What are stablecoins?
Stablecoins are a unique class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency such as the US dollar, the euro, or other assets like gold. Unlike more volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins provide a means for users to transact, save, or invest in a digital asset that isn't subject to the wild price fluctuations commonly associated with the broader crypto market. This stability is achieved through a variety of mechanisms that are crucial to understanding how stablecoins function within decentralized finance (DeFi) and the broader financial system.
At their core, stablecoins are designed to combine the best aspects of both traditional fiat currencies and cryptocurrencies. They offer the speed, transparency, and borderless nature of digital currencies, while avoiding the unpredictable price movements that can make other cryptocurrencies less practical for everyday use. By maintaining a stable value, stablecoins serve as a vital bridge between the traditional financial system and the growing decentralized world.
There are several types of stablecoins, each with its own method for achieving stability.
One common method is through collateralization, where a stablecoin is backed by reserves of assets such as fiat currencies, cryptocurrencies, or commodities. USDC, for example, is a fully collateralized stablecoin issued by Circle and pegged to the US dollar. Every USDC token in circulation is backed by an equivalent US dollar held in reserve, ensuring that the token remains redeemable at a 1:1 ratio with the dollar. This transparency and backing by a trusted asset make USDC one of the most widely used stablecoins in the market.
Decentralized stablecoins like DAI, on the other hand, achieve their stability in a different way. Instead of relying on fiat reserves held by a central entity, DAI is created through smart contracts and collateralized by other cryptocurrencies, primarily Ether (ETH). Users can lock up their assets in a decentralized protocol such as MakerDAO to mint DAI, with the value of their collateral required to exceed the amount of DAI they create. If the value of the collateral falls below a certain threshold, it is automatically liquidated to maintain the peg. This decentralized approach ensures that no single entity controls the issuance or redemption of DAI, aligning it more closely with the ethos of decentralized finance.
A third type of stablecoin that has gained significant traction in recent years is the yield-bearing stablecoin, exemplified by products like USDY from Ondo Finance. Unlike USDC or DAI, which primarily aim to maintain a stable value, USDY also generates a return for its holders. The stablecoin achieves this by being backed by yield-generating assets such as bonds or other traditional financial instruments. This allows holders to earn passive income simply by holding the stablecoin, offering a potential advantage over traditional stablecoins that do not offer yield. Yield-bearing stablecoins could represent the next evolution in stablecoin design, merging the stability of a fiat-pegged asset with the returns typically associated with investments.
The underlying mechanisms that ensure the stability of these different stablecoins vary, but the goal remains the same: to provide a reliable medium of exchange or store of value in an ecosystem that often lacks such stability. In the case of collateral-backed stablecoins like USDC, reserves held by trusted custodians ensure that the stablecoin maintains its peg. For decentralized stablecoins like DAI, over-collateralization and smart contract enforcement provide the same guarantee, but with a decentralized structure that removes the need for a central authority. Yield-bearing stablecoins, like USDY, add an extra layer of complexity by linking stability to real-world income-generating assets, which require careful management to maintain both the peg and the promised yield.
The importance of stablecoins in the broader crypto ecosystem cannot be overstated. They serve as a safe harbor for investors during periods of market volatility, allowing them to move in and out of riskier assets without converting their holdings back into fiat currencies. This makes stablecoins a vital tool for liquidity management across exchanges and decentralized protocols. Additionally, the use of stablecoins has extended beyond crypto markets into real-world applications. They are increasingly used for remittances, cross-border payments, and as a digital alternative to traditional bank accounts in regions where financial infrastructure is underdeveloped.
USDC, for instance, is widely used in DeFi protocols for lending, borrowing, and trading. It offers users the ability to participate in these systems without the risk of their collateral losing value due to crypto market volatility. Similarly, DAI has become a staple of the DeFi ecosystem, used in everything from liquidity pools to decentralized exchanges. Its decentralized nature and strong community support have made it a trusted option for users looking to maintain stability while engaging in complex financial activities. USDY and other yield-bearing stablecoins, though newer, are also being adopted in similar ways, offering the added benefit of passive income alongside stability.
The rise of stablecoins has also drawn attention from regulators, who are increasingly recognizing their potential impact on the traditional financial system. As stablecoins become more integrated into the global economy, questions about their regulation, transparency, and long-term sustainability are coming to the forefront. Regulatory scrutiny has focused particularly on centralized stablecoins like USDC, where concerns about reserve management and transparency are prominent. Decentralized stablecoins like DAI, while less reliant on central authorities, face challenges around maintaining their pegs during periods of extreme market volatility.
Despite these challenges, the appeal of stablecoins continues to grow. Their ability to provide stability in an otherwise volatile environment makes them indispensable within DeFi, while their potential use cases in the real world are expanding rapidly. The introduction of yield-bearing stablecoins like USDY only enhances their utility, potentially drawing more traditional investors into the world of digital assets. Stablecoins, in their various forms, are becoming a cornerstone of the financial systems being built on blockchain technology, offering both stability and innovation in equal measure.
Whether backed by fiat, crypto, or real-world assets, they provide the stability necessary for broader adoption of cryptocurrencies and decentralized financial systems. Their ability to serve as a bridge between traditional finance and the digital world positions them as one of the most important innovations in the financial landscape today. As stablecoins continue to evolve, their role in both DeFi and traditional finance is likely to grow, opening up new possibilities for global commerce, investment, and wealth management.
How are different types of stablecoins used?
Stablecoins have become a foundational component of the DeFi ecosystem and play an increasingly significant role in global finance. These assets provide a stable store of value, which allows for efficient transactions, lending, borrowing, and even complex financial operations in decentralized applications (dApps). The utility of stablecoins extends far beyond DeFi, as they are also being adopted in cross-border payments, remittances, and by companies that wish to explore blockchain-based finance while maintaining the familiarity of fiat-pegged currencies. In this section, we will explore how different types of stablecoins—USDC, DAI, and USDY—are used across the world and the DeFi ecosystem, while also diving into the specific workflows that make them so useful.
USD Coin (USDC) is one of the most popular stablecoins globally, primarily due to its full collateralization with U.S. dollars. Issued by Circle, USDC is audited regularly, with each coin being fully backed by a dollar held in reserve. Its transparency and regulatory compliance have made it a trusted stablecoin for both retail and institutional users. USDC is commonly used on centralized exchanges like Coinbase and decentralized exchanges like Uniswap, allowing users to trade cryptocurrencies without worrying about the volatility of assets like Bitcoin or Ethereum. Its availability on multiple blockchains, including Ethereum, Solana, and Algorand, makes it versatile for use across different DeFi platforms.
A typical workflow for USDC usage might involve a trader looking to move in and out of volatile assets on decentralized exchanges. For example, during a crypto market downturn, a user might sell their Ethereum for USDC on Uniswap. By holding USDC, they can avoid potential market volatility while still keeping their funds on-chain. When market conditions improve, the user can swap their USDC back into Ethereum or any other crypto asset, allowing them to re-enter the market with minimal friction. This type of workflow highlights USDC’s role as a safe haven in turbulent markets.
Another example of USDC usage is in the context of lending and borrowing on platforms like Aave or Compound. A user can deposit USDC into these platforms to earn interest on their stablecoin holdings, or they can use USDC as collateral to borrow other assets. The predictable value of USDC makes it a preferred choice for both borrowers and lenders in DeFi, as neither party has to worry about fluctuations in the value of the collateral or the loan.
Gyroscope introduces a unique take on stablecoin design by emphasizing resilience through diversification. Unlike single-asset-backed stablecoins, Gyro's stablecoin (GYRO) is backed by a diversified basket of assets, including cryptocurrencies, stablecoins, and real-world assets. Gyroscope’s stablecoin protocol, GYRO, is uniquely designed to be both resilient and decentralized. Unlike traditional stablecoins that rely on centralized reserves or single assets, Gyroscope uses a diversified basket of assets, including fiat, cryptocurrencies, and real-world assets.
This multi-asset reserve approach ensures stability even during extreme market conditions, mitigating the risks of de-pegging or systemic failures. Gyroscope’s reserves are managed by autonomous Stability Pools, which maintain balance by algorithmically adjusting liquidity and supply based on real-time market conditions.
Additionally, Gyroscope employs decentralized governance to manage reserve allocation and protocol updates, ensuring no central entity controls the system. Users can participate in governance and earn rewards by staking GYRO in the Stability Pools, which also contributes to maintaining the stablecoin’s peg. By decentralizing both its reserve management and governance, Gyroscope differentiates itself from other stablecoin models, making it ideal for DeFi participants who value both resilience and decentralization.
Another unique aspect of Gyroscope is its focus on creating long-term stability rather than short-term incentives. While many stablecoins rely on market incentives or yield farming to attract users, Gyroscope prioritizes protocol sustainability. Its system of algorithmic management allows GYRO to remain stable even as external market forces change, providing a robust framework for DeFi ecosystems that require a secure, resilient stablecoin.
