Stablecoins have become a cornerstone of the global digital asset ecosystem, serving as a bridge between traditional finance and blockchain-based economies. According to Token Terminal, monthly stablecoin transfer volume has surged tenfold over the past four years—rising from $100 billion to $1 trillion. On June 20, 2024, stablecoins accounted for 60.13% of the entire crypto market’s $743.91 billion trading volume, with USDT alone representing 46.85% of daily trades at $348.4 billion.
This comprehensive analysis explores the stablecoin landscape—from core models and operational mechanisms to market dynamics and future trends—with a focused look at Hong Kong’s potential role in shaping next-generation stablecoins.
What Are Stablecoins?
Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to external assets, typically fiat currencies like the U.S. dollar. The Bank for International Settlements (BIS) defines stablecoins as “cryptocurrencies whose value is linked to legal tender or other assets.” Unlike traditional fiat, which aims for long-term purchasing power stability, stablecoins focus on maintaining a 1:1 exchange rate with their reference asset.
By existing on blockchains, stablecoins inherit key features of decentralized systems: censorship resistance, peer-to-peer transfers, no central clearing authority, and immutable transaction records. These properties make them ideal for cross-border payments, DeFi applications, and digital savings—especially in regions with unstable local currencies.
Classification of Stablecoin Models
Stablecoins can be broadly categorized based on two criteria: collateralization type and centralization level.
Collateral-Based vs. Algorithmic
- Collateralized Stablecoins: Backed by real-world assets such as USD deposits, government bonds, or crypto assets.
- Algorithmic Stablecoins: Rely on smart contracts and supply adjustments to maintain price stability without full backing.
Centralized vs. Decentralized Issuance
- Centralized: Issued by regulated entities (e.g., Circle, Tether).
- Decentralized: Governed by autonomous protocols (e.g., MakerDAO).
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The most widely adopted models today include fiat-collateralized, crypto-collateralized, and hybrid algorithmic designs.
Market Overview: Dominance of USD-Pegged Tokens
The Dollar Reigns Supreme
Over 99% of stablecoins are pegged to the U.S. dollar. Alternatives like EURT (Euro), GYEN (Yen), and IDRT (Indonesian Rupiah) exist but remain niche due to limited adoption and liquidity.
Despite growing interest in multi-currency ecosystems, the dollar’s global reserve status ensures its dominance in stablecoin markets. Even regional efforts—such as Hong Kong or offshore RMB-pegged tokens—must contend with the entrenched network effects of USD-denominated stablecoins.
Market Share Leaders: USDT, USDC, and FDUSD
As of mid-2024:
- USDT: ~70.5% market share, over $110 billion in circulation
- USDC: ~21.3%, ~$33 billion
- DAI: ~3.4%
- FDUSD: ~2.5%
Total stablecoin market cap exceeds $160 billion, with USDT maintaining its lead through early-mover advantage and broad exchange integration.
Holder Distribution Reflects Trust Dynamics
A sharp decline in USDC holder addresses occurred in March 2023 following the Silicon Valley Bank collapse, when its peg temporarily dropped to $0.88. Although it recovered, trust shifted toward USDT, whose address count continued rising.
This event underscored a critical truth: perceived resilience during crises shapes user behavior more than transparency alone.
How Major Stablecoins Work: Mechanisms & Trade-offs
Fiat-Collateralized Stablecoins
Tether (USDT)
Launched in 2014 by Tether Limited (affiliated with Bitfinex), USDT operates under a simple model:
- Users deposit USD into Tether’s bank accounts.
- Tether mints an equivalent amount of USDT.
- Redemption involves burning USDT and returning USD.
Reserve Composition (Q1 2024):
- 83% cash & equivalents (mostly short-term U.S. Treasuries)
- 17% alternative assets (Bitcoin, corporate bonds, gold)
Tether uses multiple blockchains (TRC-20, ERC-20) and maintains a Proof-of-Reserves system audited quarterly. In Q1 2024, it reported $4.5 billion in profit with just ~100 employees—highlighting its capital efficiency.
