Analysis of the Current Status and Regulatory Depth of Global Stablecoins in 2023

Introduction

As the digitalization of the financial world deepens, digital currency has become the central stage in the financial sector. However, one of the biggest challenges faced by digital or cryptocurrency is price volatility. Only by reducing volatility is it possible for a broader audience to accept crypto assets. To address the volatility issue, stablecoins have emerged.

In recent years, stablecoins have received much attention for their ability to combine the advantages of digital currencies and traditional fiat currencies. By maintaining a 1:1 peg with reserve assets or algorithms, stablecoins connect the worlds of digital currencies and fiat currencies.

This report comprehensively covers the rise of stablecoins, the four main types, market status, application scale, emerging stablecoin models, and regulatory supervision of stablecoins.

The Rise of Stablecoins

What is a stablecoin

A stablecoin is a digital currency that is linked to reserve assets such as fiat currency and gold. It is also a cryptocurrency that circulates freely, extends on-chain, and is pegged to reserve assets.

The original intention of stablecoin design is to reduce price volatility. Stablecoins resist severe fluctuations by mimicking currencies such as the US dollar, euro, renminbi, and Swiss franc, contrasting sharply with other cryptocurrencies like Bitcoin.

In 2014, the first stablecoin Tether(USDT) was born, pioneering the peg to the US dollar. Currently, Tether is frequently traded in the cryptocurrency space, and its performance has proven the reliability of its original design.

The four key features of stablecoins:

1. Certification: The certification report is an important part of the stablecoin system, verifying the existence of the underlying assets that support the stablecoin.

2. Nature of reserve assets: High-quality, highly liquid assets are required to ensure the normal operation of the stablecoin.

3. Regulation and Registration: Stablecoins and their operating entities must be regulated by strong regulatory bodies to reduce the risk of financial crime.

4. Technology: The effectiveness of stablecoins depends on the degree of integration of their underlying technology with traditional non-blockchain technology.

Classification of stablecoins

According to the different stability mechanisms, the stablecoins commonly found in the market can be divided into four categories:

1. Fiat-backed stablecoin
2. Crypto Collateral Stablecoin
3. Algorithm stablecoin
4. Stablecoins supported by the product

Fiat-collateralized stablecoin

The most popular stablecoins are backed by fiat currency on a 1:1 basis. A central issuer or custodian holds fiat collateral in proportion to the number of stablecoin tokens in circulation. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the highest market cap fiat-collateralized stablecoins.

Features:

• Centralized issuing institutions, usually private companies
• It is mainly pegged to fiat currency (, which is the US dollar ), with an exchange rate generally of 1:1.
• Implement a reserve proof mechanism, increasing one fiat currency reserve for every stablecoin issued.

encrypted collateralized stablecoin

Cryptocurrency-backed stablecoins are supported by another cryptocurrency as collateral. They use smart contracts instead of custodians to hold the collateral. The issuance process of stablecoins occurs on-chain, executed by smart contracts.

When purchasing ( minting stablecoins like ), it is necessary to lock the cryptocurrency in a smart contract to receive an equivalent amount of tokens. By returning the stablecoin to the corresponding smart contract, you can withdraw the previously locked collateral amount. DAI is the most prominent stablecoin in this category.

Crypto-collateralized stablecoins require over-collateralization to buffer against price volatility of the collateral assets. For example, to purchase 100 dollars of DAI, one needs to deposit 180 dollars of ETH, which corresponds to a collateralization rate of 180%. If the price of ETH falls but remains above the liquidation threshold, the price of DAI can still remain stable due to the excess collateral. If the price of ETH drops below the threshold, the collateral will be forcibly sold for liquidation.

algorithm stablecoin

Algorithmic stablecoins attempt to maintain a peg to assets like the US dollar by dynamically expanding and contracting the supply of tokens. Instead of using fiat or cryptocurrencies as collateral, they utilize specialized algorithms and smart contracts to manage the circulating supply of tokens.

When the market price is below the tracked fiat currency price, the algorithmic stablecoin system will reduce the number of tokens in circulation. If the token price exceeds the tracked fiat currency price, new tokens will enter circulation, adjusting the stablecoin value downward.

Algorithmic stablecoins rely on powerful algorithms. For example, USTC, which is related to Luna, is an algorithmic stablecoin. However, due to the internal algorithm not considering extreme situations, a black swan event occurred, ultimately causing it to de-peg and crash.

Features:

• Unsecured
• Partially or fully backed by native asset collateral
• Floating stable

supported stablecoins

The stablecoins supported by commodities are collateralized by commodities such as precious metals, oil, and real estate. Gold is the most popular collateral commodity, with Tether Gold (XAUT) and PAX Gold (PAXG) being the top gold-backed stablecoins. These assets allow investments to move away from local assets and inject liquidity into less liquid asset classes.