DAI, on the other hand, is a decentralized stablecoin that is not backed by a central entity like Circle but is instead collateralized by a range of cryptocurrencies, primarily ETH, within the MakerDAO protocol. DAI maintains its peg to the U.S. dollar through an over-collateralization process, where users deposit assets into smart contracts to generate DAI. This decentralized approach is appealing to users who prefer a trustless and censorship-resistant alternative to fiat-backed stablecoins. DAI’s utility in DeFi is wide-ranging, from liquidity provision to collateral in lending protocols, and even as a medium of exchange on decentralized exchanges.
A potential workflow for using DAI might involve a user who wants to access liquidity without selling their Ether. They could lock their ETH into MakerDAO’s smart contracts, minting DAI in return. The user can then spend the DAI or use it in DeFi applications, all while retaining exposure to ETH’s price movements. If the value of ETH rises, the user benefits from capital appreciation, and they can repay the DAI loan to unlock their original ETH. This is a powerful example of how DAI enables users to extract liquidity from their assets without selling them, a process known as “liquidity mining.”
Another example of DAI usage can be seen in automated yield farming strategies on platforms like Yearn Finance. Users can deposit DAI into Yearn’s smart contracts, which automatically seek the highest yield opportunities across various DeFi platforms. This allows users to passively earn interest on their DAI while also benefiting from the diversification and optimization strategies that Yearn employs. As DAI is decentralized and censorship-resistant, it is particularly attractive to DeFi users who value decentralization and the ability to control their own assets.
USDY, the yield-bearing stablecoin from Ondo Finance, introduces a new dimension to stablecoins by providing not only stability but also yield generation. USDY is collateralized by real-world assets like bonds and treasuries, which generate a steady yield. This makes USDY unique among stablecoins, as it provides users with an income stream simply for holding the asset. Ondo Finance manages these assets, and the yield generated by the underlying collateral is passed on to USDY holders, making it an attractive option for investors looking for passive income.
A common workflow for USDY would involve an investor looking to park their funds in a stable asset while still earning a return. Instead of holding traditional stablecoins like USDC or DAI, which do not offer yield, the investor could swap their stablecoin holdings for USDY on a decentralized exchange or through Ondo Finance’s platform. By holding USDY, the investor earns a yield, typically derived from low-risk, income-generating assets like government bonds. This allows users to benefit from both the stability of a pegged asset and the returns associated with traditional financial instruments.
Another potential use case for USDY is in institutional treasury management. A company with significant cash reserves could convert a portion of its fiat holdings into USDY to take advantage of the yield offered by Ondo Finance’s collateralized assets. By holding USDY instead of traditional cash or even USDC, the company earns a return on its stablecoin holdings without sacrificing liquidity or stability. This workflow demonstrates how USDY can serve both retail and institutional investors looking to maximize their returns on idle capital.
Liquity V2 adds another layer of innovation with the introduction of BOLD, a stablecoin backed by ETH and staked ETH, designed with full decentralization in mind. Unlike centralized or semi-decentralized stablecoins, BOLD operates without off-chain dependencies or centralized governance. It provides a user-controlled borrowing mechanism, allowing borrowers to set their own interest rates, which contrasts sharply with traditional DeFi protocols where borrowing rates are fixed by the platform or dictated by supply and demand.
BOLD’s innovative design also ensures that loans are always over-collateralized, with automatic liquidation mechanisms to protect against bad debt. Liquity V2 allows users to mint BOLD by locking ETH or staked ETH into the protocol, and it offers one of the highest loan-to-value ratios, up to 91%. Users can also participate in Stability Pools, providing liquidity in return for a share of protocol fees and liquidation gains, only serving to enhance the stability of the system for “passive” income generation.
The global adoption of stablecoins is not limited to DeFi. Their use has expanded into remittances and cross-border payments, where they offer a more efficient and less expensive alternative to traditional methods. In regions with unstable local currencies or limited access to banking services, stablecoins provide a reliable store of value and a means of transacting with the outside world. USDC and DAI, in particular, have been used for this purpose, allowing individuals and businesses to transfer value across borders without the need for intermediaries or high fees.
For instance, a user in a country with high inflation might choose to convert their local currency into USDC or DAI to preserve the value of their savings. They could then use these stablecoins to send remittances to family members abroad or to make purchases from international merchants. The stablecoin could be received on the other end and converted into the local currency, or held in the stablecoin form if the local currency is unstable. This workflow highlights the role of stablecoins in providing financial inclusion and access to global markets.
Beyond personal finance, stablecoins are also being adopted by companies and institutions looking to leverage the benefits of blockchain technology without exposing themselves to the volatility of traditional cryptocurrencies. USDC, for example, is used by businesses to settle transactions, pay employees, and manage international trade. The programmability of stablecoins also allows for more complex financial operations, such as automated payments, escrow services, and decentralized governance structures, embedding them in the business world.
Whether they are fiat-backed, decentralized, or yield-bearing, stablecoins represent a bridge between the traditional financial world and the emerging world of decentralized finance, unlocking new opportunities for users and businesses alike. As these stablecoins continue to evolve, their potential to transform both digital and real-world economies becomes ever more apparent.
A look at stablecoin usage and adoption trends
Now that we’re more familiar with how stablecoins work and the different kinds that exist, we can examine some usage trends and get a better view on how users are transacting with stablecoins.
The total market cap of centralized stablecoins currently sits at $85.2 billion. Notably, USDT remains the leader with a commanding market share of 64.7%, while USDC holds 31.4%, indicating that these two fiat-collateralized stablecoins control the majority of the market. This underscores the critical role of centralized stablecoins in providing liquidity and stability in both DeFi and CeFi environments.
DAI, a decentralized stablecoin, still holds an important position, despite centralized stablecoins’ dominance. With a market cap of $5.145 billion, it remains the most significant decentralized option, driven by users looking for censorship-resistant alternatives. DAI's over-collateralization model continues to attract users who value the ability to mint stablecoins through decentralized protocols like MakerDAO, offering a distinct use case compared to USDT and USDC.
Fiat-collateralized stablecoins currently account for a vast 90.7% of the total stablecoin supply, while crypto over-collateralized stablecoins like DAI and Liquity’s BOLD make up about 7.9%. This distribution emphasizes that users continue to favor fiat-backed options due to their simplicity and perceived safety, though crypto-backed stablecoins are growing in appeal for DeFi-native participants seeking decentralized liquidity solutions.
However, if we look at the total picture of stablecoins, DeFillama cites a $170 billion market cap for all of these various stablecoins (centralized, decentralized, etc) combined:
A new entry into the stablecoin market is obviously PayPal’s PYUSD, which has started gaining traction with a market cap of $673.92 million. The launch of PYUSD signals a significant move by traditional financial institutions to integrate with blockchain technology. PayPal’s decision is strategic, offering a trusted, regulatory-compliant stablecoin that can easily integrate with existing financial services.
The transaction volume of stablecoins is also worth noting, with aggregated transactions totaling $6.05 trillion in the past year. This reflects their integral role in providing liquidity in DeFi applications such as lending, trading, and yield farming. Tether (USDT), given its dominance, unsurprisingly accounts for the majority of on-chain transfers.
However, USDC remains widely utilized for institutional and DeFi-based operations due to its compliance and transparency, making it the second most transacted stablecoin.
Another fascinating trend is the velocity of stablecoins, which refers to how frequently they are transacted on-chain. High velocity indicates active use for purposes such as payments and trading. USDT, with its widespread adoption across numerous blockchains and exchanges, continues to exhibit high velocity, supporting its position as the go-to choice for traders. By contrast, USDC tends to have a slightly lower velocity but is often preferred for more stable, long-term positions in liquidity pools or as collateral in lending platforms like Compound or Aave.
Algorithmic stablecoins make up 1.2 billion of the supply, with projects like FRAX and USDD representing this category. Despite previous controversies and failures in the algorithmic stablecoin space, projects like FRAX continue to explore innovative methods of maintaining a stable peg. These algorithmic stablecoins represent a smaller portion of the total supply, but they still play an important role in pushing the boundaries of stablecoin design and testing new mechanisms for stability and decentralization.
In conclusion, centralized stablecoins, particularly USDT and USDC, maintain a dominant role in the ecosystem, yet decentralized alternatives like DAI and innovations from newcomers such as PYUSD and BOLD are steadily gaining ground. Each type of stablecoin offers unique features and functionalities, catering to a diverse range of users, from institutional investors to DeFi natives. The continued growth in transaction volumes and stablecoin supply reflects their critical importance in both DeFi and global financial systems.
But why do we need stablecoins?
The potential of stablecoins to reshape the traditional financial system is becoming increasingly apparent, as major companies like PayPal and innovative projects like Ondo Finance enter the space with solutions tailored to both individual and institutional users. Stablecoins offer a digital alternative to traditional fiat currencies but also unlock new financial models, enabling more efficient payment systems, wealth generation through yield, and easier access to global markets. As these stablecoins gain more traction, their use could fundamentally shift how we interact with money, particularly through the integration of blockchain technology into everyday financial transactions.
