Stablecoins represent one of the oldest use cases for blockchains and the one that has seen the greatest adoption.
Today, they account for around 10% of the total capitalisation of the cryptocurrency market, with more than $170 billion in units in circulation. By June 2020, that figure had barely reached $10 billion, according to data compiled by Glassnode .
Their principle is simple: allow anyone to exchange tokens whose value is pegged to that of a traditional currency (the dollar in most cases).
The value of a stablecoin is guaranteed by a pool of assets that users can claim in exchange for their stablecoins. These assets can take a variety of forms, such as cash deposited in banks or, more commonly, government bonds, allowing stablecoin issuers to generate returns on their reserves.
This highly attractive business model has prompted the emergence of numerous competitors keen to capitalise on this fast-growing market.
Demand for stablecoins continues to grow for several reasons: the increased efficiency of cross-border payments, the adoption of the dollar in countries with unstable currencies, the integration of stablecoins within decentralised finance (DeFi) and the management of accounts on centralised trading platforms.
To respond to the evolution of different use cases, new forms of stablecoin are constantly emerging.
Centralised stablecoins This is currently the most proven model in the crypto ecosystem. In this configuration, a centralised company issues the stablecoin tokens and controls the strategy.
The best known are Tether's USDT and Circle's USDC. These two stablecoins dominate the market, accounting for more than 90% of its total capitalisation with 118 billion and 35 billion units in circulation respectively.
Although different in their approach, these two stablecoins are powerful soft power tools for the United States, spreading the dollar around the world via various public blockchain networks.
Such is their influence that some political figures, such as Timothy G. Massad, former chairman of the CFTC (Commodity Futures Trading Commission) under Barack Obama, have publicly described the issue as one of "national security" and called for them to be regulated.
These stablecoins are also major buyers of US debt. Their business model is simple: they invest almost all their reserves in US Treasury bonds, whose yield is currently around 5% following successive rate hikes decided by the US Federal Reserve after the COVID crisis. For several years, they have logically been posting record profits.
In Q2 2024, Tether ranked 18th among holders of US debt, ahead of countries such as Germany. That same quarter, the company announced a net profit of $5.2 billion.
Unlike its main competitor, Circle does not publish quarterly financial results. For the first half of 2023, Circle reported revenue of $779 million, well ahead of its full-year 2022 revenue of $772 million.
Tether, the controversial leader While they largely dominate the market, Tether and Circle are radical opposites in terms of approach.While Tether leads in market capitalisation, its stablecoin receives mediocre valuations. Standard & Poor's gave it a rating of 4 out of 5 (5 being the worst) in its 12 December review, while Bluechip, an independent organisation specialising in stablecoin ratings, gave it a D.
The main reason for these ratings is Tether's lack of transparency. Information on its organisation chart and banking partners is scarce, and its reserve raises many questions.
Since Q1 2023, Tether has published an audit presented as "independent", carried out by BDO Italia. However, doubts persist. One specialist points out, "This is a virtually unknown audit firm."
Why not call in a firm from the "Big Four" (KPMG, EY, Deloitte, PwC)? According to a source close to Tether, the latter would refuse to work with the company.
As at 30 June 2024, Tether's reserves consisted mainly of:
84.24% liquid assets, including short-term US Treasuries 3.22% precious metals, including gold 4% bitcoins Garett Jones, co-founder of Bluechip, argues, "Contrary to popular belief, Tether's opacity is also its strength. Publicly revealing the details of how they operate could backfire, as it has for many traditional financial players."
In recent years, the company run by Paolo Ardoino has been working hard to improve its image. In particular, it has recruited Jesse Spiro as head of public affairs, with similar experience at PayPal and Chainalysis.
Circle, the good student Circle has always placed regulation at the heart of its USDC development strategy, launched in January 2018 with the Coinbase platform, with which it has historically been close.
On 1 July this year, the US company obtained its Electronic Money Establishment (EME) licence, an essential sesame to issue stablecoins in a regulated manner in Europe, in accordance with MiCA (Markets in Crypto-Assets) regulations. These regulations aim to harmonise the rules for digital assets in the European Union. To date, very few crypto players have obtained this green light.
