Author: insights4.vc
Compiled by: TechFlow
It has been ten years since the first stable coin BitUSD was launched, marking an important evolution in the decentralized finance (DeFi) ecosystem. Today, stable coins have become an indispensable financial tool in this field, with a total supply now exceeding $156 billion. BitUSD was launched on the BitShares blockchain in July 2021 by crypto pioneers Dan Larimer and Charles Hoskinson, aiming to maintain a stable value of 1:1 with the US dollar. However, the de-pegging event of BitUSD in 2018 revealed the complexities of early stable models.
In contrast, modern stable coins like Tether (USDT) and USD Coin (USDC) rely on large fiat reserves and other robust mechanisms to achieve significant stability. Stable coins now play a crucial role in the crypto and DeFi ecosystems, providing liquidity to exchanges, supporting collateralized lending, and allowing market participants to maintain exposure to digital assets without frequent conversion to fiat.
Types of Stable Coins
Stable coins can be categorized based on their methods of maintaining price stability:
Fiat-collateralized Stable Coins: These stable coins are backed by fiat currencies (such as the US dollar) held in reserve by a central custodian. Examples include Tether (USDT) and USD Coin (USDC). The issuers hold fiat reserves equivalent to the issued stable coins, ensuring a 1:1 redemption ratio, which stabilizes the coin value and enhances user trust.
Crypto-collateralized Stable Coins: These stable coins are supported by other cryptocurrencies as collateral, such as Dai from MakerDAO. Users need to lock up a certain amount of cryptocurrencies (e.g., Ethereum) as collateral. Due to the high volatility of cryptocurrencies, these stable coins typically employ over-collateralization and automatic liquidation mechanisms to maintain their pegged value.
Algorithmic Stable Coins: These stable coins rely on algorithms to adjust the supply based on market demand, without the need for actual collateral. For example, FRAX combines algorithmic and partial collateral mechanisms, while TerraUSD (UST) previously used a seigniorage model before its collapse. Their stability largely depends on market confidence and the robustness of the algorithms.
Top 5 Stable Coins by Supply (Total Supply: $155.1 billion, Source: Artemis)
Stable Coin Models: Collateral and Custody Analysis
Tether (USDT)
Collateral and Custody: Tether is supported by fiat reserves, including cash, cash equivalents, and US Treasuries, and is custodied by Cantor Fitzgerald. As of October 26, Tether reported holding $100 billion in US Treasuries, over 82,000 bitcoins (worth around $55 million), and 48 tons of high-quality gold.
Supply and Usage Trends: The USDT supply is $113.4 billion, decreasing by 5.73% in the past month. While the transaction volume grew by 5.27%, the number of active addresses decreased by 6.11%, indicating a decline in user activity.
USDC
Collateral and Custody: USDC is fully backed by fiat reserves and managed by BNY Mellon, Customers Bank, and Cross River Bank.
Supply and Usage Trends: The USDC supply is $33.6 billion, decreasing by 2.46%, but the transaction volume surged by 29.95%. The number of active addresses increased by 23.45%, reflecting strong demand for transactions.
Dai
Collateral and Custody: This over-collateralized stable coin uses ETH, BTC, private credit, and US Treasuries as collateral, custodied by Coinbase Custody, Sygnum Bank, and Wedbush Securities.
Supply and Usage Trends: The Dai supply is $5 billion, decreasing by 2.75%, but the transaction volume grew by 40.52%, and the number of active addresses increased by 45.35%, reflecting rising adoption and trading activity.
USDe
Collateral and Custody: USDe is a synthetic stable coin that achieves delta neutrality using ETH, ETH LSTs, BTC, and USDT, custodied by Copper, Ceffu, and Cobo.
Supply and Usage Trends: The USDe supply is $2.7 billion, with a slight decline in transaction volume but a slight increase in active addresses, indicating stability in its usage patterns.
PYUSD (PayPal USD)
Collateral and Custody: PYUSD is issued by PayPal, fully backed by fiat assets (such as US Treasuries, cash, and equivalents), and custodied by State Street Bank and Trust Company and Customers Bank.
Supply and Usage Trends: PYUSD is the smallest stable coin by supply, at $598 million. Its transaction volume increased by 58.75%, and the number of active addresses grew by 153.79%, indicating significant user interest and usage expansion.
Stable Coins - Supply (Source: Artemis)
The data in the chart shows the growth and fluctuation trends of stable coin usage and transaction volume over time. Starting from early 2018, the supply and transaction volume of stable coins have risen significantly, peaking in mid-2021, likely due to increased interest in decentralized finance (DeFi) and the broader crypto market. After 2021, while the supply has remained high, the transaction volume has experienced cyclical surges, particularly in early 2024, which may indicate renewed market activity or volatility during this period.
Stable Coins - Transaction Volume (Source: Artemis)
USDT and USDC dominate the stable coin market, accounting for the majority of supply and trading volume. Other stable coins, such as Dai, BUSD, and the emerging PYUSD, while smaller in share, are growing, indicating a trend towards diversification in the market.