One of the most significant moves in the stablecoin space was the launch of PayPal’s USD-pegged stablecoin, PYUSD. PayPal, a global payments giant with over 430 million active accounts, made a calculated decision to introduce PYUSD as a way to bridge the gap between traditional finance and the world of digital currencies. By creating a fully backed and regulated stablecoin, PayPal aims to offer its vast user base a secure and efficient way to engage with the rapidly growing digital economy. PYUSD is fully backed by U.S. dollar deposits, short-term treasuries, and similar cash equivalents, which ensures that users can redeem their stablecoins at a 1:1 ratio with the U.S. dollar, maintaining trust and stability.
The reasoning behind PayPal’s decision to launch PYUSD is multifaceted. First and foremost, the company sees the demand for stable, blockchain-based assets that can facilitate fast and inexpensive transactions globally. Traditional payment systems, especially for cross-border transfers, are often slow and expensive, relying on multiple intermediaries and incurring significant fees. PYUSD, integrated directly into PayPal’s platform, removes many of these inefficiencies by providing a direct, blockchain-powered settlement mechanism. PayPal users can send and receive PYUSD instantly, avoiding traditional banking delays, and merchants can settle payments in the stablecoin or convert it back to dollars seamlessly.
In addition, PayPal’s introduction of PYUSD is part of its broader strategy to embrace the future of digital payments, particularly as younger generations increasingly favor cryptocurrencies and digital assets. By offering a stablecoin, PayPal is positioning itself as a key player in the transition to a more digital economy, one in which fiat-backed stablecoins like PYUSD can coexist with or even replace traditional payment methods. This could also allow PayPal to compete with decentralized financial applications that offer fast, cheap, and borderless transactions, while still providing users with the familiar experience of a trusted, regulated company.
A key aspect of PYUSD’s potential is its ability to integrate into decentralized finance (DeFi) ecosystems. While PayPal is a centralized company, the launch of PYUSD opens the door for its stablecoin to be used on DEXs and lending platforms. Users could theoretically leverage PYUSD to participate in DeFi without exposing themselves to the volatility of traditional cryptocurrencies. This hybrid model, where a highly regulated stablecoin like PYUSD can interact with decentralized financial systems, could unlock a new wave of adoption, particularly among users who want the benefits of DeFi but with the safety and regulatory backing of a company like PayPal.
In a broader sense, stablecoins like PYUSD also hold the potential to reshape remittances and cross-border payments. Today, sending money internationally can be both costly and slow, especially when intermediaries like banks and money transfer services are involved. PYUSD, backed by a global payments giant with established infrastructure, could reduce friction in this process. PayPal users could send PYUSD to recipients abroad almost instantly and with lower fees than traditional services. As more merchants adopt PYUSD, recipients could use the stablecoin directly for purchases, streamlining cross-border commerce.
Ondo Finance’s USDY, a yield-bearing stablecoin, represents another way stablecoins can unlock value, particularly through financial innovation. Unlike traditional stablecoins, USDY is backed by yield-generating assets such as short-term treasuries and corporate bonds, which are commonly used in traditional finance to generate steady income. USDY holders receive a portion of the returns generated by these assets, making it attractive to users who want both stability and yield. This marks a significant shift from earlier stablecoin models, which focused purely on maintaining price stability without offering any yield.
The integration of USDY into decentralized finance could unlock new forms of passive income for users, particularly for those looking to hold stable assets while earning returns. In traditional finance, investors must choose between low-risk, low-yield assets like savings accounts or riskier investments that can offer higher returns but come with volatility. USDY breaks this dichotomy by offering the best of both worlds: stability in price with a built-in yield. This could make it particularly attractive for institutions managing large amounts of cash or individuals who want to preserve their capital while still generating a return.
Beyond individual use, USDY could also have significant implications for institutional investors, corporate treasuries, and even governments. By holding USDY, these entities can benefit from stable, predictable yields while avoiding the complexity and costs associated with traditional asset management. This could lead to a future where stablecoins like USDY serve as core components of corporate and government financial strategies, offering an easy way to manage liquidity, earn returns, and participate in the broader blockchain ecosystem without the need for intermediaries.
The broader societal unlocks of stablecoins like PYUSD and USDY are vast. PYUSD could make digital currencies more accessible to millions of people who might otherwise be hesitant to interact with cryptocurrencies due to volatility concerns or a lack of regulatory clarity. Meanwhile, yield-bearing stablecoins like USDY introduce new models of wealth generation that merge the benefits of traditional financial instruments with the openness and accessibility of blockchain technology. As more companies, governments, and users adopt these stablecoins, we could see a more efficient and democratized financial system, where money flows more freely across borders, earning potential is expanded, and access to financial services is universalized.
PayPal’s launch of PYUSD underscores the increasing importance of digital currencies in global payments, while USDY from Ondo Finance introduces a new way to earn passive income through yield-bearing assets. These developments are just the beginning of what could be a massive shift in the financial landscape, as stablecoins continue to unlock new possibilities for efficiency, financial inclusion, and wealth generation. As the future unfolds, the impact of these stablecoins could be felt across the entire spectrum of the global economy.
Final thoughts
The evolution of stablecoins is creating new dynamics within both decentralized and traditional financial ecosystems. From fiat-collateralized giants like USDT and USDC to decentralized options like DAI, each stablecoin design serves a distinct purpose, offering users various ways to manage liquidity, risk, and yield. Recent innovations, such as PayPal’s PYUSD and Ondo Finance’s USDY, demonstrate the increasing convergence between stablecoins and traditional finance, as these assets offer more secure, regulatory-compliant solutions while still leveraging blockchain's efficiency.
Stablecoins are also pushing boundaries with unique designs, such as Gyroscope’s diversified reserve model and Liquity’s decentralized borrowing system through BOLD. These examples highlight the adaptability and potential of stablecoins to serve diverse use cases—from providing liquidity in DeFi to offering new wealth-generation opportunities through yield-bearing assets. The ability of stablecoins to facilitate seamless cross-border payments, enhance financial inclusion, and power decentralized economies illustrates their growing relevance in global finance.
As the ecosystem continues to mature, it is evident that the landscape will increasingly shift toward more resilient, decentralized, and versatile stablecoin solutions. Each model brings its own advantages, but their collective role in the wider blockchain and financial ecosystems underscores their importance. Stablecoins will likely remain central to the ongoing integration of digital and traditional financial systems, serving as a critical bridge between these two worlds.
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
What are stablecoins?
Stablecoins are a unique class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency such as the US dollar, the euro, or other assets like gold. Unlike more volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins provide a means for users to transact, save, or invest in a digital asset that isn't subject to the wild price fluctuations commonly associated with the broader crypto market. This stability is achieved through a variety of mechanisms that are crucial to understanding how stablecoins function within decentralized finance (DeFi) and the broader financial system.
At their core, stablecoins are designed to combine the best aspects of both traditional fiat currencies and cryptocurrencies. They offer the speed, transparency, and borderless nature of digital currencies, while avoiding the unpredictable price movements that can make other cryptocurrencies less practical for everyday use. By maintaining a stable value, stablecoins serve as a vital bridge between the traditional financial system and the growing decentralized world.
There are several types of stablecoins, each with its own method for achieving stability.
One common method is through collateralization, where a stablecoin is backed by reserves of assets such as fiat currencies, cryptocurrencies, or commodities. USDC, for example, is a fully collateralized stablecoin issued by Circle and pegged to the US dollar. Every USDC token in circulation is backed by an equivalent US dollar held in reserve, ensuring that the token remains redeemable at a 1:1 ratio with the dollar. This transparency and backing by a trusted asset make USDC one of the most widely used stablecoins in the market.
Decentralized stablecoins like DAI, on the other hand, achieve their stability in a different way. Instead of relying on fiat reserves held by a central entity, DAI is created through smart contracts and collateralized by other cryptocurrencies, primarily Ether (ETH). Users can lock up their assets in a decentralized protocol such as MakerDAO to mint DAI, with the value of their collateral required to exceed the amount of DAI they create. If the value of the collateral falls below a certain threshold, it is automatically liquidated to maintain the peg. This decentralized approach ensures that no single entity controls the issuance or redemption of DAI, aligning it more closely with the ethos of decentralized finance.
A third type of stablecoin that has gained significant traction in recent years is the yield-bearing stablecoin, exemplified by products like USDY from Ondo Finance. Unlike USDC or DAI, which primarily aim to maintain a stable value, USDY also generates a return for its holders. The stablecoin achieves this by being backed by yield-generating assets such as bonds or other traditional financial instruments. This allows holders to earn passive income simply by holding the stablecoin, offering a potential advantage over traditional stablecoins that do not offer yield. Yield-bearing stablecoins could represent the next evolution in stablecoin design, merging the stability of a fiat-pegged asset with the returns typically associated with investments.
The underlying mechanisms that ensure the stability of these different stablecoins vary, but the goal remains the same: to provide a reliable medium of exchange or store of value in an ecosystem that often lacks such stability. In the case of collateral-backed stablecoins like USDC, reserves held by trusted custodians ensure that the stablecoin maintains its peg. For decentralized stablecoins like DAI, over-collateralization and smart contract enforcement provide the same guarantee, but with a decentralized structure that removes the need for a central authority. Yield-bearing stablecoins, like USDY, add an extra layer of complexity by linking stability to real-world income-generating assets, which require careful management to maintain both the peg and the promised yield.
