Stablecoin: The vast ocean of dual currency

Stablecoins have the advantages of digital money, offering convenient payments and protecting transaction privacy; they also possess the benefits of centralized currencies, with stable value. One could say that stablecoins are a "double-edged" currency. Bitcoin has strong investment attributes and its value is unstable. When the value of a currency is unstable, it becomes difficult to enter ordinary transaction scenarios. In contrast, stablecoins pursue value stability, and their investment value may drop to zero, sacrificing investment value in exchange for a broader trading audience. As the era of digital transactions approaches, entering the ordinary transaction scenarios of the general public is the vast ocean that stablecoins tirelessly seek.

After the massive monetary easing in 2008 and the large fiscal policies post-pandemic, the public has begun to question the US dollar-centered international monetary system due to two instances of currency flooding. Geopolitical games and tariff wars have repeatedly shaken the foundation of the US dollar-dominated traditional monetary system. This has led to the digital transaction demand, which originally fled the fiat currency system, being wrapped in a layer of stablecoin and returning to the fiat currency system. This may be the fundamental intention of regulators who welcome the development of stablecoins.

Since the establishment of Digital Money, the market has discussed trading currencies in two major categories: Digital Money and centralized currencies (fiat currencies).

Starting from the characteristics of digital and decentralization, stablecoins are undoubtedly digital money; however, the vast majority of stablecoins are pegged to fiat currencies (especially the US dollar), which also possess certain characteristics of fiat currency.

Because of this, stablecoins can be said to be a "double-sided" currency between decentralized digital currencies and fiat currencies.

How to understand the "dual nature" of stablecoins, what are the difficulties in the development of stablecoins, what is the underlying intention of policy regulation, and what is the long-term trend of stablecoin development in the future?

We will deconstruct the above market doubts one by one through six questions and answers.

First, let's look at the first aspect of stablecoins, digital characteristics (derived from the decentralized logic of blockchain accounting).

The first aspect of stablecoins - digital characteristics, that is, stablecoins are digital money based on blockchain accounting, inherently accompanied by decentralized features.

Because of decentralization, stablecoins and digital currencies like Bitcoin can demonstrate strong "convenience" in many payment scenarios.

Especially in the field of cross-border payments, a cross-border payment needs to involve the exchange of two or more central currencies (fiat currencies), requiring at least two types of information processing: first, the delivery of transaction information (swift essentially serves as a unified "language" to solve the convenience of information delivery); second, the banking systems of the two major central currencies for currency clearing and settlement.

Because of decentralization, digital money does not involve the transaction information and settlement information processing of the two major currencies. There is no need to rely on a large and complex agent mechanism, and digital money can demonstrate convenience in the field of cross-border payments.

Because of decentralization, stablecoins and other digital money like Bitcoin can demonstrate a strong "anonymity feature" in payment scenarios.

In the fiat currency system, banks are primarily responsible for implementing currency transaction payments. Opening a bank account requires registration of social information - real name and related credit endorsement proof. During the transaction process, information about the business dealings between both parties is recorded, and transaction information is fully exposed.

Digital money that is attached to blockchain transactions leaves traces of virtual account information with each transaction, without involving real-world information. This demonstrates a strong appeal in niche payment areas, especially in transactions that require a high level of privacy.

The reason why digital money has transitioned from a niche market for geeks to a trading currency widely recognized by the public is closely related to the privacy and convenience inherently brought by blockchain. The rapid development of stablecoins is also riding on the natural attribute of "decentralization" of digital money.

2. Looking at the second aspect of stablecoins, the stability characteristic (from the currency value management system of fiat currency).

The second aspect of stablecoins - the value stability characteristics brought by pegging to fiat currency.

The stable value characteristic allows stablecoins to have prospects that other digital currencies cannot achieve—the breadth of transactions can now have imaginative space.

Even with the convenience and privacy features at the transaction level, it does not mean that digital currencies can be unique in the transaction field. Due to the lack of an effective supply-demand balance mechanism, the value of most digital currencies is not stable. Currency stability is the most basic requirement for a currency to act as an intermediary for a wide range of transactions. This is why the development of digital currencies has not really entered the widespread daily transactions of the general public.