Stablecoin Market Status

Cryptocurrency Market Overview

In 2021, the market value of the cryptocurrency industry grew more than three times, reaching approximately $2.4 trillion, briefly hitting $3 trillion in the middle of the year.

The total market value of cryptocurrencies in 2022 was approximately $830 billion, a decrease of 64% compared to the beginning of the year. At the beginning of the year, it faced high inflation, the Russia-Ukraine conflict, and the Federal Reserve's interest rate hikes. The market was relatively calm in the third quarter but faced regulatory turmoil, with the total market value briefly reaching $1.2 trillion. The collapse of FTX dealt the final blow to the market.

In the first quarter of 2023, the market shook off the bearish trend. The first half was relatively calm, while the turmoil in the traditional banking sector in the second half triggered a rebound in the crypto market.

stablecoin market overview

Total Market Cap of stablecoin

As of May 12, 2023, the total market capitalization of stablecoins is approximately $131.8 billion. The top 9 stablecoins account for over 97% of the market cap, while the top 5 account for over 96%.

Top 5 stablecoins:

1. Tether USDT
2. USD Coin USDC
3. Binance USD BUSD
4. DAI
5. TrueUSD TUSD

USDT, USDC, and BUSD account for over 90% of the stablecoin market, all of which are centralized stablecoins. The market capitalization of the decentralized stablecoin DAI is $4.86 billion, accounting for 3.73%.

Main stablecoin comparison

USDT:

• Market cap of 82.7 billion USD
• Issued by Tether
• With assets such as US dollars as reserves

USDC:

• Market cap of 30.1 billion USD
• Issued by Circle and Coinbase
• With US dollars and short-term government bonds as reserves

BUSD:

• Market capitalization of $5.7 billion
• Issued in partnership between Paxos and Binance
• Reserve in US dollars

DAI:

• Market cap of 4.86 billion USD
• Issued by MakerDAO
• Use cryptocurrency assets as collateral

TUSD:

• Market capitalization of 2 billion USD
• Issued by TrustToken
• Reserve in US dollars

Classification and Application of Stablecoins

centralized stablecoin

The total market value of centralized stablecoins exceeds 129.4 billion USD, with USDT and USDC being the largest in scale. There are mainly six types: USDT, USDC, BUSD, TUSD, USDP, and GUSD.

Tether USDT

• Launched in October 2014
• Market value exceeds 82.7 billion USD
• Operating mechanism: Users deposit USD, Tether creates USDT account
• Reserve Assets: including cash, cash equivalents, short-term deposits, etc.

USD Coin (USDC)

• Launched in July 2018
• Market cap is approximately 30.1 billion USD
• Operating mechanism: Users deposit USD, Circle issues USDC
• Reserve assets: fully backed by US dollars and short-term government bonds

Binance USD (BUSD)

• Launched in September 2019
• Market cap of 5.7 billion USD
• Operating mechanism: Paxos issuance, Binance issues Binance-Peg BUSD on other chains.
• Reserve Assets: 100% USD Reserve

TrueUSD (TUSD)

• Launched in March 2018
• Market cap of 2 billion USD
• Operating mechanism: multiple custodial accounts hold USD reserves
• Reserve Assets: 100% USD Reserve

decentralized stablecoin

MakerDAO (DAI)

• Launched in December 2017
• Market cap of $4.86 billion
• Operating mechanism: Users collateralize cryptocurrency assets to generate DAI
• Stability Mechanism: Interest Rate Adjustments, Liquidation, etc.

FRAX

• Launched in December 2020
• Partially collateralized, partially algorithmic stablecoin
• Operating mechanism: Dual collateral support for USDC and FXS
• Stability Mechanism: Dynamic Adjustment of Collateral Ratio

new stablecoin

Some large protocols are developing their own stablecoins, DEXs, and lending protocols:

• Curve's crvUSD
• AAVE's GHO
• USDD: an endogenous collateral stablecoin supported by various tokens
• Rai, Olympus: Attempting to create a stablecoin that is not pegged to fiat currency.
• Ampleforth: Uncollateralized pure rebase stablecoin

The Growth Potential and Use Cases of Stablecoins

Growth Potential

1. Solve the problem of price volatility of digital currencies
2. Undertake financial functions
3. Provide a more transparent market trading

Use case

1. Fiat Currency Exchange Channels
2. Transaction Medium
3. Safe-haven assets
4. Fund payments, especially cross-border payments

![A Comprehensive Understanding: In-depth Analysis of the Global Stablecoin Landscape in 2023](