The importance of stablecoins in the broader crypto ecosystem cannot be overstated. They serve as a safe harbor for investors during periods of market volatility, allowing them to move in and out of riskier assets without converting their holdings back into fiat currencies. This makes stablecoins a vital tool for liquidity management across exchanges and decentralized protocols. Additionally, the use of stablecoins has extended beyond crypto markets into real-world applications. They are increasingly used for remittances, cross-border payments, and as a digital alternative to traditional bank accounts in regions where financial infrastructure is underdeveloped.
USDC, for instance, is widely used in DeFi protocols for lending, borrowing, and trading. It offers users the ability to participate in these systems without the risk of their collateral losing value due to crypto market volatility. Similarly, DAI has become a staple of the DeFi ecosystem, used in everything from liquidity pools to decentralized exchanges. Its decentralized nature and strong community support have made it a trusted option for users looking to maintain stability while engaging in complex financial activities. USDY and other yield-bearing stablecoins, though newer, are also being adopted in similar ways, offering the added benefit of passive income alongside stability.
The rise of stablecoins has also drawn attention from regulators, who are increasingly recognizing their potential impact on the traditional financial system. As stablecoins become more integrated into the global economy, questions about their regulation, transparency, and long-term sustainability are coming to the forefront. Regulatory scrutiny has focused particularly on centralized stablecoins like USDC, where concerns about reserve management and transparency are prominent. Decentralized stablecoins like DAI, while less reliant on central authorities, face challenges around maintaining their pegs during periods of extreme market volatility.
Despite these challenges, the appeal of stablecoins continues to grow. Their ability to provide stability in an otherwise volatile environment makes them indispensable within DeFi, while their potential use cases in the real world are expanding rapidly. The introduction of yield-bearing stablecoins like USDY only enhances their utility, potentially drawing more traditional investors into the world of digital assets. Stablecoins, in their various forms, are becoming a cornerstone of the financial systems being built on blockchain technology, offering both stability and innovation in equal measure.
Whether backed by fiat, crypto, or real-world assets, they provide the stability necessary for broader adoption of cryptocurrencies and decentralized financial systems. Their ability to serve as a bridge between traditional finance and the digital world positions them as one of the most important innovations in the financial landscape today. As stablecoins continue to evolve, their role in both DeFi and traditional finance is likely to grow, opening up new possibilities for global commerce, investment, and wealth management.
How are different types of stablecoins used?
Stablecoins have become a foundational component of the DeFi ecosystem and play an increasingly significant role in global finance. These assets provide a stable store of value, which allows for efficient transactions, lending, borrowing, and even complex financial operations in decentralized applications (dApps). The utility of stablecoins extends far beyond DeFi, as they are also being adopted in cross-border payments, remittances, and by companies that wish to explore blockchain-based finance while maintaining the familiarity of fiat-pegged currencies. In this section, we will explore how different types of stablecoins—USDC, DAI, and USDY—are used across the world and the DeFi ecosystem, while also diving into the specific workflows that make them so useful.
USD Coin (USDC) is one of the most popular stablecoins globally, primarily due to its full collateralization with U.S. dollars. Issued by Circle, USDC is audited regularly, with each coin being fully backed by a dollar held in reserve. Its transparency and regulatory compliance have made it a trusted stablecoin for both retail and institutional users. USDC is commonly used on centralized exchanges like Coinbase and decentralized exchanges like Uniswap, allowing users to trade cryptocurrencies without worrying about the volatility of assets like Bitcoin or Ethereum. Its availability on multiple blockchains, including Ethereum, Solana, and Algorand, makes it versatile for use across different DeFi platforms.
A typical workflow for USDC usage might involve a trader looking to move in and out of volatile assets on decentralized exchanges. For example, during a crypto market downturn, a user might sell their Ethereum for USDC on Uniswap. By holding USDC, they can avoid potential market volatility while still keeping their funds on-chain. When market conditions improve, the user can swap their USDC back into Ethereum or any other crypto asset, allowing them to re-enter the market with minimal friction. This type of workflow highlights USDC’s role as a safe haven in turbulent markets.
Another example of USDC usage is in the context of lending and borrowing on platforms like Aave or Compound. A user can deposit USDC into these platforms to earn interest on their stablecoin holdings, or they can use USDC as collateral to borrow other assets. The predictable value of USDC makes it a preferred choice for both borrowers and lenders in DeFi, as neither party has to worry about fluctuations in the value of the collateral or the loan.
Gyroscope introduces a unique take on stablecoin design by emphasizing resilience through diversification. Unlike single-asset-backed stablecoins, Gyro's stablecoin (GYRO) is backed by a diversified basket of assets, including cryptocurrencies, stablecoins, and real-world assets. Gyroscope’s stablecoin protocol, GYRO, is uniquely designed to be both resilient and decentralized. Unlike traditional stablecoins that rely on centralized reserves or single assets, Gyroscope uses a diversified basket of assets, including fiat, cryptocurrencies, and real-world assets.
This multi-asset reserve approach ensures stability even during extreme market conditions, mitigating the risks of de-pegging or systemic failures. Gyroscope’s reserves are managed by autonomous Stability Pools, which maintain balance by algorithmically adjusting liquidity and supply based on real-time market conditions.
Additionally, Gyroscope employs decentralized governance to manage reserve allocation and protocol updates, ensuring no central entity controls the system. Users can participate in governance and earn rewards by staking GYRO in the Stability Pools, which also contributes to maintaining the stablecoin’s peg. By decentralizing both its reserve management and governance, Gyroscope differentiates itself from other stablecoin models, making it ideal for DeFi participants who value both resilience and decentralization.
Another unique aspect of Gyroscope is its focus on creating long-term stability rather than short-term incentives. While many stablecoins rely on market incentives or yield farming to attract users, Gyroscope prioritizes protocol sustainability. Its system of algorithmic management allows GYRO to remain stable even as external market forces change, providing a robust framework for DeFi ecosystems that require a secure, resilient stablecoin.
DAI, on the other hand, is a decentralized stablecoin that is not backed by a central entity like Circle but is instead collateralized by a range of cryptocurrencies, primarily ETH, within the MakerDAO protocol. DAI maintains its peg to the U.S. dollar through an over-collateralization process, where users deposit assets into smart contracts to generate DAI. This decentralized approach is appealing to users who prefer a trustless and censorship-resistant alternative to fiat-backed stablecoins. DAI’s utility in DeFi is wide-ranging, from liquidity provision to collateral in lending protocols, and even as a medium of exchange on decentralized exchanges.
A potential workflow for using DAI might involve a user who wants to access liquidity without selling their Ether. They could lock their ETH into MakerDAO’s smart contracts, minting DAI in return. The user can then spend the DAI or use it in DeFi applications, all while retaining exposure to ETH’s price movements. If the value of ETH rises, the user benefits from capital appreciation, and they can repay the DAI loan to unlock their original ETH. This is a powerful example of how DAI enables users to extract liquidity from their assets without selling them, a process known as “liquidity mining.”
Another example of DAI usage can be seen in automated yield farming strategies on platforms like Yearn Finance. Users can deposit DAI into Yearn’s smart contracts, which automatically seek the highest yield opportunities across various DeFi platforms. This allows users to passively earn interest on their DAI while also benefiting from the diversification and optimization strategies that Yearn employs. As DAI is decentralized and censorship-resistant, it is particularly attractive to DeFi users who value decentralization and the ability to control their own assets.
USDY, the yield-bearing stablecoin from Ondo Finance, introduces a new dimension to stablecoins by providing not only stability but also yield generation. USDY is collateralized by real-world assets like bonds and treasuries, which generate a steady yield. This makes USDY unique among stablecoins, as it provides users with an income stream simply for holding the asset. Ondo Finance manages these assets, and the yield generated by the underlying collateral is passed on to USDY holders, making it an attractive option for investors looking for passive income.
A common workflow for USDY would involve an investor looking to park their funds in a stable asset while still earning a return. Instead of holding traditional stablecoins like USDC or DAI, which do not offer yield, the investor could swap their stablecoin holdings for USDY on a decentralized exchange or through Ondo Finance’s platform. By holding USDY, the investor earns a yield, typically derived from low-risk, income-generating assets like government bonds. This allows users to benefit from both the stability of a pegged asset and the returns associated with traditional financial instruments.
Another potential use case for USDY is in institutional treasury management. A company with significant cash reserves could convert a portion of its fiat holdings into USDY to take advantage of the yield offered by Ondo Finance’s collateralized assets. By holding USDY instead of traditional cash or even USDC, the company earns a return on its stablecoin holdings without sacrificing liquidity or stability. This workflow demonstrates how USDY can serve both retail and institutional investors looking to maximize their returns on idle capital.
Liquity V2 adds another layer of innovation with the introduction of BOLD, a stablecoin backed by ETH and staked ETH, designed with full decentralization in mind. Unlike centralized or semi-decentralized stablecoins, BOLD operates without off-chain dependencies or centralized governance. It provides a user-controlled borrowing mechanism, allowing borrowers to set their own interest rates, which contrasts sharply with traditional DeFi protocols where borrowing rates are fixed by the platform or dictated by supply and demand.