As a result, Circle is entitled to offer USDC and EURC, its euro stablecoin, to European users. On the other hand, Tether does not currently intend to submit to MiCA regulation, as its CEO Paolo Ardoino reaffirmed in an interview with The Big Whale.
In early January 2024, Circle announced that it was working on an IPO on the New York Stock Exchange. This will be the second attempt after the aborted one in December 2022. The US company is aiming for a valuation of around $5 billion. Previously based in Dublin, Ireland, Circle has officially moved its headquarters to New York, inaugurating its new premises on September 13.
Circle's banking partners are well known, as is its auditor, Deloitte. The latter provides a monthly report on the state of reserves, made up exclusively of assets such as US Treasury bills, denominated in dollars and held in segregated accounts. Nevertheless, all is not perfect.
"Circle's claims that USDC's reserves are bankruptcy-proof have yet to be proven, making it less secure than stablecoins overseen by the NYDFS (the New York regulator)," says Vaidya Pallasena, head of ratings at Bluechip. The proof: the USDC momentarily lost its indexation to the dollar when Silicon Valley Bank collapsed in spring 2023, a bank where Circle had placed some of its reserves.
Standard & Poor's considers the USDC to be one of the safest projects in the ecosystem, giving it a rating of 2. Bluechip gives it a rating of B+.
In March 2023, Silicon Valley Bank (SVB) collapsed. As Circle was partly exposed to it, this created a wave of panic leading to the USDC "depeg", which fell as low as $0.7 before regaining its equilibrium.
DefiLlama The FDUSD, to the rescue of Binance Launched in June 2023 in Hong Kong, the FDUSD is issued by First Digital Group.
Currently, it ranks as the 4th largest stablecoin on the market with nearly 3 billion units in circulation. Its growth has been meteoric: just 6 months after its launch, its market capitalisation was already approaching $1 billion.
The main driver of this growth is the Binance platform. The latter began listing it in August 2023 and removed fees on the BTC/FDUSD pair. This move was prompted by the scheduled disappearance in February 2024 of the BUSD, Binance's in-house stablecoin. The latter had been banned by the US authorities in February 2022.
The reserves of the FDUSD are held by a trust in Hong Kong, the identity of which has not been revealed publicly. At 31 August 2023, the date of the last official tally, they consisted of 79% cash deposits and 20% short-term US Treasury bills.
Standard & Poor's sanctions the FDUSD with a rating of 4 due to the lack of asset segregation. Bluechip is no more lenient, awarding it a C.
To date, this stablecoin circulates on the Ethereum, BNB (Binance's blockchain), and Sui Network networks.
PayPal (PYUSD), Paxos (USDP), Gemini (GUSD): supervised stablecoins These stablecoins currently offer "the best guarantees for retail investors, as their reserves are directly supervised by the regulator", explains Benjamin Levit, co-founder and CEO of Bluechip.
In practical terms, they have to comply with strict control and issuance requirements, similar in many respects to traditional finance. In the event of bankruptcy, the New York State Department of Financial Services (NYDFS), which is responsible for supervising them, can directly seize the reserves.
Their availability is currently limited to a restricted number of networks authorised by the regulator, which considerably hampers their development.
"The fact that they are supervised by the authorities, and therefore easily censored, is an argument that is holding back their adoption outside the US and Europe, where this feature is important," says Sébastien Derivaux, director of consultancy Steakhouse Capital. "What's more, for Europe and the United States, they are not very useful at the moment, since there are already effective payment solutions for individuals", he continues.
On the other hand, their strong regulation makes them prime assets for incorporation into decentralised finance protocols that need near-perfect price stability. This is the case with DAI (renamed USDS in September 2024), where investors are encouraged to deposit them in the "Peg Stability Module" (PSM) to maintain the dollar peg of Maker's stablecoin (now Sky).
The nascent market for euro stablecoins Currently, demand for euro stablecoins is almost non-existent, accounting for just 0.2% of stablecoins in circulation. Circle's EURC dominates this embryonic market, with 57 million euros in circulation. However, the entry into force of the first part of MiCA (Markets in Crypto-Assets) in Europe is encouraging many traditional players to enter this sector.