In the real world, in order to maintain the stability of the value of fiat currency, a country's government has constructed a complex currency value management system. We know that the state has set up a central bank to regulate the balance of currency supply and demand, and at the same time set up a financial regulatory framework to prevent extreme scenarios of currency fluctuations, supplemented by exchange rate control to stabilize the exchange rate. After all, fiat currency stability has two meanings, stable internal inflation and stable external exchange rate.

Stablecoins, especially those pegged to fiat assets, essentially leverage the powerful value management system of fiat currencies, ultimately impressing the public with stable value, and can truly enter the daily transaction scenarios of the public.

3. Since there is already Bitcoin, why do we need "stablecoin"?

"With the birth of Yu, why give birth to Liang?" Both are digital money, Bitcoin has a first-mover advantage and acceptance far exceeds that of stablecoins, why can't stablecoin characteristics be developed based on Bitcoin?

We might as well analyze the detailed differences between Bitcoin and stablecoins.

Stablecoins have unique advantages in maintaining value stability, but this also means disadvantages arise - they lack investment value for investors.

The value of a flawed stablecoin can quickly go to zero. Only when a stablecoin is good enough can it play the "value" that the stablecoin promises - price stability. In other words, if you hold a high-quality stablecoin, the income you get is that the price does not move; However, if you are not careful, holding an inferior stablecoin has the risk of falling in price or even zeroing in value. There is only a downside risk to the price of stablecoins (although the probability is extremely low), and the probability of price increases is extremely low, so it is clear that holding stablecoins is not a good investment.

Since the price will not rise, why hold stablecoins? Because the stability of the coin's value leads to trading acceptance, and a sufficiently broad trading base creates economies of scale.

Because of its stable value, it has universal trading recognition. The reason is easy to understand; no one wants to exchange a digital currency that is expected to rise for a regular product (such as a cola); of course, no one is willing to accept a digital currency whose value is about to drop significantly in exchange for their regular products (such as a car).

The purpose of creating stablecoins is not to treat them as investment products that provide holders with price increases and wealth accumulation experiences (i.e., investment value); the aim is to promote trading audiences (i.e., trading value).

The more stable the value of a coin, the more it can exert its trading value, and the dimension for evaluating trading value is the trading scale. If the trading scale is large enough, even with small profits (allocating high-grade, high-liquidity assets), it can still bring significant returns. Therefore, stablecoin issuance institutions (which can be in the private sector) can profit from this.

Bitcoin, on the other hand, is completely different; the trading value is not the ultimate goal, the ultimate goal is the investment value of holding the coin for appreciation.

Although Bitcoin's natural attribute is that it is a decentralized digital money, its convenience for cross-border transactions and privacy are significantly stronger than fiat currency. However, faced with strong financial attributes and supply constraints, the primary motivation for Bitcoin holders is to profit from holding coins rather than using Bitcoin for ordinary transactions.

We have provided a detailed argument in "Bitcoin and Gold: The 'Substitute Currency' of the New and Old Era." Since its creation in 2009, Bitcoin's price increase has surpassed that of most assets. In the four cycles of bull and bear markets, each round of Bitcoin bull market has been triggered by a reduction in supply.

The supply constraints and investment properties of Bitcoin determine that it cannot enter the daily transactions of ordinary people, thus failing to become a universally accepted currency.

The creation of wealth in contemporary society has both a long-term expansion trend and cyclical fluctuation characteristics, and the supply of money must cater to the current creation of wealth in society.

Once the breadth of transactions increases, the supply of bitcoin is limited, and once bitcoin is widely accepted, then investment attributes will inevitably be derived from the transaction attributes of bitcoin. Once there are investment attributes, Bitcoin holders are reluctant to pay for them, and the transaction attributes are limited. On the other hand, if the breadth of Bitcoin transactions is average, and the investment attributes of Bitcoin cannot rise (stronger investment attributes must have sufficient market capacity and buyers), then Bitcoin holders are only willing to use it as a medium of exchange, and the trading attributes are strong.