BOLD’s innovative design also ensures that loans are always over-collateralized, with automatic liquidation mechanisms to protect against bad debt. Liquity V2 allows users to mint BOLD by locking ETH or staked ETH into the protocol, and it offers one of the highest loan-to-value ratios, up to 91%. Users can also participate in Stability Pools, providing liquidity in return for a share of protocol fees and liquidation gains, only serving to enhance the stability of the system for “passive” income generation.
The global adoption of stablecoins is not limited to DeFi. Their use has expanded into remittances and cross-border payments, where they offer a more efficient and less expensive alternative to traditional methods. In regions with unstable local currencies or limited access to banking services, stablecoins provide a reliable store of value and a means of transacting with the outside world. USDC and DAI, in particular, have been used for this purpose, allowing individuals and businesses to transfer value across borders without the need for intermediaries or high fees.
For instance, a user in a country with high inflation might choose to convert their local currency into USDC or DAI to preserve the value of their savings. They could then use these stablecoins to send remittances to family members abroad or to make purchases from international merchants. The stablecoin could be received on the other end and converted into the local currency, or held in the stablecoin form if the local currency is unstable. This workflow highlights the role of stablecoins in providing financial inclusion and access to global markets.
Beyond personal finance, stablecoins are also being adopted by companies and institutions looking to leverage the benefits of blockchain technology without exposing themselves to the volatility of traditional cryptocurrencies. USDC, for example, is used by businesses to settle transactions, pay employees, and manage international trade. The programmability of stablecoins also allows for more complex financial operations, such as automated payments, escrow services, and decentralized governance structures, embedding them in the business world.
Whether they are fiat-backed, decentralized, or yield-bearing, stablecoins represent a bridge between the traditional financial world and the emerging world of decentralized finance, unlocking new opportunities for users and businesses alike. As these stablecoins continue to evolve, their potential to transform both digital and real-world economies becomes ever more apparent.
A look at stablecoin usage and adoption trends
Now that we’re more familiar with how stablecoins work and the different kinds that exist, we can examine some usage trends and get a better view on how users are transacting with stablecoins.
The total market cap of centralized stablecoins currently sits at $85.2 billion. Notably, USDT remains the leader with a commanding market share of 64.7%, while USDC holds 31.4%, indicating that these two fiat-collateralized stablecoins control the majority of the market. This underscores the critical role of centralized stablecoins in providing liquidity and stability in both DeFi and CeFi environments.
DAI, a decentralized stablecoin, still holds an important position, despite centralized stablecoins’ dominance. With a market cap of $5.145 billion, it remains the most significant decentralized option, driven by users looking for censorship-resistant alternatives. DAI's over-collateralization model continues to attract users who value the ability to mint stablecoins through decentralized protocols like MakerDAO, offering a distinct use case compared to USDT and USDC.
Fiat-collateralized stablecoins currently account for a vast 90.7% of the total stablecoin supply, while crypto over-collateralized stablecoins like DAI and Liquity’s BOLD make up about 7.9%. This distribution emphasizes that users continue to favor fiat-backed options due to their simplicity and perceived safety, though crypto-backed stablecoins are growing in appeal for DeFi-native participants seeking decentralized liquidity solutions.
However, if we look at the total picture of stablecoins, DeFillama cites a $170 billion market cap for all of these various stablecoins (centralized, decentralized, etc) combined:
A new entry into the stablecoin market is obviously PayPal’s PYUSD, which has started gaining traction with a market cap of $673.92 million. The launch of PYUSD signals a significant move by traditional financial institutions to integrate with blockchain technology. PayPal’s decision is strategic, offering a trusted, regulatory-compliant stablecoin that can easily integrate with existing financial services.
The transaction volume of stablecoins is also worth noting, with aggregated transactions totaling $6.05 trillion in the past year. This reflects their integral role in providing liquidity in DeFi applications such as lending, trading, and yield farming. Tether (USDT), given its dominance, unsurprisingly accounts for the majority of on-chain transfers.
However, USDC remains widely utilized for institutional and DeFi-based operations due to its compliance and transparency, making it the second most transacted stablecoin.
Another fascinating trend is the velocity of stablecoins, which refers to how frequently they are transacted on-chain. High velocity indicates active use for purposes such as payments and trading. USDT, with its widespread adoption across numerous blockchains and exchanges, continues to exhibit high velocity, supporting its position as the go-to choice for traders. By contrast, USDC tends to have a slightly lower velocity but is often preferred for more stable, long-term positions in liquidity pools or as collateral in lending platforms like Compound or Aave.
Algorithmic stablecoins make up 1.2 billion of the supply, with projects like FRAX and USDD representing this category. Despite previous controversies and failures in the algorithmic stablecoin space, projects like FRAX continue to explore innovative methods of maintaining a stable peg. These algorithmic stablecoins represent a smaller portion of the total supply, but they still play an important role in pushing the boundaries of stablecoin design and testing new mechanisms for stability and decentralization.
In conclusion, centralized stablecoins, particularly USDT and USDC, maintain a dominant role in the ecosystem, yet decentralized alternatives like DAI and innovations from newcomers such as PYUSD and BOLD are steadily gaining ground. Each type of stablecoin offers unique features and functionalities, catering to a diverse range of users, from institutional investors to DeFi natives. The continued growth in transaction volumes and stablecoin supply reflects their critical importance in both DeFi and global financial systems.
But why do we need stablecoins?
The potential of stablecoins to reshape the traditional financial system is becoming increasingly apparent, as major companies like PayPal and innovative projects like Ondo Finance enter the space with solutions tailored to both individual and institutional users. Stablecoins offer a digital alternative to traditional fiat currencies but also unlock new financial models, enabling more efficient payment systems, wealth generation through yield, and easier access to global markets. As these stablecoins gain more traction, their use could fundamentally shift how we interact with money, particularly through the integration of blockchain technology into everyday financial transactions.
One of the most significant moves in the stablecoin space was the launch of PayPal’s USD-pegged stablecoin, PYUSD. PayPal, a global payments giant with over 430 million active accounts, made a calculated decision to introduce PYUSD as a way to bridge the gap between traditional finance and the world of digital currencies. By creating a fully backed and regulated stablecoin, PayPal aims to offer its vast user base a secure and efficient way to engage with the rapidly growing digital economy. PYUSD is fully backed by U.S. dollar deposits, short-term treasuries, and similar cash equivalents, which ensures that users can redeem their stablecoins at a 1:1 ratio with the U.S. dollar, maintaining trust and stability.
The reasoning behind PayPal’s decision to launch PYUSD is multifaceted. First and foremost, the company sees the demand for stable, blockchain-based assets that can facilitate fast and inexpensive transactions globally. Traditional payment systems, especially for cross-border transfers, are often slow and expensive, relying on multiple intermediaries and incurring significant fees. PYUSD, integrated directly into PayPal’s platform, removes many of these inefficiencies by providing a direct, blockchain-powered settlement mechanism. PayPal users can send and receive PYUSD instantly, avoiding traditional banking delays, and merchants can settle payments in the stablecoin or convert it back to dollars seamlessly.
In addition, PayPal’s introduction of PYUSD is part of its broader strategy to embrace the future of digital payments, particularly as younger generations increasingly favor cryptocurrencies and digital assets. By offering a stablecoin, PayPal is positioning itself as a key player in the transition to a more digital economy, one in which fiat-backed stablecoins like PYUSD can coexist with or even replace traditional payment methods. This could also allow PayPal to compete with decentralized financial applications that offer fast, cheap, and borderless transactions, while still providing users with the familiar experience of a trusted, regulated company.
A key aspect of PYUSD’s potential is its ability to integrate into decentralized finance (DeFi) ecosystems. While PayPal is a centralized company, the launch of PYUSD opens the door for its stablecoin to be used on DEXs and lending platforms. Users could theoretically leverage PYUSD to participate in DeFi without exposing themselves to the volatility of traditional cryptocurrencies. This hybrid model, where a highly regulated stablecoin like PYUSD can interact with decentralized financial systems, could unlock a new wave of adoption, particularly among users who want the benefits of DeFi but with the safety and regulatory backing of a company like PayPal.
In a broader sense, stablecoins like PYUSD also hold the potential to reshape remittances and cross-border payments. Today, sending money internationally can be both costly and slow, especially when intermediaries like banks and money transfer services are involved. PYUSD, backed by a global payments giant with established infrastructure, could reduce friction in this process. PayPal users could send PYUSD to recipients abroad almost instantly and with lower fees than traditional services. As more merchants adopt PYUSD, recipients could use the stablecoin directly for purchases, streamlining cross-border commerce.
Ondo Finance’s USDY, a yield-bearing stablecoin, represents another way stablecoins can unlock value, particularly through financial innovation. Unlike traditional stablecoins, USDY is backed by yield-generating assets such as short-term treasuries and corporate bonds, which are commonly used in traditional finance to generate steady income. USDY holders receive a portion of the returns generated by these assets, making it attractive to users who want both stability and yield. This marks a significant shift from earlier stablecoin models, which focused purely on maintaining price stability without offering any yield.
