Blending the reliability of traditional money with the speed, transparency, and global reach of block chain technology

In a cryptocurrency landscape often defined by sharp price
swings and market instability, stablecoins emerge as a compelling alternative, not because they promise dramatic returns, but because they offer stability. These digital assets are designed to maintain a steady value and to enable individuals and businesses to leverage blockchain’s speed, transparency, and global reach without facing rapid market fluctuations.

Beyond price stability, stablecoins offer several practical advantages that extend their usefulness in global finance. They combine the trust and familiarity of traditional currency with the efficiency of blockchain-based transactions. They simplify international transactions, cutting costs and settlement times that traditional banking systems still struggle with. They expand financial inclusion by giving access to digital assets and payments to people and regions underserved by traditional banks. Perhaps most importantly, they build trust, offering a bridge between the predictability of traditional currencies and the innovation of blockchain technology.

These advantages have helped fuel rapid market expansion. Over the past 18 months, the stablecoin market has grown substantially: as of October 2025, the total market capitalization of stablecoins stood at approximately US$301 billion. According to JPMorgan Chase analysts, the market could expand to about US$500 billion by 2028. Although the scale and timing of that transformation remain uncertain, stablecoins and tokenized deposits are fast becoming a major story in digital finance.

To understand why stablecoins have scaled so quickly and how they differ from one another, it is essential to examine the technical foundations that secure their pegs. The concept of a peg refers to the practice of tying the value of one asset to another, in this case fixing the coin’s value to an external reference, most commonly the U.S. dollar, ensuring that one unit of a stablecoin is consistently equal to one dollar. Different designs maintain price stability in different ways, employing collateral reserves, algorithms or hybrid models to keep their value fixed, typically around one dollar. As a result, stablecoins have become one of the most operationally efficient ways to move funds within the broader crypto ecosystem. They are widely used for cross-border transfers and for settling transactions involving tokenized assets.

Today we are mainly exposed to three primary models. Fiat-collateralized models are the most widely used They are backed 1:1 by a reserve of fiat currency, such as USD Coin (USDC), held by the issuer, making redemption at the pegged value possible.

Stablecoins: still from challenging the dollar’s dominance in daily cross-border transactions. Average daily trading volume, USD billions

Source: DefiLlama, Data as of August 26, 2025. Note: Algorithmic stablecoins excluded, shown under “Other Stablecoins”

For each token issued on-chain, the issuer deposits a corresponding unit of fiat currency in a regulated bank or custodian institution. This design relies on off-chain solvency and trust in custodial reserves. Crypto-backed stablecoins use overcollateralized smart contracts to absorb volatility in the collateral asset. Users lock digital assets (such as ETH) into a smart contract that issues stablecoins worth less than the collateral’s market value.

Price oracles bridge blockchain systems with external markets by feeding real-time asset prices to the smart contract, aggregating price data from multiple exchanges to provide accurate collateral valuations. However, when collateral value drops, automatic liquidation modules are triggered by the smart contracts and, without any human intervention, they sell or auction these holdings to repay the stablecoin debt and restore system solvency. Algorithmic models regulate price purely through supply elasticity, relying on market incentives and expectations of future convertibility rather than collateral reserves. Based on the relative price of the stablecoin to its target price, new tokens are minted, burned or temporarily locked.

Major fiat-colollateralized stablecoins (USDT, USDC) hold 84% of total market cap

Source: Coingecko, BIS Triennal Central Bank Survey, Haver Analytics

These approaches manifest in widely used stablecoins such as Tether (USDT), USD Coin (USDC) and DAI, each embodying different trade-offs. One of the most influential examples is Tether (USDT), demonstrating a centralized model that prioritizes high liquidity at the expense of full transparency.

Conversely, USD Coin (USDC) emphasizes regulatory compliance and verified reserves, making it a trusted choice for institutional investors, though it remains dependent on traditional finance. Differing from both, DAI employs a decentralized, crypto-collateralized system, aligning with blockchain principles of autonomy but introducing vulnerability to market volatility.

As stablecoins mature and gain adoption across crypto platforms and traditional financial systems, their path forward is shaped by regulatory pressures, technological evolution, and competitive dynamics. While their utility has been proven through real-world applications, significant challenges remain.

Regulation represents the most consequential challenge. In the United States, multiple agencies claim oversight, creating compliance complexity and legal uncertainty. Proposed federal legislation aims to establish clear rules for reseve backing and audits, but political disagreements have stalled progress. The European Union’s MiCA regulation offers more clarity, creating a unified framework that requires authorization and transparency but imposes significant compliance costs. Meanwhile, emerging markets like Nigeria and China have restricted or banned stablecoins entirely, viewing them as threats to monetary sovereignty while developing their own central bank digital currencies.

Beyond regulation, structural and technical constraints also pose risks. Scalability remains a concern during high demand periods, when network congestion increases fees and slows transactions. Security vulnerabilities pose existential threats, as demonstrated by TerraUSD’s catastrophic collapse in 2022. For reserve-backed stablecoins like USDT and USDC, transparency questionspersist despite regular attestations, particularly regarding real-time reserve verification during market stress. Decentralized options like DAI face stability challenges when collateral values fluctuate dramatically.

As stablecoins grow, they also pose potential systemic risks. Their concentration in Treasury bills and money market funds means disruptions could impact broader financial markets, as nearly occurred during the Silicon Valley Bank crisis, when USDC briefly lost its peg.

At the same time, stablecoins face competition from over 100 countries developing central bank digital currencies (CBDCS) and from traditional banks modernizing payment infrastructure. However, the ecosystem continues to evolve through diversification beyond dollar-pegged coins, innovations like yield-bearing stablecoins, and deep integration with decentralized finance.

Stablecoins have demonstrated genuine utility in payments, financial inclusion and DeFi. Their future depends on navigating regulatory frameworks, technical improvements and competitive pressures. The likely outcome is coexistence: regulated stablecoins serving mainstream users alongside decentralized alternatives that prioritize autonomy. By combining stable value with digital innovation, stablecoins continue to redefine money fora world demanding both security and progress.

Written by:

• Keti Aznaurashvili
• Domenico Agostino
• Nicolò Ballabio
• Matilde Sommese