This summer, two banks obtained official approval to issue stablecoins. Société Générale, via its subsidiary SG-Forge, deployed CoinVertible (EURCV) on Ethereum in April 2023. Banking Circle, a Luxembourg fintech founded in 2016 and holding a banking licence since 2020, launched EURITE on 26 August. The latter, listed on Binance, has a capitalisation of around €30 million.
According to our sources, many players are preparing to enter this nascent market. Olivier Mammet, head of trading at Gemini, an American exchange platform, explains, "At the moment, first-mover advantage remains crucial in the crypto ecosystem. All the players have in mind the success of Tether and Circle with the dollar."
What to remember about centralised stablecoins If centralised stablecoins such as USDT or USDC have been successful, it is largely thanks to the simplicity and reliability of their reserve management. Although some models remain dependent on banks - as the USDC demonstrated during the US banking crisis in spring 2023 - centralised stablecoins are proving to be real cash machines in a high interest rate environment.
Initially designed for institutional use, these stablecoins are now increasingly being adopted for everyday payments.
However, their decision not to share the revenue generated with their users, mainly for regulatory reasons, has paved the way for the emergence of other stablecoin initiatives - this time decentralised - offering this functionality.
Decentralised stablecoins Unlike "centralised" stablecoins such as Circle or Tether, the protocol strategy is not decided unilaterally by a central entity. Instead, it is managed by a decentralised autonomous organisation (DAO) in which holders of governance tokens can participate. In the case of MakerDAO - renamed Sky in summer 2024 - this is the MKR token.
👉 Read our full analysis of Maker and its rebranding as Sky
The DAI, 1st decentralised stablecoin of scale The DAI, launched by MakerDAO in December 2017 on Ethereum, is the first widely adopted decentralised stablecoin in decentralised finance (DeFi). Initially, MakerDAO promised to guarantee the incensurability of its stablecoin by only accepting unseizable assets such as ether (ETH) or bitcoin (BTC) in its reserves. This promise is less true today.
The DAI is based on an innovative concept: the collateralised debt position (CDP). Users deposit cryptocurrencies to create and borrow a stablecoin, which they will have to repay with interest to get their deposit back. This mechanism allows everyone to use leverage on their capital.
However, CDPs have a limit: borrowings must always be covered by over-collateralised deposits. As the value of collateral is volatile, the protocol must maintain sufficient margin to liquidate this collateral before its value falls below that of the loan granted. This reduces capital efficiency.
The DAI also allows a return if it is staked in its "Saving Module".
In its new roadmap, Sky intends to foster the emergence of a new DAI (named USDS) that will have new features (including the ability to freeze addresses, which is not possible with the DAI) with the aim of increasing its institutional use.
In 2023, Curve and Aave also launched their own stablecoins: the crvUSD and the GHO, which are also based on the CDP model. The crvUSD has the particularity of having introduced the concept of "soft liquidation", which allows loans to be liquidated gradually.
We can also note Angle, which was the first protocol to issue a decentralised euro stablecoin: the EURA, but this type of asset still has only limited demand, the USDA (its dollar equivalent) then came to complete their offering.
LUSD & BOLD: Radically censorship-resistant Most CDP models, including DAI, have incorporated centralised stablecoins or RWAs (Treasury bills or tokenised bonds) into their reserves. This strategy aims to effectively increase the amount of their stablecoin in circulation and generate returns. However, the downside is that some of the reserves of these "decentralised" stablecoins may be frozen by centralised entities.
The LUSD, issued by Liquity V1, is often considered the most resilient stablecoin. It accepts only ETH as collateral, its smart contract is permanently immutable, and the borrowing rate is paid only once, at loan origination. Nevertheless, the stability pool (SP) can sometimes force the liquidation of loans well before their liquidation threshold.
Liquity V2's smart contract, which is also immutable, will issue BOLD. This new stablecoin will accept two additional tokens as collateral: stETH and rETH, liquid staking tokens issued by Lido and Rocket Pool respectively.
In addition, Liquity V2 will offer users the ability to set and adjust their annual borrowing rates at will. The Stability Pool (SP) will prioritise the liquidation of loans at the lowest rates, ensuring balance in a variety of market conditions.