The integration of USDY into decentralized finance could unlock new forms of passive income for users, particularly for those looking to hold stable assets while earning returns. In traditional finance, investors must choose between low-risk, low-yield assets like savings accounts or riskier investments that can offer higher returns but come with volatility. USDY breaks this dichotomy by offering the best of both worlds: stability in price with a built-in yield. This could make it particularly attractive for institutions managing large amounts of cash or individuals who want to preserve their capital while still generating a return.
Beyond individual use, USDY could also have significant implications for institutional investors, corporate treasuries, and even governments. By holding USDY, these entities can benefit from stable, predictable yields while avoiding the complexity and costs associated with traditional asset management. This could lead to a future where stablecoins like USDY serve as core components of corporate and government financial strategies, offering an easy way to manage liquidity, earn returns, and participate in the broader blockchain ecosystem without the need for intermediaries.
The broader societal unlocks of stablecoins like PYUSD and USDY are vast. PYUSD could make digital currencies more accessible to millions of people who might otherwise be hesitant to interact with cryptocurrencies due to volatility concerns or a lack of regulatory clarity. Meanwhile, yield-bearing stablecoins like USDY introduce new models of wealth generation that merge the benefits of traditional financial instruments with the openness and accessibility of blockchain technology. As more companies, governments, and users adopt these stablecoins, we could see a more efficient and democratized financial system, where money flows more freely across borders, earning potential is expanded, and access to financial services is universalized.
PayPal’s launch of PYUSD underscores the increasing importance of digital currencies in global payments, while USDY from Ondo Finance introduces a new way to earn passive income through yield-bearing assets. These developments are just the beginning of what could be a massive shift in the financial landscape, as stablecoins continue to unlock new possibilities for efficiency, financial inclusion, and wealth generation. As the future unfolds, the impact of these stablecoins could be felt across the entire spectrum of the global economy.
Final thoughts
The evolution of stablecoins is creating new dynamics within both decentralized and traditional financial ecosystems. From fiat-collateralized giants like USDT and USDC to decentralized options like DAI, each stablecoin design serves a distinct purpose, offering users various ways to manage liquidity, risk, and yield. Recent innovations, such as PayPal’s PYUSD and Ondo Finance’s USDY, demonstrate the increasing convergence between stablecoins and traditional finance, as these assets offer more secure, regulatory-compliant solutions while still leveraging blockchain's efficiency.
Stablecoins are also pushing boundaries with unique designs, such as Gyroscope’s diversified reserve model and Liquity’s decentralized borrowing system through BOLD. These examples highlight the adaptability and potential of stablecoins to serve diverse use cases—from providing liquidity in DeFi to offering new wealth-generation opportunities through yield-bearing assets. The ability of stablecoins to facilitate seamless cross-border payments, enhance financial inclusion, and power decentralized economies illustrates their growing relevance in global finance.
As the ecosystem continues to mature, it is evident that the landscape will increasingly shift toward more resilient, decentralized, and versatile stablecoin solutions. Each model brings its own advantages, but their collective role in the wider blockchain and financial ecosystems underscores their importance. Stablecoins will likely remain central to the ongoing integration of digital and traditional financial systems, serving as a critical bridge between these two worlds.
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
What are stablecoins?
Stablecoins are a unique class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency such as the US dollar, the euro, or other assets like gold. Unlike more volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins provide a means for users to transact, save, or invest in a digital asset that isn't subject to the wild price fluctuations commonly associated with the broader crypto market. This stability is achieved through a variety of mechanisms that are crucial to understanding how stablecoins function within decentralized finance (DeFi) and the broader financial system.
At their core, stablecoins are designed to combine the best aspects of both traditional fiat currencies and cryptocurrencies. They offer the speed, transparency, and borderless nature of digital currencies, while avoiding the unpredictable price movements that can make other cryptocurrencies less practical for everyday use. By maintaining a stable value, stablecoins serve as a vital bridge between the traditional financial system and the growing decentralized world.
There are several types of stablecoins, each with its own method for achieving stability.
One common method is through collateralization, where a stablecoin is backed by reserves of assets such as fiat currencies, cryptocurrencies, or commodities. USDC, for example, is a fully collateralized stablecoin issued by Circle and pegged to the US dollar. Every USDC token in circulation is backed by an equivalent US dollar held in reserve, ensuring that the token remains redeemable at a 1:1 ratio with the dollar. This transparency and backing by a trusted asset make USDC one of the most widely used stablecoins in the market.
Decentralized stablecoins like DAI, on the other hand, achieve their stability in a different way. Instead of relying on fiat reserves held by a central entity, DAI is created through smart contracts and collateralized by other cryptocurrencies, primarily Ether (ETH). Users can lock up their assets in a decentralized protocol such as MakerDAO to mint DAI, with the value of their collateral required to exceed the amount of DAI they create. If the value of the collateral falls below a certain threshold, it is automatically liquidated to maintain the peg. This decentralized approach ensures that no single entity controls the issuance or redemption of DAI, aligning it more closely with the ethos of decentralized finance.
A third type of stablecoin that has gained significant traction in recent years is the yield-bearing stablecoin, exemplified by products like USDY from Ondo Finance. Unlike USDC or DAI, which primarily aim to maintain a stable value, USDY also generates a return for its holders. The stablecoin achieves this by being backed by yield-generating assets such as bonds or other traditional financial instruments. This allows holders to earn passive income simply by holding the stablecoin, offering a potential advantage over traditional stablecoins that do not offer yield. Yield-bearing stablecoins could represent the next evolution in stablecoin design, merging the stability of a fiat-pegged asset with the returns typically associated with investments.
The underlying mechanisms that ensure the stability of these different stablecoins vary, but the goal remains the same: to provide a reliable medium of exchange or store of value in an ecosystem that often lacks such stability. In the case of collateral-backed stablecoins like USDC, reserves held by trusted custodians ensure that the stablecoin maintains its peg. For decentralized stablecoins like DAI, over-collateralization and smart contract enforcement provide the same guarantee, but with a decentralized structure that removes the need for a central authority. Yield-bearing stablecoins, like USDY, add an extra layer of complexity by linking stability to real-world income-generating assets, which require careful management to maintain both the peg and the promised yield.
The importance of stablecoins in the broader crypto ecosystem cannot be overstated. They serve as a safe harbor for investors during periods of market volatility, allowing them to move in and out of riskier assets without converting their holdings back into fiat currencies. This makes stablecoins a vital tool for liquidity management across exchanges and decentralized protocols. Additionally, the use of stablecoins has extended beyond crypto markets into real-world applications. They are increasingly used for remittances, cross-border payments, and as a digital alternative to traditional bank accounts in regions where financial infrastructure is underdeveloped.
USDC, for instance, is widely used in DeFi protocols for lending, borrowing, and trading. It offers users the ability to participate in these systems without the risk of their collateral losing value due to crypto market volatility. Similarly, DAI has become a staple of the DeFi ecosystem, used in everything from liquidity pools to decentralized exchanges. Its decentralized nature and strong community support have made it a trusted option for users looking to maintain stability while engaging in complex financial activities. USDY and other yield-bearing stablecoins, though newer, are also being adopted in similar ways, offering the added benefit of passive income alongside stability.
The rise of stablecoins has also drawn attention from regulators, who are increasingly recognizing their potential impact on the traditional financial system. As stablecoins become more integrated into the global economy, questions about their regulation, transparency, and long-term sustainability are coming to the forefront. Regulatory scrutiny has focused particularly on centralized stablecoins like USDC, where concerns about reserve management and transparency are prominent. Decentralized stablecoins like DAI, while less reliant on central authorities, face challenges around maintaining their pegs during periods of extreme market volatility.
Despite these challenges, the appeal of stablecoins continues to grow. Their ability to provide stability in an otherwise volatile environment makes them indispensable within DeFi, while their potential use cases in the real world are expanding rapidly. The introduction of yield-bearing stablecoins like USDY only enhances their utility, potentially drawing more traditional investors into the world of digital assets. Stablecoins, in their various forms, are becoming a cornerstone of the financial systems being built on blockchain technology, offering both stability and innovation in equal measure.
Whether backed by fiat, crypto, or real-world assets, they provide the stability necessary for broader adoption of cryptocurrencies and decentralized financial systems. Their ability to serve as a bridge between traditional finance and the digital world positions them as one of the most important innovations in the financial landscape today. As stablecoins continue to evolve, their role in both DeFi and traditional finance is likely to grow, opening up new possibilities for global commerce, investment, and wealth management.
How are different types of stablecoins used?
Stablecoins have become a foundational component of the DeFi ecosystem and play an increasingly significant role in global finance. These assets provide a stable store of value, which allows for efficient transactions, lending, borrowing, and even complex financial operations in decentralized applications (dApps). The utility of stablecoins extends far beyond DeFi, as they are also being adopted in cross-border payments, remittances, and by companies that wish to explore blockchain-based finance while maintaining the familiarity of fiat-pegged currencies. In this section, we will explore how different types of stablecoins—USDC, DAI, and USDY—are used across the world and the DeFi ecosystem, while also diving into the specific workflows that make them so useful.