USDC and USDT Distribution
USDC and USDT have significant differences in their distribution across decentralized finance (DeFi) and centralized finance (CeFi) platforms, as well as various wallets. For USDC, the largest holdings are in Externally Owned Accounts (EOAs) at $16.8 billion, followed by CeFi at $2.3 billion, and bridge assets at $1.8 billion. Treasury accounts hold $438 million, decentralized exchanges (DEXs) hold $388 million, and lending protocols hold $195 million. Yield farming usage is relatively low at $3 million, while other miscellaneous holdings total $3.2 billion.
USDC Distribution
In comparison, the distribution of USDT is more concentrated, with $81.5 billion held in Externally Owned Accounts (EOAs) and $26.3 billion in centralized finance (CeFi). Bridge assets hold $5.1 billion, decentralized exchanges (DEXs) hold $473 million, and lending protocols hold $439 million. Treasury accounts hold a relatively small amount of $54 million, yield farming is only $1 million, and other holdings total $2.5 billion.
USDT Distribution
As of October 2024, Ethereum, Tron, Arbitrum, Coinbase's Base, and Solana are the main stablecoin settlement blockchains. While Ethereum leads in overall settlement value, its high network transaction fees have resulted in a lower monthly active address count compared to lower-cost networks like Tron and Binance Smart Chain. Since active addresses are harder to manipulate than raw transaction counts, these metrics reveal a complex landscape where Tron, Polygon, Solana, and Ethereum are leading in stablecoin activity.
Stablecoin Transfer Volume on Networks (in Trillions of USD) 2024 Market Trends
Stripe Acquires Bridge Network
On October 20, 2024, Stripe acquired Bridge Network for $1.1 billion, marking a significant milestone in the stablecoin and crypto payments market. Bridge has been dubbed the "Stripe of crypto," focusing on helping businesses use stablecoins for payments without directly handling digital tokens. Bridge's valuation has grown by 200% since August, when it raised funding from leading investors including Index Ventures and Haun Ventures, now estimated to be between $100-150 million in annual revenue. Stripe's acquisition of Bridge signals its emphasis on stablecoin infrastructure, with CEO Patrick Collison comparing it to "room-temperature superconductors in financial services."
Emerging Markets and Currency Stability
In emerging markets facing severe currency devaluation, stablecoins have become a tool to combat local currency instability. Residents of countries like Argentina, Turkey, and Venezuela have widely adopted stablecoins to address local currency depreciation. For example, stablecoin trading volume in Argentina is far above the global average at 61.8%, driven by hyperinflation and the need for a US dollar alternative.
Stablecoin Trading Volume on Bitso (in Million USD) vs. Purchasing Power of Argentine Peso (ARS)
Share of Retail Transaction Volume by Asset Type Compared to Global Average (July 2023 - June 2024)
Cross-Border Transactions and Remittances
Stablecoins are transforming cross-border payments, particularly in Africa and Latin America. In sub-Saharan Africa, stablecoins are crucial for businesses facing foreign exchange shortages and high remittance costs. For example, in Nigeria, using stablecoins can reduce remittance fees by around 60% compared to traditional methods. Similarly, in Latin America, stablecoins enable lower-cost and faster cross-border transactions, with Circle recently expanding its business in Brazil to meet this demand.
Regulatory Developments and Challenges
Significant differences in regulatory environments across regions impact the growth of stablecoins. The European Union's Markets in Crypto-Assets (MiCA) regulation, effective from June 2024, provides a comprehensive regulatory framework for stablecoin projects in Europe, creating a favorable environment. In contrast, regulatory uncertainty in the US has led to some stablecoin activity shifting to non-US markets, with issuers like Circle emphasizing that clear regulation is crucial for maintaining the US's competitiveness in the stablecoin space.
Institutional and Retail Demand
The use of stablecoins is increasing among both retail users and institutions. In Nigeria, stablecoins are widely used for daily transactions and cross-border payments, while in the EU, stablecoins are more prevalent in B2B transactions, such as invoice settlement and remittances. Additionally, in high-inflation countries like Turkey, retail users have heavily adopted stablecoins as a means to combat inflation.
Percentage of GDP Spent on Purchasing Stablecoins with Fiat Currency (July 2023 - June 2024)
Global Stablecoin Regulation
Stablecoin regulation varies globally due to factors such as financial stability, investor protection, anti-money laundering compliance, and innovation. Here are the approaches taken by major countries and regions regarding stablecoin regulation:
European Union
MiCA Regulation: Effective from mid-2024, MiCA regulation requires stablecoins to hold sufficient reserves and ensures market integrity and consumer protection.
Innovation Initiatives: The EU supports innovation through blockchain regulatory sandboxes and distributed ledger technology (DLT) pilot programs, helping businesses test within a compliant framework.
Scope Limitations: MiCA currently does not cover decentralized finance (DeFi) or non-fungible tokens (NFTs), limiting its application in the broader cryptocurrency space.
