The Final Product of Crypto Assets: Stablecoin

Last year, three major events propelled stablecoins into the mainstream:

1. Tether, as the issuer of the world's largest stablecoin USDT, has generated nearly $13 billion in profit with just under 200 employees.

2. Trump's inauguration and the reversal of the United States' stance on digital asset regulation;

3. Stripe acquired the stablecoin infrastructure company Bridge for $1.1 billion, coordinating cross-border transactions.

As a thriving ecosystem generates enormous profits, regulation becomes increasingly clear.

If you are issuing or using stablecoins to develop your business, we hope this guide can help you understand the views of seasoned operators in this field.

To provide a multi-faceted perspective, we leverage a broad network of contacts to gain unique insights from leading contributors at the forefront of stablecoin transformation.

Let's start learning!

Definition of stablecoin

Stablecoins are typically liabilities denominated in US dollars, supported by reserves of assets with equal or greater market value.

There are mainly two types:

• Fiat Currency Support: Fully backed by bank deposits, cash, or low-risk cash equivalents ( such as government bonds ).

• Collateral Debt Position ( CDP ): Mainly over-collateralized by encryption native assets ( such as ETH or BTC ).

The fundamental determining factor of stablecoin utility is its "peg" to the underlying reference asset ( USD ). This peg is maintained through two mechanisms: primary redemption and secondary market. First, can I immediately redeem my stablecoin liability for an equivalent amount of reserve backing? If not, is there a deep and persistent secondary market that allows market participants to buy and sell my stablecoin liability at the pegged exchange rate?

Due to the unpredictability of the secondary market, we believe that primary redemption is a more durable peg mechanism. Additionally, it is worth noting that there have been many attempts at low-collateral or algorithmic stablecoins, which lack support, and we will not elaborate on these in this guide.

It is important to note that stablecoins do not come out of thin air. When you hold a USD deposit at JPMorgan Chase, JPMorgan Chase is responsible for safeguarding your dollars, ensuring you can use them, and allowing you to transact with others using USD.

Stablecoins rely on blockchain to provide the same core functionality.

Definition of Blockchain

Blockchain is a global "accounting system" that includes personal assets, transaction records, and transaction rules and terms.

For example, Circle's stablecoin USDC is issued based on the ERC-20 token standard, which specifies the following rules for a successful token transfer: deducting a certain amount from the sender's account and adding the same amount to the receiver's account. These rules, combined with the blockchain's consensus mechanism, ensure that no user can transfer more USDC than they hold. This is commonly referred to as the double-spending problem. In short, blockchain is like an append-only database or a double-entry ledger, having an initial state and recording every transaction that has occurred in its closed-loop network.

All assets on the blockchain, including USDC, are hosted by Ethereum account (EOA or wallet ) or smart contracts. When certain conditions are met, smart contracts can receive and transfer assets. EOA ownership, which is the ability to trade assets from a public address, is enforced by the underlying blockchain's public-private key encryption scheme, which binds each public address to a private key on a one-to-one basis. If you own the private key, you actually own the assets in the public address. "Not your keys, not your coins." Smart contracts hold and trade stablecoins based on pre-programmed transparent logic, enabling on-chain organizations like DAOs or AI agents to programmatically trade stablecoins without human intervention.

The "trust" in the accuracy of the system comes from the execution and consensus mechanisms of the underlying blockchain (. For example, the Ethereum Virtual Machine ) EVM ( and Proof of Stake ). Accuracy can be demonstrated through the initial state of the blockchain and the publicly auditable history of each subsequent transaction. Transaction settlements are managed 24/7 by a globally distributed network of node operators, allowing stablecoin settlements to be free from the constraints of traditional banking hours. To compensate for the service provided by node operators, transaction fees ( Gas ) are charged during transaction processing, and this fee is typically denominated in the native currency of the underlying blockchain (, such as ETH (.

These definitions may seem somewhat pedantic, and even rebellious to some, but this concise and practical overview provides our readers with an appropriate common ground. So, let's start with the more interesting part: how did we get here?

![Understanding the Past and Present, A Guide for Stablecoin Practitioners])https://img-cdn.gateio.im/webp-social/moments-82e47ab2344769c3f8462c17745f4517.webp)

History of Stablecoins

Twelve years ago, stablecoins were just a dream. Today, Circle, which issued the world's second-largest stablecoin USDC, is preparing for a sale or IPO. Circle's S-1 filing provides firsthand information from USDC founder Jeremy Allaire, detailing the creation of USDC.

We invited our friends Phil Potter and Rune Christensen, who are the founders of the world's largest stablecoin (USDT) and the third-largest stablecoin (DAI), to share their entrepreneurial stories.

( Tether: The Birth of a King

Back in 2013, the Crypto Assets market was in a wild west era, where the main places to access and trade Crypto Assets were exchanges like Mt.Gox and BitFinex. Given that Crypto Assets were in their early stages, the regulatory environment at that time was much more ambiguous than it is now: exchanges were advised to follow "best practices", which meant accepting only Crypto Assets deposits and conducting Crypto Assets withdrawals, for example, BTC deposits and BTC withdrawals ). This meant that traders were forced to convert dollars into Crypto Assets on their own, a mandate that hindered the widespread adoption of Crypto Assets. Additionally, traders needed a place to escape the drastic price fluctuations of Crypto Assets without having to leave the "casino".