USD Coin (USDC) is one of the most popular stablecoins globally, primarily due to its full collateralization with U.S. dollars. Issued by Circle, USDC is audited regularly, with each coin being fully backed by a dollar held in reserve. Its transparency and regulatory compliance have made it a trusted stablecoin for both retail and institutional users. USDC is commonly used on centralized exchanges like Coinbase and decentralized exchanges like Uniswap, allowing users to trade cryptocurrencies without worrying about the volatility of assets like Bitcoin or Ethereum. Its availability on multiple blockchains, including Ethereum, Solana, and Algorand, makes it versatile for use across different DeFi platforms.
A typical workflow for USDC usage might involve a trader looking to move in and out of volatile assets on decentralized exchanges. For example, during a crypto market downturn, a user might sell their Ethereum for USDC on Uniswap. By holding USDC, they can avoid potential market volatility while still keeping their funds on-chain. When market conditions improve, the user can swap their USDC back into Ethereum or any other crypto asset, allowing them to re-enter the market with minimal friction. This type of workflow highlights USDC’s role as a safe haven in turbulent markets.
Another example of USDC usage is in the context of lending and borrowing on platforms like Aave or Compound. A user can deposit USDC into these platforms to earn interest on their stablecoin holdings, or they can use USDC as collateral to borrow other assets. The predictable value of USDC makes it a preferred choice for both borrowers and lenders in DeFi, as neither party has to worry about fluctuations in the value of the collateral or the loan.
Gyroscope introduces a unique take on stablecoin design by emphasizing resilience through diversification. Unlike single-asset-backed stablecoins, Gyro's stablecoin (GYRO) is backed by a diversified basket of assets, including cryptocurrencies, stablecoins, and real-world assets. Gyroscope’s stablecoin protocol, GYRO, is uniquely designed to be both resilient and decentralized. Unlike traditional stablecoins that rely on centralized reserves or single assets, Gyroscope uses a diversified basket of assets, including fiat, cryptocurrencies, and real-world assets.
This multi-asset reserve approach ensures stability even during extreme market conditions, mitigating the risks of de-pegging or systemic failures. Gyroscope’s reserves are managed by autonomous Stability Pools, which maintain balance by algorithmically adjusting liquidity and supply based on real-time market conditions.
Additionally, Gyroscope employs decentralized governance to manage reserve allocation and protocol updates, ensuring no central entity controls the system. Users can participate in governance and earn rewards by staking GYRO in the Stability Pools, which also contributes to maintaining the stablecoin’s peg. By decentralizing both its reserve management and governance, Gyroscope differentiates itself from other stablecoin models, making it ideal for DeFi participants who value both resilience and decentralization.
Another unique aspect of Gyroscope is its focus on creating long-term stability rather than short-term incentives. While many stablecoins rely on market incentives or yield farming to attract users, Gyroscope prioritizes protocol sustainability. Its system of algorithmic management allows GYRO to remain stable even as external market forces change, providing a robust framework for DeFi ecosystems that require a secure, resilient stablecoin.
DAI, on the other hand, is a decentralized stablecoin that is not backed by a central entity like Circle but is instead collateralized by a range of cryptocurrencies, primarily ETH, within the MakerDAO protocol. DAI maintains its peg to the U.S. dollar through an over-collateralization process, where users deposit assets into smart contracts to generate DAI. This decentralized approach is appealing to users who prefer a trustless and censorship-resistant alternative to fiat-backed stablecoins. DAI’s utility in DeFi is wide-ranging, from liquidity provision to collateral in lending protocols, and even as a medium of exchange on decentralized exchanges.
A potential workflow for using DAI might involve a user who wants to access liquidity without selling their Ether. They could lock their ETH into MakerDAO’s smart contracts, minting DAI in return. The user can then spend the DAI or use it in DeFi applications, all while retaining exposure to ETH’s price movements. If the value of ETH rises, the user benefits from capital appreciation, and they can repay the DAI loan to unlock their original ETH. This is a powerful example of how DAI enables users to extract liquidity from their assets without selling them, a process known as “liquidity mining.”
Another example of DAI usage can be seen in automated yield farming strategies on platforms like Yearn Finance. Users can deposit DAI into Yearn’s smart contracts, which automatically seek the highest yield opportunities across various DeFi platforms. This allows users to passively earn interest on their DAI while also benefiting from the diversification and optimization strategies that Yearn employs. As DAI is decentralized and censorship-resistant, it is particularly attractive to DeFi users who value decentralization and the ability to control their own assets.
USDY, the yield-bearing stablecoin from Ondo Finance, introduces a new dimension to stablecoins by providing not only stability but also yield generation. USDY is collateralized by real-world assets like bonds and treasuries, which generate a steady yield. This makes USDY unique among stablecoins, as it provides users with an income stream simply for holding the asset. Ondo Finance manages these assets, and the yield generated by the underlying collateral is passed on to USDY holders, making it an attractive option for investors looking for passive income.
A common workflow for USDY would involve an investor looking to park their funds in a stable asset while still earning a return. Instead of holding traditional stablecoins like USDC or DAI, which do not offer yield, the investor could swap their stablecoin holdings for USDY on a decentralized exchange or through Ondo Finance’s platform. By holding USDY, the investor earns a yield, typically derived from low-risk, income-generating assets like government bonds. This allows users to benefit from both the stability of a pegged asset and the returns associated with traditional financial instruments.
Another potential use case for USDY is in institutional treasury management. A company with significant cash reserves could convert a portion of its fiat holdings into USDY to take advantage of the yield offered by Ondo Finance’s collateralized assets. By holding USDY instead of traditional cash or even USDC, the company earns a return on its stablecoin holdings without sacrificing liquidity or stability. This workflow demonstrates how USDY can serve both retail and institutional investors looking to maximize their returns on idle capital.
Liquity V2 adds another layer of innovation with the introduction of BOLD, a stablecoin backed by ETH and staked ETH, designed with full decentralization in mind. Unlike centralized or semi-decentralized stablecoins, BOLD operates without off-chain dependencies or centralized governance. It provides a user-controlled borrowing mechanism, allowing borrowers to set their own interest rates, which contrasts sharply with traditional DeFi protocols where borrowing rates are fixed by the platform or dictated by supply and demand.
BOLD’s innovative design also ensures that loans are always over-collateralized, with automatic liquidation mechanisms to protect against bad debt. Liquity V2 allows users to mint BOLD by locking ETH or staked ETH into the protocol, and it offers one of the highest loan-to-value ratios, up to 91%. Users can also participate in Stability Pools, providing liquidity in return for a share of protocol fees and liquidation gains, only serving to enhance the stability of the system for “passive” income generation.
The global adoption of stablecoins is not limited to DeFi. Their use has expanded into remittances and cross-border payments, where they offer a more efficient and less expensive alternative to traditional methods. In regions with unstable local currencies or limited access to banking services, stablecoins provide a reliable store of value and a means of transacting with the outside world. USDC and DAI, in particular, have been used for this purpose, allowing individuals and businesses to transfer value across borders without the need for intermediaries or high fees.
For instance, a user in a country with high inflation might choose to convert their local currency into USDC or DAI to preserve the value of their savings. They could then use these stablecoins to send remittances to family members abroad or to make purchases from international merchants. The stablecoin could be received on the other end and converted into the local currency, or held in the stablecoin form if the local currency is unstable. This workflow highlights the role of stablecoins in providing financial inclusion and access to global markets.
Beyond personal finance, stablecoins are also being adopted by companies and institutions looking to leverage the benefits of blockchain technology without exposing themselves to the volatility of traditional cryptocurrencies. USDC, for example, is used by businesses to settle transactions, pay employees, and manage international trade. The programmability of stablecoins also allows for more complex financial operations, such as automated payments, escrow services, and decentralized governance structures, embedding them in the business world.
Whether they are fiat-backed, decentralized, or yield-bearing, stablecoins represent a bridge between the traditional financial world and the emerging world of decentralized finance, unlocking new opportunities for users and businesses alike. As these stablecoins continue to evolve, their potential to transform both digital and real-world economies becomes ever more apparent.
A look at stablecoin usage and adoption trends
Now that we’re more familiar with how stablecoins work and the different kinds that exist, we can examine some usage trends and get a better view on how users are transacting with stablecoins.
The total market cap of centralized stablecoins currently sits at $85.2 billion. Notably, USDT remains the leader with a commanding market share of 64.7%, while USDC holds 31.4%, indicating that these two fiat-collateralized stablecoins control the majority of the market. This underscores the critical role of centralized stablecoins in providing liquidity and stability in both DeFi and CeFi environments.
DAI, a decentralized stablecoin, still holds an important position, despite centralized stablecoins’ dominance. With a market cap of $5.145 billion, it remains the most significant decentralized option, driven by users looking for censorship-resistant alternatives. DAI's over-collateralization model continues to attract users who value the ability to mint stablecoins through decentralized protocols like MakerDAO, offering a distinct use case compared to USDT and USDC.
Fiat-collateralized stablecoins currently account for a vast 90.7% of the total stablecoin supply, while crypto over-collateralized stablecoins like DAI and Liquity’s BOLD make up about 7.9%. This distribution emphasizes that users continue to favor fiat-backed options due to their simplicity and perceived safety, though crypto-backed stablecoins are growing in appeal for DeFi-native participants seeking decentralized liquidity solutions.
