stability and trustworthiness of stablecoins will continue to grow. And while all of the risks obviously can’t be eliminated, the industry is hard at work to address them. Plus, the potential rewards (a faster, more inclusive, dollar-based global internet financial system) and the opportunities presented from that disruption provide ample motivation to get stablecoins right.
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Convinced Yet?
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Stablecoins have swiftly moved from the periphery of crypto as BTC trading pairs to center stage in global finance. What started as a simple concept - digital IOU tokens for a dollar - has grown into what very well may be the foundation upon which the next generation of financial infrastructure is built. All of the benefits we have highlighted throughout, specifically the global, permissionless 24/7 access to US dollars present a compelling case that blockchain protocols, with stablecoins at their core, will be the anchor for the truly open internet financial systems of the future. 

Greater integration of stablecoins into mainstream finance is around the corner. We already have payment giants like Visa, Mastercard, Stripe and Paypal all getting involved, and multi-trillion-dollar banks such as Bank of America exploring ways to jump in as well. It is not difficult to imagine a near future where sending a stablecoin is as common as sending a text (and just as easy), and where every financial institution has a stablecoin strategy, whether that involves using them for back-end settlement or offering them to clients for yield and payments. With comprehensive stablecoin and market structure legislation around the corner in the US, the floodgates are on the brink of bursting open for institutional adoption.

Though there are definitely reasons to still be cautious, it is abundantly clear that there are far, far more reasons to be enthusiastic about what stablecoins can do.  And the direction of travel is clear: stablecoins are increasingly legitimized and ever more woven into the fabric of finance. Their advantages are simply too significant to ignore, and with each passing month we see new use cases and endorsements that would have gotten one laughed out of a boardroom just a few years ago. Think about that for a moment: aside from the most strident early supporters of blockchain technology, who would have honestly thought that Visa would be settling transactions on cryptocurrency blockchains or perhaps more far-fetched, that an entirely grassroots network would spring up to facilitate more transactions than Visa, Mastercard and Paypal combined?

In many ways, stablecoins simply represent the dollar being reinvented for the internet-native 21st century. Not replacing the USD, but significantly upgrading it.

The era of digital dollars is dawning, and it looks stable.
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