Phil Potter entered the Crypto Assets space with a Wall Street background and a pragmatic perspective, keenly observing market bottlenecks. His solution was simple: a "stablecoin"—a dollar-backed Crypto Assets liability supported by a dollar reserve—allowing traders to cope with exchange and market volatility through dollar-denominated liabilities. In 2014, he brought this idea to BitFinex, then one of the largest exchanges. Ultimately, he partnered with BitFinex to create Tether, an independent entity with the necessary currency transmission licenses to integrate with a broader financial network of banks, auditors, and regulators. These providers were crucial for Tether to custody reserve assets and handle complex fiat transactions in the background while allowing BitFinex to maintain its positioning as a "pure Crypto Assets" exchange.

This product is simple, but the structure is very radical: Tether issues dollar-denominated liabilities (USDT), and only certain trusted entities that have undergone KYC certification can directly mint or redeem USDT for its underlying reserve assets.

However, USDT operates on a permissionless blockchain, which means that any holder can freely transfer USDT and exchange it for other assets in the open secondary market.

For a full two years, this concept seems to have been stillborn.

By 2017, Phil noticed that the adoption of USDT was growing in regions like Southeast Asia. After investigating, he found that export companies began to view USDT as a faster and cheaper alternative to a regional dollar payment network. Eventually, these companies started using USDT as collateral for imports and exports. Around the same time, crypto assets native developers began to notice the increasing liquidity of USDT and started using USDT as margin for arbitrage across exchanges. At this point, Phil realized that Tether had built a faster, simpler, and always-open parallel dollar network.

Once the flywheel starts spinning, it never slows down. Since issuance and redemption always occur within a regulated framework, and tokens circulate freely on blockchains like TRON and Ethereum, USDT has reached escape velocity. Every new user, merchant, or exchange that accepts USDT only enhances its network effect, increasing the utility of USDT as a store of value and means of payment.

Today, the circulating value of USDT is nearly $150 billion, far exceeding the circulating volume of USDC at $61 billion. Many people call Tether the company with the highest per capita profit in the world.

Phil Potter is a prominent figure in the Crypto Assets field, and his philosophy is quite unique.

However, we cannot call him an "outsider" in the traditional financial world; he is the kind of person you would expect to create the world's largest stablecoin. Rune Christensen, however, is not that.

DAI: The first decentralized stablecoin

Rune discovered it when Crypto Assets were still in their infancy and quickly crowned himself as the "Bitcoin Boss." He is a typical adopter of Crypto Assets, viewing BTC and blockchain as a ticket to escape the unfair and exclusive financial order. In 2013, the price of BTC opened at around $13 and broke through $700 by the end of the year, giving early adopters every reason to believe that Crypto Assets could truly replace our financial system.

However, the subsequent economic downturn forced Rune to accept a fact: the ultimate utility of Crypto Assets depends on managing this volatility. "Stability is beneficial for business," Rune summarized, giving rise to a new idea.

In 2015, after witnessing the failure of BitShares' "first" stablecoin, Rune collaborated with Nikolai Mushegian to design and build a USD-pegged stablecoin. However, unlike Phil, he lacked the connections to execute a strategy similar to Tether's and had no intention of building a solution reliant on the traditional financial system. The emergence of Ethereum, as a programmable alternative to Bitcoin, allowed anyone to encode logic into the network through smart contracts, providing Rune with a platform for creation. Could he utilize the native asset ETH to issue a stablecoin based on it? If the volatility of the underlying reserve asset ETH is as great as that of BTC, how will the system maintain solvency?

The solution by Rune and Nikolai is the MakerDAO protocol, which is based on Ethereum and was launched in December 2017. MakerDAO allows any user to deposit $100 worth of ETH and receive a fixed amount of DAI(, for example, $50), thereby creating a collateral-backed stablecoin liability supported by ETH reserves. To ensure the system's solvency, the smart contract sets a liquidation threshold(, for example, if the price of ETH falls to $70), once breached, a third-party liquidator can sell their underlying ETH assets to absolve the DAI debt. Over time, new modules have emerged, aimed at streamlining the auction process, setting interest rates to regulate the issuance of DAI, and further incentivizing those third-party liquidators who act for profit.

This ingenious solution is now known in the Crypto Assets field as "collateralized debt position ( CDP )" stablecoin, and this original concept has sparked a frenzy of imitators. The key to the system's ability to operate without centralized gatekeepers lies in the programmability of Ethereum and the transparency offered by public chains: all reserve assets, liabilities, liquidation parameters, and logic are known to every participant in the market. In Rune's words, this achieves "decentralized dispute resolution", ensuring that every participant understands the rules for maintaining the system's solvency.

As the circulation of DAI### and its sister project USDS( exceeds $7 billion, the creation of Rune has evolved into a systemically important pillar in decentralized finance) DeFi(. However, in the rapidly changing competitive landscape, it has become increasingly difficult to manage the ideological demands to escape a collapsing system; the inefficiency of CDP's capital and the lack of an efficient and direct redemption mechanism have stifled its scalability. Recognizing this reality, MakerDAO began a significant transformation towards traditional reserve assets) such as USDC( in 2021 and will transition to BlackRock's tokenized money market fund) BUIDL( in 2025. During this transition, MakerDAO) is now Sky( through the Tokenized Grand Prix), a tokenized money market fund( MMF valued at $1bn managed by Steakhouse Financial, and the blockchain issued in partnership with BlockTower Credit and Centrifuge.