However, if we look at the total picture of stablecoins, DeFillama cites a $170 billion market cap for all of these various stablecoins (centralized, decentralized, etc) combined:
A new entry into the stablecoin market is obviously PayPal’s PYUSD, which has started gaining traction with a market cap of $673.92 million. The launch of PYUSD signals a significant move by traditional financial institutions to integrate with blockchain technology. PayPal’s decision is strategic, offering a trusted, regulatory-compliant stablecoin that can easily integrate with existing financial services.
The transaction volume of stablecoins is also worth noting, with aggregated transactions totaling $6.05 trillion in the past year. This reflects their integral role in providing liquidity in DeFi applications such as lending, trading, and yield farming. Tether (USDT), given its dominance, unsurprisingly accounts for the majority of on-chain transfers.
However, USDC remains widely utilized for institutional and DeFi-based operations due to its compliance and transparency, making it the second most transacted stablecoin.
Another fascinating trend is the velocity of stablecoins, which refers to how frequently they are transacted on-chain. High velocity indicates active use for purposes such as payments and trading. USDT, with its widespread adoption across numerous blockchains and exchanges, continues to exhibit high velocity, supporting its position as the go-to choice for traders. By contrast, USDC tends to have a slightly lower velocity but is often preferred for more stable, long-term positions in liquidity pools or as collateral in lending platforms like Compound or Aave.
Algorithmic stablecoins make up 1.2 billion of the supply, with projects like FRAX and USDD representing this category. Despite previous controversies and failures in the algorithmic stablecoin space, projects like FRAX continue to explore innovative methods of maintaining a stable peg. These algorithmic stablecoins represent a smaller portion of the total supply, but they still play an important role in pushing the boundaries of stablecoin design and testing new mechanisms for stability and decentralization.
In conclusion, centralized stablecoins, particularly USDT and USDC, maintain a dominant role in the ecosystem, yet decentralized alternatives like DAI and innovations from newcomers such as PYUSD and BOLD are steadily gaining ground. Each type of stablecoin offers unique features and functionalities, catering to a diverse range of users, from institutional investors to DeFi natives. The continued growth in transaction volumes and stablecoin supply reflects their critical importance in both DeFi and global financial systems.
But why do we need stablecoins?
The potential of stablecoins to reshape the traditional financial system is becoming increasingly apparent, as major companies like PayPal and innovative projects like Ondo Finance enter the space with solutions tailored to both individual and institutional users. Stablecoins offer a digital alternative to traditional fiat currencies but also unlock new financial models, enabling more efficient payment systems, wealth generation through yield, and easier access to global markets. As these stablecoins gain more traction, their use could fundamentally shift how we interact with money, particularly through the integration of blockchain technology into everyday financial transactions.
One of the most significant moves in the stablecoin space was the launch of PayPal’s USD-pegged stablecoin, PYUSD. PayPal, a global payments giant with over 430 million active accounts, made a calculated decision to introduce PYUSD as a way to bridge the gap between traditional finance and the world of digital currencies. By creating a fully backed and regulated stablecoin, PayPal aims to offer its vast user base a secure and efficient way to engage with the rapidly growing digital economy. PYUSD is fully backed by U.S. dollar deposits, short-term treasuries, and similar cash equivalents, which ensures that users can redeem their stablecoins at a 1:1 ratio with the U.S. dollar, maintaining trust and stability.
The reasoning behind PayPal’s decision to launch PYUSD is multifaceted. First and foremost, the company sees the demand for stable, blockchain-based assets that can facilitate fast and inexpensive transactions globally. Traditional payment systems, especially for cross-border transfers, are often slow and expensive, relying on multiple intermediaries and incurring significant fees. PYUSD, integrated directly into PayPal’s platform, removes many of these inefficiencies by providing a direct, blockchain-powered settlement mechanism. PayPal users can send and receive PYUSD instantly, avoiding traditional banking delays, and merchants can settle payments in the stablecoin or convert it back to dollars seamlessly.
In addition, PayPal’s introduction of PYUSD is part of its broader strategy to embrace the future of digital payments, particularly as younger generations increasingly favor cryptocurrencies and digital assets. By offering a stablecoin, PayPal is positioning itself as a key player in the transition to a more digital economy, one in which fiat-backed stablecoins like PYUSD can coexist with or even replace traditional payment methods. This could also allow PayPal to compete with decentralized financial applications that offer fast, cheap, and borderless transactions, while still providing users with the familiar experience of a trusted, regulated company.
A key aspect of PYUSD’s potential is its ability to integrate into decentralized finance (DeFi) ecosystems. While PayPal is a centralized company, the launch of PYUSD opens the door for its stablecoin to be used on DEXs and lending platforms. Users could theoretically leverage PYUSD to participate in DeFi without exposing themselves to the volatility of traditional cryptocurrencies. This hybrid model, where a highly regulated stablecoin like PYUSD can interact with decentralized financial systems, could unlock a new wave of adoption, particularly among users who want the benefits of DeFi but with the safety and regulatory backing of a company like PayPal.
In a broader sense, stablecoins like PYUSD also hold the potential to reshape remittances and cross-border payments. Today, sending money internationally can be both costly and slow, especially when intermediaries like banks and money transfer services are involved. PYUSD, backed by a global payments giant with established infrastructure, could reduce friction in this process. PayPal users could send PYUSD to recipients abroad almost instantly and with lower fees than traditional services. As more merchants adopt PYUSD, recipients could use the stablecoin directly for purchases, streamlining cross-border commerce.
Ondo Finance’s USDY, a yield-bearing stablecoin, represents another way stablecoins can unlock value, particularly through financial innovation. Unlike traditional stablecoins, USDY is backed by yield-generating assets such as short-term treasuries and corporate bonds, which are commonly used in traditional finance to generate steady income. USDY holders receive a portion of the returns generated by these assets, making it attractive to users who want both stability and yield. This marks a significant shift from earlier stablecoin models, which focused purely on maintaining price stability without offering any yield.
The integration of USDY into decentralized finance could unlock new forms of passive income for users, particularly for those looking to hold stable assets while earning returns. In traditional finance, investors must choose between low-risk, low-yield assets like savings accounts or riskier investments that can offer higher returns but come with volatility. USDY breaks this dichotomy by offering the best of both worlds: stability in price with a built-in yield. This could make it particularly attractive for institutions managing large amounts of cash or individuals who want to preserve their capital while still generating a return.
Beyond individual use, USDY could also have significant implications for institutional investors, corporate treasuries, and even governments. By holding USDY, these entities can benefit from stable, predictable yields while avoiding the complexity and costs associated with traditional asset management. This could lead to a future where stablecoins like USDY serve as core components of corporate and government financial strategies, offering an easy way to manage liquidity, earn returns, and participate in the broader blockchain ecosystem without the need for intermediaries.
The broader societal unlocks of stablecoins like PYUSD and USDY are vast. PYUSD could make digital currencies more accessible to millions of people who might otherwise be hesitant to interact with cryptocurrencies due to volatility concerns or a lack of regulatory clarity. Meanwhile, yield-bearing stablecoins like USDY introduce new models of wealth generation that merge the benefits of traditional financial instruments with the openness and accessibility of blockchain technology. As more companies, governments, and users adopt these stablecoins, we could see a more efficient and democratized financial system, where money flows more freely across borders, earning potential is expanded, and access to financial services is universalized.
PayPal’s launch of PYUSD underscores the increasing importance of digital currencies in global payments, while USDY from Ondo Finance introduces a new way to earn passive income through yield-bearing assets. These developments are just the beginning of what could be a massive shift in the financial landscape, as stablecoins continue to unlock new possibilities for efficiency, financial inclusion, and wealth generation. As the future unfolds, the impact of these stablecoins could be felt across the entire spectrum of the global economy.
Final thoughts
The evolution of stablecoins is creating new dynamics within both decentralized and traditional financial ecosystems. From fiat-collateralized giants like USDT and USDC to decentralized options like DAI, each stablecoin design serves a distinct purpose, offering users various ways to manage liquidity, risk, and yield. Recent innovations, such as PayPal’s PYUSD and Ondo Finance’s USDY, demonstrate the increasing convergence between stablecoins and traditional finance, as these assets offer more secure, regulatory-compliant solutions while still leveraging blockchain's efficiency.
Stablecoins are also pushing boundaries with unique designs, such as Gyroscope’s diversified reserve model and Liquity’s decentralized borrowing system through BOLD. These examples highlight the adaptability and potential of stablecoins to serve diverse use cases—from providing liquidity in DeFi to offering new wealth-generation opportunities through yield-bearing assets. The ability of stablecoins to facilitate seamless cross-border payments, enhance financial inclusion, and power decentralized economies illustrates their growing relevance in global finance.
As the ecosystem continues to mature, it is evident that the landscape will increasingly shift toward more resilient, decentralized, and versatile stablecoin solutions. Each model brings its own advantages, but their collective role in the wider blockchain and financial ecosystems underscores their importance. Stablecoins will likely remain central to the ongoing integration of digital and traditional financial systems, serving as a critical bridge between these two worlds.
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
