Crypto Assets ultimately outputted something beyond imagination: stablecoin

In the past year, three major events have pushed stablecoins into the mainstream:

1. Tether generated nearly $13 billion in profit with fewer than 200 employees;

2. Trump's inauguration and the shift in the U.S. attitude towards the regulation of digital assets.

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

When a certain ecosystem is thriving and regulation is becoming clearer, it means someone is making big money.

If you are issuing or using stablecoins to develop your business, I hope this guide will help you understand how seasoned practitioners view this field.

To provide a multi-faceted perspective, we leverage a broad network to draw 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 substitutes ( such as government bonds ) as collateral.

• Collateralized debt position ( CDP ): Mainly over-collateralized by native encryption assets ( such as ETH or BTC ).

The fundamental determining factor of the utility of stablecoins is their "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 liabilities for an equivalent amount of reserve support? If not, is there a deep and persistent secondary market that allows market participants to buy and sell my stablecoin liabilities at the pegged exchange rate?

Due to the unpredictability of the secondary market, we believe that primary redemptions are a more durable pegging 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, the bank 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 functions.

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 rules for a successful transfer of tokens: deducting a certain amount from the sender's account and adding the same amount to the receiver's account. These rules, combined with the consensus mechanism of the blockchain, ensure that no user can transfer more USDC than they hold. This is commonly referred to as the double-spending problem. In short, the blockchain acts 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 held by on-chain account (EOA, wallet ), or smart contracts. When specific 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 through the underlying blockchain's public-private key encryption scheme, which binds each public address to a private key one-to-one. If you have the private key, you effectively 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 ) such as 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 ), such as 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 around the clock by a globally distributed network of node operators, which allows the settlement of stablecoins to be unaffected by traditional bank operating hours. To compensate for the service provided by node operators, transaction fees are charged during transaction processing ( Gas ), which is typically priced in the native currency of the underlying blockchain ), such as ETH (.

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

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The History of Stablecoins

Twelve years ago, stablecoins were just a fantasy. Today, Circle, which issues the world's second-largest stablecoin USDC, is preparing to sell or go public. Circle's S-1 filing provides firsthand information from USDC founder Jeremy Allaire, detailing the founding journey 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 cryptocurrency market was in the Wild West era, where the main places to access and trade cryptocurrencies were exchanges like Mt.Gox and BitFinex. Given that cryptocurrencies 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 only accepting cryptocurrency deposits and conducting cryptocurrency withdrawals (, such as BTC deposits and BTC withdrawals ). This meant that traders were forced to convert dollars into cryptocurrencies on their own, a mandate that hindered the widespread adoption of cryptocurrencies. Additionally, traders needed a place to escape the severe price volatility of cryptocurrencies without having to leave the "casino."

Phil Potter entered the Crypto Assets field with a Wall Street background and a pragmatic perspective, keenly identifying 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 are crucial for Tether's custody of reserve assets and handling complex fiat transactions behind the scenes, while enabling BitFinex to maintain its "pure Crypto Assets" positioning.

This product is simple, but the structure is very aggressive: 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 on an open secondary market.

For a full two years, this concept seemed to be stillborn.

Until 2017, Phil noticed that the adoption rate of USDT was increasing in regions like Southeast Asia. After investigation, he found that export companies began to see 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 asset native users began to notice the growing liquidity of USDT and started using it 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. As the issuance and redemption always occur within regulated limits, while the tokens circulate freely on blockchains such as TRON and Ethereum, USDT has reached escape velocity. Each new user, merchant, or exchange that accepts USDT only strengthens its network effect, enhancing the utility of USDT as a store of value and a means of payment.

Currently, the circulating value of USDT is nearly 150 billion USD, far exceeding the circulating volume of USDC at 61 billion USD. 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, on the other hand, is not.

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) DAI: The first decentralized stablecoin

Rune discovered it when Crypto Assets were still in their infancy and quickly dubbed himself the "Bitcoin Big Shot." He is a typical Crypto Assets adopter, viewing BTC and blockchain as a ticket to escape the unfair and exclusionary financial order. In 2013, 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 recession forced Rune to accept a fact: the ultimate utility of Crypto Assets depends on managing this volatility. "Stability is beneficial for business," Rune summarized, and a new idea was born.

In 2015, after witnessing the failure of BitShares' "first" stablecoin, Rune collaborated with Nikolai Mushegian to design and build a dollar-pegged stablecoin. However, unlike Phil, he lacked the connections to execute a strategy similar to Tether and was not interested in creating a solution reliant on the traditional financial system. The emergence of Ethereum, as a programmable alternative to Bitcoin, allowed anyone to encode logic onto the network through smart contracts, providing Rune with a platform for creation. Could he issue a stablecoin based on the native asset ETH? If the volatility of the underlying reserve asset ETH is as great as that of BTC, how can 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 USD worth of ETH and receive a fixed amount of DAI(, such as 50 USD), thereby creating an over-collateralized stablecoin liability backed by ETH reserves. To ensure the solvency of the system, the smart contract sets a liquidation threshold###, such as when the price of ETH reaches 70 USD(. Once breached, third-party liquidators can sell the underlying ETH assets, thereby eliminating the DAI debt. Over time, new modules have emerged to simplify the auction process, set interest rates to adjust the issuance of DAI, and further incentivize third-party liquidators motivated by profit.

This ingenious solution is now known as "Collateralized Debt Position ) CDP (" stablecoin in the Crypto Assets field, a concept that has sparked the interest of dozens of imitators. The key to the system's ability to operate without a centralized gatekeeper lies in the programmability of Ethereum and the transparency provided by the public blockchain: 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.

With the circulation of DAI) and its sister project USDS( exceeding $7 billion, the creation of Rune has evolved into a systemically important pillar in decentralized finance) DeFi(. However, in a rapidly changing competitive landscape, the ideological appeal to break free from a collapsing system has become increasingly difficult to manage; the capital inefficiency of CDPs and the lack of efficient direct redemption mechanisms stifle its scalability. Recognizing this reality, MakerDAO began a significant transformation towards traditional reserve assets) such as USDC( in 2021, and will shift towards BlackRock's tokenized money market fund) BUIDL( in 2025. During this transformation, MakerDAO) is now leveraging Sky( through the Tokenized Grand Prix), a tokenized money market fund( MMF) RFP managed by Steakhouse Financial with a value of $1bn, and BlockTower Credit partnering with Centrifuge to issue blockchain-native securities.