Welcome to the third edition of stative.

Today we are getting a bit philosophical, but don’t worry - I’ll stay on topic 🤓

Market overview

• Market cap of the stablecoin market hit new all-time-highs of above 230bn USD. Not by much, but still.

• Trading volume had a drop of more than 60% (!) but now recovered to around 90bn USD, which is like 40% up from its low but still also like 60% down from its recent high.

• The continuously high market cap may be evidence, that investors remain sceptical and stay in stablecoins.

• At the same time, the largest stablecoins USDT und USDC are growing their supply - meaning they mint new tokens. Probably to either host potential further growth by investors with interest of leaving volatile assets and buying into their stable assets and / or coming into the market and preparing to buy into more volatile assets once the sentiment changes.

Interesting news

• Ripple CEO has a very positive outlook for stablecoins. He believes the market could potentially grow tenfold in the next five years mainly thanks to regulatory clarity in the US.

• He seems to have a point as just shortly after his statement, Kristin Smith, CEO of industry advocacy group the Blockchain Association, stated that United States lawmakers are on track to pass legislation setting rules for stablecoins and cryptocurrency market structure by as soon as August giving a clear framework for stablecoin issuers.

How is a stablecoin “stable”?

“Stablecoin” sounds simple—it’s a coin that stays stable. But stable against what? The US dollar? Inflation? The crypto market? And what does “stable” even mean? Let’s break it down from a few angles.

Economics: Stability vs. Illusion of Stability

In traditional finance, stability means predictability. A stablecoin pegged to the US dollar is designed to always be worth $1, just like a dollar bill in your pocket. But even the US dollar isn’t really “stable” - it loses value over time due to inflation. In Argentina or Turkey, where national currencies can lose double-digit percentages in value overnight, even a slowly depreciating US dollar feels rock solid. But it still loses value because its buying power might decrease over time. So a dollar might always be a dollar, but what you can buy with it or exchange it for will still fluctuate - just more slowly than the value of e.g. bitcoin might fluctuate.

So, when we say stablecoins are “stable,” we usually mean they don’t fluctuate wildly in the short term and they are in that way more predictable.

History: From Gold to Algorithmic Experiments

Historically, stability meant being backed by something “real” - like gold. The US dollar famously was tied to gold until 1971, giving people confidence in its value. Some stablecoins follow this logic: they are fully backed by actual US dollars in a bank (like USDC or USDT). Others try to be “decentralized” and algorithmically maintain stability through smart contracts (like DAI or the failed UST). Both of those concepts with their own advantages, disadvantages and limitations. I guess as everything in life, but more on that below.

Sociology: Trust is Everything

What makes a stablecoin stable isn’t just reserves - it’s belief. If people trust that they can always swap 1 USDC for 1 dollar, it stays stable. If trust is lost (like when Terra’s UST collapsed - I will need to do a whole episode on that one day), stability disappears instantly. Governments, banks, and big corporations are watching stablecoins closely because they challenge the traditional monopoly on money and if or who can be trusted.

Philosophy: Does Stability Even Exist?

Is anything in life truly stable? The economy isn’t. Governments change. Even gold fluctuates in price. Stability, then, is relative - a stablecoin is only stable as long as we collectively agree that it is.

Bottomline

A stablecoin is only as good as what backs it, how people perceive it, and how well it holds its peg. Whether it’s USDC, PayPal’s PYUSD, or China’s digital yuan, the real question is: Do you trust it? Because in the end, that’s all money has ever been - a shared illusion of stability.

Current concepts for stability in stablecoins

So, we tried to establish what stable in the context of stablecoins mean.

Over the years, different approaches for how that can be applied to stablecoins conceptually have emerged - some relying on traditional finance, others purely on code, and some blending both worlds. Each model has its own strengths, risks, and business incentives.

Here’s a breakdown of the key stablecoin concepts that have shaped the space thus far. As I am more of a visual guy and there are a lot of hybrid projects applying aspects of multiple of these concepts, I also decided to create an illustration of how the most relevant projects fit into these concepts.

Fiat-Collateralized Stablecoins

• How it works: Every stablecoin is backed 1:1 by fiat currency (e.g., USD, EUR) held in a bank. Issuers maintain reserves to ensure redeemability.

• Advantages: Simple, “trusted”, relatively stable, widely used.

• Disadvantages / Risks / Critics: Requires trust in centralized issuers, regulatory scrutiny, potential lack of transparency in reserves.

• Business Model: Issuers generate revenue through interest on fiat reserves, transaction fees, and partnerships.

• Popular projects: USDT, USDC

Crypto-Collateralized Stablecoins

• How it works: Stablecoins are backed by crypto assets (e.g., ETH, BTC) held in smart contracts, usually overcollateralized to account for volatility.

• Advantages: More decentralized than fiat-backed, transparent, auditable on-chain.

• Disadvantages / Risks / Critics: Requires overcollateralization (capital inefficiency), vulnerable to crypto crashes (liquidations).

• Business Model: Issuers (often DAOs) earn fees from minting, borrowing, and liquidations within their protocols.

• Popular projects: DAI, crvUSD, GHO

Algorithmic Stablecoins (Uncollateralized or Partially Collateralized)

• How it works: Smart contracts control the supply via algorithms and incentives, often using seigniorage mechanisms or multiple tokens.

• Advantages: Fully decentralized (in theory), no reliance on fiat or banks.

• Disadvantages / Risks / Critics: Historically unstable, prone to de-pegging or collapse in crises.

• Business Model: Often relies on arbitrage mechanisms, transaction fees, and governance token appreciation.

• Popular projects: UST (collapsed), FRAX (partially collateralized), USDD

Commodity-Backed Stablecoins

• How it works: Pegged to real-world assets like gold, silver, or oil, with reserves held in vaults.

• Advantages: Hedge against fiat inflation, potential store of value.

• Disadvantages / Risks / Critics: Storage costs, potential liquidity issues, dependency on physical asset management.

• Business Model: Issuers make money through storage fees, transaction fees, and arbitrage on asset-backed tokens.

• Popular projects: PAXG (gold-backed), Tether Gold (XAUT)

Central Bank Digital Currencies (CBDCs)

• How it works: Government-issued digital currencies pegged to national fiat, often using blockchain-like technology.

• Advantages: Fully regulated, government-backed, potential for financial inclusion.

• Disadvantages / Risks / Critics: Privacy concerns, state control, competition with private stablecoins.

• Business Model: Governments use CBDCs to enhance monetary policy, reduce cash handling costs, and improve financial oversight.

• Popular projects: Digital Yuan (China)

Corporate-Issued Stablecoins

• How it works: Issued by corporations for payments and financial services, often fully fiat-backed.

• Advantages: Strong brand backing, regulatory compliance, integration with existing ecosystems.

• Disadvantages / Risks / Critics: Centralized control, regulatory risks.

• Business Model: Companies profit from transaction fees, interest on reserves, and ecosystem integration.

• Popular projects: Diem (Libra) (canceled), PYUSD (PayPal)

Real-World Asset (RWA)-Backed Stablecoins

• How it works: Pegged to baskets of real-world assets like real estate, treasury bonds, or stocks.

• Advantages: Diversification, potential yield generation.

• Disadvantages / Risks / Critics: Complexity, regulatory concerns, liquidity risks.

• Business Model: Revenue comes from asset management fees, interest on underlying securities, and tokenization services.

• Popular projects: Still rather experimental and early stage at most Ondo’s OUSG or Mountain Protocol’s USDM

Thanks for reading in 🤍

// Kai