10 min read
Written by
Colossus Digital
Published on
Aug 29, 2025
Introduction
Volatility is the hallmark of most crypto-assets, yet portfolio managers often need on-chain liquidity that behaves more like cash in a money-market fund than a high-beta equity. Stablecoins fulfil that role: they are digital tokens engineered to keep a steady price, typically USD 1.00, while retaining the programmability and 24/7 reach of public blockchains. The sector has ballooned from ≈ US $20 billion in 2020 to US $246 billion in May 2025, processing about US $28 trillion in transfers last year, a volume that already surpasses Visa and Mastercard combined.
What is a stable coin?
A stablecoin is a crypto-token whose issuer (or underlying protocol) employs one of several mechanisms to keep the token’s market value closely pegged to a reference asset—most often the U.S. dollar, but also gold or the euro. In practice, each time a token is minted, an equivalent amount of collateral is placed in reserve, or an algorithmic balancing act is triggered. Tokens can be redeemed on demand, creating an arbitrage loop that pulls the market price back to par. Think of it as a tokenised money-market share with intraday settlement finality.
How the PEG is mantained
Issuance & Redemption
Authorised participants deposit collateral (fiat, crypto or commodities) and receive newly-minted tokens; redemptions burn tokens and release collateral.Market-Making Incentives
When a token drifts from its peg, arbitrageurs buy below US$1 or sell above US$1, restoring equilibrium.Transparency & Audits
High-quality issuers publish reserve attestations or on-chain proofs to reinforce confidence.Emergency Controls
Some designs include circuit-breakers or collateral ratio buffers to handle extreme volatility.
Peg: In its simplest form, a currency peg refers to a fixed or stable price for the exchange rate between two assets. In traditional markets, it involves pegging a currency to another, like the US dollar being pegged to gold.
The four main stable archetypes
Category | Collateral & Mechanism | Traditional-finance parallel | Examples |
Fiat-backed (off-chain reserves) | 1:1 bank deposits or T-Bills held by a trust company; monthly attestations | Cash held at a custodian bank | USDT, USDC, PYUSD, FDUSD |
Crypto-collateralised | Over-collateralised baskets of liquid crypto locked in smart contracts; automatic liquidation if collateral ratio falls | Over-collateralised repo line | DAI, RAI |
Commodity-backed | Title to a physical asset (gold, oil, carbon credit) held with a regulated vault | Exchange-traded gold certificates | PAXG (1 oz London Good Delivery bar per token) |
Algorithmic / Synthetic | Programmatic supply changes or hedging strategies aim to match the peg with minimal collateral | Currency board or balance-sheet hedging | FRAX, USDe, MIM, MAI |
How many stablecoins exist and which ones matter?
Public data services list well over 120 active stablecoin tickers in mid-2025, but the top ten account for more than 90 % of aggregate supply. Below is a selection of the most significant by market capitalisation:
Rank | Ticker | Peg | Market Cap (July 2025) | Issuer / Model |
1 | USDT | USD | ≈ US $159 B | Tether – fiat-backed |
2 | USDC | USD | ≈ US $62 B | Circle – fiat-backed |
3 | DAI | USD | ≈ US $5.4 B | MakerDAO – crypto-collateralised |
4 | USDe | USD | ≈ US $5.3 B | Ethena Labs – synthetic/hedged |
5 | FDUSD | USD | ≈ US $1.5 B | First Digital – fiat-backed |
6 | PYUSD | USD | ≈ US $0.9 B | PayPal – fiat-backed |
7 | PAXG | Gold | ≈ US $0.9 B | Paxos – gold-backed |
8 | TUSD | USD | ≈ US $0.49 B | Techteryx – fiat-backed |
9 | USDD | USD | ≈ US $0.43 B | TRON DAO – hybrid model |
10 | EURT / EURS | EUR | ≈ US $0.59 B (EUR value) | Tether/Stasis – fiat-backed |
Source: CoinMarketCap snapshot 10 July 2025 (source: CoinMarketCap).
Stablecoins vs. "regular" crypto-assets
Dimension | Bitcoin / Ether / “Coin” | Stablecoin |
Price behaviour | Free-floating, often highly volatile | Target price is fixed (e.g., USD 1) |
Value driver | Market supply and demand, perceived scarcity | Credibility of collateral and peg mechanism |
Primary use case | Long-term appreciation, speculation, smart-contract gas | Payments, liquidity parking, on-chain settlement |
Risk profile | Market risk dominates | Counterparty / collateral risk dominates |
Accounting treatment | Intangible asset (IAS 38) under IFRS | Often treated as cash or cash equivalent if redemption rights are robust |
Stablecoins function much like tokenised cash equivalents, whereas other crypto-assets behave more like digital commodities or high-growth equities.
Advantages and institutional use-cases
Advantage | Description | Analogy |
Reduced volatility | Pegging to fiat shields treasuries from day-to-day price swings | Money-market fund NAV stability |
Instant, global settlement | 24/7, T+0 transfers across chains | Real-time gross-settlement (RTGS) without cut-off times |
On-chain liquidity hub | Facilitates DeFi lending, swaps and collateral posting | Repo cash leg on inter-dealer brokers |
Programmable compliance | Smart-contract controls for whitelists, velocity limits and reporting | SWIFT gpi with embedded rule-sets |
Treasury-yield capture | Top issuers hold ~US $150 B in short-dated U.S. Treasurys, passing some yield to holders | Holding treasury bills in an omnibus account |
Key risks & limitations
Risk | Description | Case study |
Reserve opacity | Lack of real-time proof of funds undermines trust | Historical Tether reserve questions |
Regulatory change | Draft STABLE & GENIUS Acts could impose bank-like rules on issuers | Potential capital-adequacy requirements |
Peg failure / run-risk | Algorithmic or under-collateralised designs can collapse | Terra USD (2022) |
Concentration of issuers | Dollar dominance; two issuers hold >70 % of supply | Systemic relevance for money markets |
Blockchain congestion | Stablecoin traffic can crowd out other transactions | High gas fees during market stress |
Conclusion
For institutional allocators, stablecoins provide a familiar risk–return profile—cash-like stability plus blockchain efficiency—without sacrificing the governance and audit trails demanded by regulators. Whether used as settlement rails between desks, as collateral in DeFi strategies, or as a strategic liquidity sleeve, they bridge traditional capital markets and the decentralised economy.
Yet due diligence is paramount. Understanding the collateral stack, legal enforceability of redemption rights, and jurisdictional oversight is what turns a stablecoin from a handy tool into a secure component of a diversified digital-asset strategy. With regulatory clarity on the horizon and market depth expanding, stablecoins are poised to become the on-chain equivalent of commercial paper—an essential, if unseen, layer of modern financial plumbing.
Disclaimer: This article is educational in nature and does not constitute investment advice.
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