Stablecoins that redistribute their returns Also known as "Yield Bearing", these stablecoins aim to offer stable value to their holders while providing a passive return. The idea is to share with users a portion of the returns generated by the underlying assets. Unlike DAI, it is not necessary to stage them to benefit from the return.
In June last year, US fintech Paxos launched a centralised stablecoin called "Lift dollar" (USDL). This allows its holders to earn a 5% return generated by its reserve made up of US Treasury bonds.
With this stablecoin, Paxos is primarily targeting the Argentine market, which has been facing double-digit inflation for several years. Other similar stablecoins have recently emerged, such as the USDM issued by Mountain Protocol.
The USDY, issued by Ondo, is currently the most widely adopted stablecoin in this category. Backed by short-term US Treasuries and bank deposits, it is available to non-US retail and institutional investors.
👉 Read our full analysis of Ondo
Currently, the development of these stablecoins is considerably hampered by regulation. In the United States, the Securities and Exchange Commission (SEC) is threatening to reclassify this type of product as a security.
In Europe, MiCA regulations prohibit regulated issuers from offering a direct return to their users. This prohibition has never been clearly justified publicly. Several experts interviewed by The Big Whale point to the potential risk of competition with banks that this practice could engender.
Decentralisation with Usual Among the stablecoins in this category with claims of decentralisation is USD0, issued by Usual. It is a kind of RWA (Real World Assets) aggregator. Currently, the protocol's reserves consist solely of USYC, the on-chain representation of the Short Duration Yield Fund (SDYF) issued by the US company Hashnote. The SDYF is made up of short-term US Treasuries.
Holders of USD0 do not benefit from any direct yield, but they will soon be able to block their tokens to obtain USD0++. USD0++ holders will have two options: either to receive immediate rewards in the form of USUAL governance tokens, or to receive the returns generated by the reserve's assets every six months. The USD0++ matures after 4 years, at which point the blocked USD0 is released. Before then, it will be possible to trade them on the secondary market.
The main challenges for Usual will be to continue to increase the quantity of USD0 in circulation after the airdrop campaign and to manage the liquidity risks associated with the long maturation period of USD0++.
The main problem associated with the multiplication of these stablecoin issuers is that they are all competing for the adoption and liquidity of their respective tokens. The emergence of common standards, allowing different players to issue the same fungible stablecoin, could be the solution to this dilemma.
M^0: standardise and democratise access to currency issuance So far, no decentralised stablecoin has managed to compete with the USDC, let alone the USDT. Launching your own stablecoin and getting it adopted by users is a real challenge, because the leaders in the field benefit from powerful network effects. Distribution is the sinews of war.
In fact, the stablecoin market presents huge barriers to entry: a stablecoin's liquidity is crucial to its adoption by the major players. Almost all trading pairs are denominated in USDT and USDC. These stablecoins are also integrated into most centralised and decentralised platforms, and have succeeded in establishing a relationship of trust with their holders.
M^0 assumes that the various platforms with which users interact (centralised and decentralised exchanges, wallets, apps, etc.) play a major role in the distribution and success of stablecoins.
M^0 therefore wants to rely on these platforms by allowing them to issue a single fungible stablecoin, the "M", and collect returns linked to the Ms they distribute, rather than participating in the distribution of stablecoins that do not benefit them. Platforms adopting M would then have the option of whether or not to share these returns with their users.
Protocol governance elects "Minters" capable of issuing M. To do so, Minters must block short-term US Treasuries with eligible depositories, with these actions monitored and approved by protocol validators.
The idea is therefore to create a set of common standards (particularly on depositories and the type of collateral) for all Minters, so that as many entities as possible can issue the same fungible stablecoin. This eliminates many barriers to entry for stablecoin issuers, who normally have to manage to create a new stablecoin that is sufficiently liquid and adopted on the various centralised and decentralised platforms.
Protocol validators provide daily certification of Minters' reserves, with Minters also having to obtain the validators' authorisation to sell assets from their reserves. This system would therefore offer greater transparency than centralised stablecoin issuers.
M^0 governance is based on a two-token system: the POWER (having an active management role) and the ZERO (having a custodian role). POWER holders receive ZEROs when they participate in the governance of the protocol, and fees generated by the protocol are distributed to ZERO holders.