USD Coin (USDC)
Issued by Circle and Coinbase in 2018, USDC emphasizes regulatory compliance:
- Monthly reserve disclosures
- Audits by Deloitte
- Assets held primarily in short-term Treasuries (<3 months maturity)
- Custodied under SEC-regulated funds (Circle Reserve Fund via BlackRock)
Unlike USDT, Circle does not directly serve retail users—only institutional partners like exchanges can mint/redeem. This enhances control but limits accessibility.
First Digital USD (FDUSD)
Launched in June 2023 by First Digital Trust (Hong Kong), FDUSD rose rapidly after Binance phased out BUSD and adopted FDUSD for Launchpad/Launchpool mining.
Key Features:
- Monthly audits by Prescient Assurance
- Fully backed by ultra-short-term assets (Treasuries, time deposits)
- Backed by Hong Kong’s regulatory-compliant trust infrastructure
Its growth illustrates how exchange support + high-yield use cases can accelerate adoption—even against established players.
👉 Explore how new entrants are challenging legacy stablecoins with innovative incentives
Crypto-Collateralized Stablecoins
DAI (MakerDAO)
DAI is the leading decentralized stablecoin, created via over-collateralized vaults on Ethereum.
Mechanism:
- Users lock ETH or other approved assets (including real-world assets) in a Maker Vault.
- They generate DAI up to a collateralization ratio (e.g., 150%).
- To retrieve collateral, users repay DAI plus a stability fee.
- If collateral value drops below threshold, automatic liquidation occurs via Dutch auction.
Price Stability Tools:
- Stability Fee: Adjustable borrowing cost to influence supply/demand
- DAI Savings Rate (DSR): Incentivizes holding DAI
- Surplus Buffer & MKR Dilution: Protocol-level risk mitigation
DAI also integrates with USDC through its "Endgame Plan," using yield-generating strategies like U.S. Treasury investments to boost returns.
Ethena (USDe)
Launched in February 2024, USDe is a synthetic dollar protocol using delta-neutral hedging:
Operation:
- User deposits stETH.
- Ethena opens an equivalent short position on perpetual futures.
- This creates price-insensitive exposure—gains on shorts offset losses on spot holdings.
Yield Generation:
- stETH staking rewards (~3–4% APY)
- Long-funded perpetual funding rates (~20–30% APY in bullish markets)
These yields are passed to users who stake sUSDe (staked USDe), creating a powerful flywheel effect.
Risks:
- stETH depeg risk (as seen during 3AC collapse)
- Counterparty risk if CEXs fail
- Overreliance on funding rate income
- Governance and centralization concerns around ENA token
Still, USDe reached top-five status within months—proving that high-yield models attract capital faster than trust or decentralization alone.
Algorithmic Stablecoins: The FRAX Hybrid Model
After the UST/Luna crash, pure algorithmic stablecoins lost credibility. FRAX pioneered a hybrid approach combining partial collateral with algorithmic adjustments.
How It Works:
- Initially 100% backed by USDC
- As demand grows, collateral ratio decreases (e.g., to 90%)
- The remaining 10% is covered by burning FXS governance tokens
- Arbitrageurs restore peg by minting/redeeming when price deviates
FRAX further enhances yield via its Algorithmic Market Operations (AMO), deploying reserves into DeFi protocols for additional returns.
While safer than pure algo-stables, FRAX struggles with scalability due to reliance on narrow arbitrage opportunities and limited ecosystem integration.