United States
Multi-Agency Regulation: Multiple agencies, including the SEC, CFTC, and FinCEN, are responsible for stablecoin regulation, creating a complex regulatory environment.
Federal Legislation: Proposed bills like Lummis-Gillibrand and FIT21 aim to establish a unified legal framework for stablecoin regulation.
State-Level Innovation: New York and Wyoming are leading in legal innovation, with Wyoming recognizing decentralized autonomous organizations (DAOs) as legal entities.
United Kingdom
Stablecoins Under Existing Frameworks: Stablecoins are incorporated into existing financial regulations, with the Financial Conduct Authority (FCA) setting anti-money laundering (AML), know-your-customer (KYC), and promotion standards.
Digital Securities Sandbox: The sandbox allows businesses to experiment with digital asset solutions in a controlled environment, supporting safe innovation.
Singapore
Comprehensive Guidance from the Monetary Authority of Singapore (MAS): MAS imposes strict AML, consumer protection, and licensing requirements on stablecoins.
Regulatory Sandbox: Provides a safe testing environment, supports innovation, and requires strict KYC, security, and reserve management.
Japan
FSA-Led Regulation: The Financial Services Agency (FSA) enforces KYC/AML requirements and requires stablecoin issuers to obtain licenses.
Leader in International Standards: Japan allows internationally regulated stablecoins to operate domestically, promoting global interoperability.
Updates to the Payment Services Act: Recent updates ensure security while adapting to new digital asset trends.
United Arab Emirates (UAE)
VARA's Licensing Requirements: The UAE's Virtual Assets Regulatory Authority (VARA) requires businesses engaged in stablecoin-related activities to obtain licenses.
Focus on Security: Strict KYC and AML frameworks protect consumers and promote responsible development in the stablecoin space.
Switzerland
FINMA Supervision: The Swiss Financial Market Supervisory Authority (FINMA) takes a principles-based regulatory approach, enforcing anti-money laundering (AML) and data protection laws.
Support for DeFi: Its regulatory framework encourages innovation while ensuring security and transparency.
Key Regulatory Themes and Requirements
AML and KYC Compliance:
Global AML and KYC compliance requirements align with FATF standards, requiring stablecoin issuers to verify user identities and monitor transactions, with recommendations to use innovative tools like zero-knowledge proofs for privacy-preserving KYC.
Regulatory Sandboxes
Regulatory sandboxes provide a safe environment for testing digital asset products, balancing innovation and compliance. Major jurisdictions, including the UAE, UK, and Japan, utilize sandbox frameworks and often engage in international cooperation to coordinate regulatory practices.
Privacy and Security Agreement
Stablecoin providers need to implement robust cybersecurity measures, and as data privacy and asset custody regulations become increasingly important, regions like Hong Kong have required ensuring the secure storage of assets.
Integration and Exclusion of DeFi
Decentralized Finance (DeFi) largely remains outside the regulatory scope of stablecoins, but countries like the UK and Japan are exploring how to integrate DeFi with traditional finance, while the EU's MiCA currently excludes DeFi from regulation, which may be revised in the future.
Outcomes and Unintended Consequences
Positive Outcomes
Enhanced consumer protection and market integrity have boosted confidence in stablecoins, driving market growth in regions with clear regulatory frameworks.
In places like Singapore and Switzerland, clear regulatory policies have attracted digital asset companies, driving economic development and positioning these regions as global digital asset hubs.
Challenges and Unintended Consequences
Regulatory Arbitrage: Some companies may choose regions with more lax regulations, posing the risk of regulatory arbitrage. Places like Gibraltar and the UAE face the challenge of balancing innovation and strict regulation.
Privacy Concerns: MiCA's transparency requirements may conflict with privacy-focused blockchain technologies, potentially impacting user privacy.
Innovation vs. Regulation: Strict regulatory frameworks may hinder new market entrants; for example, the US's decentralized regulatory approach has led some companies to move their business overseas due to regulatory uncertainty.
Conclusion
Over the past decade, stablecoins have rapidly evolved from the initial concept of BitUSD to become a crucial component of decentralized finance, with a total supply now exceeding $156 billion. Modern stablecoins like Tether (USDT) and USD Coin (USDC) have achieved widespread adoption through adequate fiat currency reserves, with USDT leading in supply at $113.4 billion. Emerging markets are increasingly using stablecoins as a hedge against currency devaluation, with stablecoin trading accounting for 61.8% of retail trading volume in Argentina. Global regulatory responses to stablecoins vary: the EU's MiCA regulation encourages innovation through clear guidance, while regulatory uncertainty in the US has led some issuers to turn to other markets. Institutional interest in stablecoins is growing rapidly, as evidenced by Stripe's $1.1 billion acquisition of Bridge Network. As stablecoins continue to bridge the gap between traditional finance and cryptocurrencies, their future will depend on finding the right balance between innovation and effective regulation.