The trading and investment attributes of Bitcoin are difficult to reconcile. This explains the two characteristics of Bitcoin's development up to now: first, a strong cyclical value fluctuation, corresponding to high investment value volatility; second, Bitcoin, as a transaction currency, has a limited scope of application.

This logic applies to gold as well, which cannot become a universally accepted medium of exchange. The supply of gold is stable, yet the demand for gold in today's technology-driven mode of wealth creation is not stable. Therefore, in modern society, gold is considered money (a consensus held by humanity for centuries), but it is also not entirely money (as it cannot truly enter large-scale trading and payment scenarios).

Stablecoins overcome the flaw of currency value instability at the expense of investment value, which is why they have the potential to truly provide a foundation for widespread trading.

Four, the prospects of stablecoins - or they may become the most multi-dimensional currency in trading attributes in history.

How can we enjoy the privacy and convenience brought by the decentralization of Digital Money while also benefiting from a higher stability in coin value?

Either pegged to fiat assets (such as the US dollar or US Treasury bonds), or using algorithms (precisely regulating currency supply and demand), to strive to maintain the stability of the value of digital money. In this way, a digital currency that is value-stable and also has decentralized characteristics has emerged - stablecoin.

Stablecoins can be said to be a type of currency that lies between digital money (decentralized currency) and fiat money (centralized currency), which is also the origin of the "dual nature" of stablecoins.

Earlier, when comparing stablecoins and Bitcoin, one question remained unanswered: the ultimate goal of Bitcoin holders is to gain investment value. The founders of stablecoins can profit from economies of scale. For stablecoin holders, what are the benefits of holding stablecoins that lack investment properties?

Fiat currency has slightly weaker privacy and convenience, and the value stability of ordinary digital money is somewhat inferior; only stablecoins can balance the dual advantages of digital currency and fiat currency.

For stablecoin holders, they have obtained a currency that combines trading convenience, privacy, and extremely stable value, making it the most multifaceted currency in terms of trading attributes in history.

The quality trading attributes of stablecoins may herald a new era in trading payments. This could be why government departments in the United States, Hong Kong, and elsewhere are paying attention to stablecoins and providing regulatory guidance, in preparation for a more stable era of stablecoin development.

What is the ultimate intention behind stablecoin regulation?

Stablecoins are inherently digital money, so the payment convenience and privacy features brought by decentralization naturally accompany stablecoins.

To become a highly versatile trading and payment currency, the real challenge that stablecoins need to overcome is how to maintain the stability of their value.

As mentioned above, in order to accommodate the explosive creation of social wealth brought about by the modern technological revolution and the fluctuations of economic cycles, managing the stability of currency value is not easy. After the deconstruction of the Bretton Woods system, fiat currency shifted from being pegged to gold to being pegged to the pure government credit of a country, that is, the credit currency standard.

A country's government needs to establish a central bank and a financial regulatory system to manage the stability of credit money. How can stablecoins created solely by the private sector manage currency stability?

At this point in the text, readers may have a question: didn't stablecoins emphasize the use of various mechanisms to maintain value stability from the very beginning? For example, pegging to the US dollar, or using algorithms for adjustment, what is so difficult about managing the value?

Not to mention the distant past, since the establishment of stablecoins, cases of coin value dropping significantly or even dropping to zero are not uncommon. Especially, algorithmic stablecoins are more commonly seen to drop.

For example, in May 2022, Terra Luna collapsed, and in just one week, the market value of LUNA/UST plummeted from a peak of $50 billion to near zero. The reason is not difficult to understand, computation can solve the complexity of the operation of celestial bodies, but it is difficult to calculate the resilience complexity of the underlying transaction. The market sentiment derived from animal spirits often challenges the accuracy of the model, which is the underlying logic of the algorithmic stablecoin thunderstorm.