Key Success Factors Across Models
| Factor | Importance |
|---|---|
| Regulatory Compliance | Critical for fiat-backed coins (e.g., USDC) |
| Transparency & Audits | Builds trust; drives migration during crises |
| Exchange Support | Determines liquidity and user access |
| Yield & Utility | Drives adoption in DeFi and mining ecosystems |
| Risk Management | Determines long-term survival |
"Stablecoin success isn’t about technology—it’s about trust, access, and incentives." – Industry Insight
Future Outlook & Hong Kong’s Opportunity
Core Challenges Ahead
- Regulatory Scrutiny: U.S. lawmakers are pushing for stricter stablecoin rules; issuers must prepare for licensing and capital requirements.
- Scalability of Yield Models: High APYs from funding rates may not persist in bear markets.
- Interoperability Needs: Cross-chain fragmentation requires better bridging solutions.
- Centralization Risks: Even "decentralized" models often rely on centralized components (oracles, custodians).
Hong Kong’s Strategic Position
With its clear virtual asset regulatory framework post-2023 licensing rules, Hong Kong is well-positioned to launch compliant stablecoins pegged to HKD or offshore RMB (CNH).
Potential Use Cases:
HKD-Pegged Stablecoin
- Leverage Hong Kong’s trusted financial infrastructure
- Offer yield via short-term bond portfolios
- Enable seamless cross-border payments within Greater Bay Area
Offshore RMB (CNH) Stablecoin
- Tap into $1.5 trillion offshore RMB deposits
- Facilitate trade settlements along Belt & Road corridors
- Partner with Bank of China Hong Kong for custody and clearing
- Integrate with e-CNY for controlled convertibility
👉 See how Asian financial hubs are positioning themselves in the global stablecoin race
Innovative Yield Mechanisms
- Combine USD and CNH collateral for dual-income streams
- Tokenize offshore RMB bonds (~$300B annual issuance)
- Use Real World Assets (RWA) as yield-generating backing
Frequently Asked Questions (FAQ)
Q: Are stablecoins safe during banking crises?
A: Not all are equal. USDC lost its peg during the SVB collapse due to exposure to failed banks, while USDT maintained stability thanks to diversified reserves including Treasuries and repos. Diversification and short-duration assets reduce risk.
Q: Can decentralized stablecoins replace centralized ones?
A: Not yet. While DAI and USDe offer innovation and yield, they lack the scale and reliability of fiat-backed tokens. Regulatory clarity and broader adoption are needed before true decentralization becomes viable at mass scale.
Q: Why do people trust USDT despite transparency concerns?
A: Network effects and proven resilience matter more than perfect audits. USDT has survived multiple crises by quickly proving solvency when challenged—building a reputation for operational strength.
Q: Is yield-bearing stablecoin sustainable?
A: Only if yields come from real economic activity—not speculation. Protocols like Ethena depend heavily on perpetual funding rates, which fluctuate with market sentiment. Long-term viability requires diversified income sources like bond yields or lending spreads.
Q: Can Hong Kong launch a successful local stablecoin?
A: Yes—but only if it offers clear advantages over existing options. A HKD or CNH stablecoin must provide tangible benefits like higher yield, faster settlement, or unique payment integrations to gain traction.
Q: What happens if a stablecoin loses its peg?
A: Temporary depegs occur regularly due to liquidity imbalances. Severe or prolonged deviations trigger redemptions, arbitrage activity, or even systemic panic (as with UST). Strong reserve management and rapid response mechanisms are essential to restore confidence.
Conclusion
The stablecoin landscape is evolving beyond simple dollar proxies into sophisticated financial instruments combining stability, yield, and programmability.
While USDT remains dominant through scale and resilience, challengers like USDC (compliance), FDUSD (exchange leverage), DAI (decentralization), and USDe (yield innovation) show diverse paths to relevance.
For emerging markets like Hong Kong, the opportunity lies not in replicating existing models—but in building next-generation stablecoins that merge regulatory clarity with real-world utility, cross-border functionality, and sustainable yield mechanisms.
The future belongs to those who understand: stable value is just the beginning—the real competition is for user loyalty through utility and returns.