The protocol is still in the pre-launch phase; it remains to be seen how successful it will be in realising its ambitions.
Other types of stablecoin As more traditional players such as BlackRock begin to roll out on-chain products, the term "stablecoin" increasingly tends to cover realities different from its original use cases such as crypto purchases or collateralisation of DeFi positions.
"Tokenised money market funds" The best example of these new types of product are tokenised money market funds. Their issuers offer a disintermediated investment system, but are much more constrained in terms of regulation. Indeed, tokens can only be exchanged between authorised persons and so cannot, for the time being, be used to collateralise positions in DeFi.
The most famous of these is BUIDL, deployed by BlackRock on Ethereum last March. It is currently the most successful, attracting $520 million. Several protocols, such as Aave - the leader in lending and borrowing protocols - have also announced that they want to include it in their reserves for diversification purposes.
In June this year, France's Spiko launched two similar products (in euros and dollars) that already total almost $90 million in outstandings.
Some players, such as US asset manager Franklin Templeton, which has also launched a tokenised money market fund called BENJI, are betting that it will one day be possible to use it as a payment instrument. For the time being, this use is totally prohibited in jurisdictions such as the United States and Europe.
"Structured products" Most stablecoins are similar in that they are almost all backed by low-risk Treasury bills or bonds. The aim is to have a pool of return-generating assets whose value is not volatile.
However, there are other ways to obtain return-generating positions that are not very sensitive to market volatility.
The reserve of value of USDe, issued by Ethena, is secured in part by a "basis trade" strategy: a "short" position is opened to hedge the volatility of the reserve assets (BTC & ETH) while benefiting from "funding rate" returns.
👉 Read our full analysis of Ethena
The USDe is the stablecoin with the most explosive launch in recent years. It reached the threshold of 3 billion tokens in circulation in just 6 months and was quickly integrated into most DeFi applications as well as some centralised exchanges such as Bybit.
However, its growth is stagnating, or even regressing, due to market conditions that have caused a fall in the funding rate. As a result, USDT now accounts for almost a third of its reserves.
It will be interesting to monitor developments in this type of stablecoin, whose store of value is secured by trading positions. They take advantage of the composability enabled by blockchains and allow more complex trading strategies to be implemented.
JP Morgan's interbank cash Very different from other projects, the JPM Coin is a stablecoin aimed at improving interbank transfers within the flows of US bank JP Morgan. At the end of 2023, the banking giant said it would manage the equivalent of one billion dollars in daily transactions with this system.
The way it works is simple: in exchange for a deposit in euros or dollars into one of their bank accounts, the user receives the equivalent in digital assets. These are then instantly transferred via the Onyx network, a private blockchain inspired by Ethereum. This infrastructure guarantees the confidentiality of exchanges and high transaction speeds. What's more, the system promises to operate 24/7.
The JPM Coin stands out for its unique design: it is intended to exist exclusively within the JP Morgan ecosystem.
The Big Whale's general view on stablecoins The stablecoin war is in full swing, with more and more players entering the fray to grab a share of this fast-growing market. The current business model largely favours issuers.
Liquidity and adoption are the two key factors ensuring the growth of a stablecoin. These elements are closely linked to how they are distributed. Tether's USDT initially spread thanks to its integration on all centralised trading platforms, while the USDC benefited from Coinbase's support.
Distribution therefore appears to be the central vector for a stablecoin's success. To stand out against Tether and Circle, it is necessary to find new distribution channels. This explains the growth of PayPal's PYUSD, issued by a company with a broad user base beyond crypto. Similarly, it's no surprise that Revolut is considering launching its own stablecoin.
Some of the population in South America, Africa and South Asia have adopted dollar stablecoins as a hedge against inflation in local currencies. These stablecoins do not require a bank account and facilitate all types of payments, including cross-border transfers as part of remittances.
The dollar accounts for more than 99% of the current stablecoin market. The issuers of these stablecoins are thus becoming distribution channels for the dollar on a global scale.
It remains to be seen how state regulations will frame the use of stablecoins and whether banks will have to reinvent themselves, potentially by becoming stablecoin issuers themselves.