For example, on March 13, 2023, USDC and the U.S. dollar were unpegged, and the value of USDC plummeted, and the U.S. dollar once reached 1:0.88 against USDC. The main reason is that Circle has $3.3 billion (8.25% of the total reserves) in deposits with Silicon Valley Bank, and the Silicon Valley Bank incident has triggered a USDC redemption panic. This is a run frenzy that belongs to stablecoins.

For stablecoins, there are countless methods, but in summary, it is to make stablecoins accumulate more "trust consensus" just like fiat currencies.

Let’s further examine the recent stablecoin regulatory regulations introduced in the United States and Hong Kong. Regardless of the details, they are essentially aimed at controlling the risk exposure of underlying assets, ensuring the liquidity of underlying assets, fully disclosing information, improving the credit rating of currency issuers, and preventing moral hazard.

The direct purpose of regulation is to ensure that stablecoins effectively anchor to underlying assets, reducing information asymmetry between stablecoins and the public. The ultimate goal is to promote more stable development of stablecoins. Only with a stable value can stablecoins truly reach for the stars.

Six, the vast ocean of stablecoins: the new era of payments and the digital cloak of fiat currency.

Before discussing the development trends of stablecoins, let's first understand what changes have occurred in the dollar-dominated credit currency system in recent years?

We first notice an important trend change; the wave of decentralized currency payments has emerged.

This change can be traced back to the global financial crisis of 2008, after which the world's major countries collectively initiated monetary easing.

Of course, the reason behind this is that in the era of the global trade boom, the balance sheets of countries colluded with each other, and the ripple effect of the crisis was more persistent. However, global fiscal and monetary easing has pushed up the prices of financial assets, while at the same time sowing the seeds of loosening trust in sovereign currencies.

The reason decentralized currencies represented by Bitcoin have emerged in the post-financial crisis era is that the public is resisting the rampant proliferation of centralized sovereign currencies.

Blockchain technology is maturing day by day, serving as a technological means for decentralized currency and driving the surge of DeFi forward.

Post-pandemic fiscal stimulus and the Russia-Ukraine conflict are driving more payment demand away from the traditional international payment system.

The traditional agency model already has defects such as low payment efficiency, high transaction costs, limited coverage, and low transparency, making it difficult to effectively meet the current diverse transaction demands of cross-border finance, which leaves a lot of room for the development of payment-friendly Digital Money.

After the pandemic, major countries reopened their fiscal policies, and high inflation further undermined public trust in the US dollar as a sovereign currency. Coupled with the Russia-Ukraine conflict in 2022, geopolitical games have forced some countries and regions to disengage from the modern cross-border payment system.

Whether active or passive, an increasing number of payment demands are escaping the international payment system and entering the realm of Digital Money transactions. The rapid development of Digital Money post-pandemic is the best response to this trend.

In 2025, Trump initiated a trade war, further undermining the foundation of the dollar-dominated international financial order.

The biggest difference between this round of tariffs and previous ones is that it involves a wide range of countries and regions, covering the vast majority of goods. Therefore, this is a tariff war that reshapes the global manufacturing supply chain, while also being a reshaping of the rules that undermine the dollar's dominance in the international monetary system.

Currently, although the tariff rules are still unclear, a round of trade rule restructuring and the reshaping of supply chains and financial order are already underway. This is also why the dollar and US bonds have both fallen recently; it is not that US assets are weakening, but rather that the credit of the dollar is weakening.

In this context, let us further understand the essential logic behind the development of stablecoins.

Due to the duality of both digital money and centralized currency, the "dual-sided currency" stablecoin can redirect the demand for the convenience and privacy of digital money back to fiat currency. It is equivalent to putting a layer of stablecoin digital clothing on fiat currency (such as the US dollar).

Because stablecoins emphasize transactional value, while Bitcoin emphasizes investment value, stablecoins are suitable as payment tools and the infrastructure for DeFi, linking on-chain finance with real-world assets, becoming the core of payment settlement in the digital world.

Holding stablecoins in reality is to prepare for investing in Bitcoin, which is widely pursued under the narrative of scarcity and financial order reconstruction, serving as an important investment commodity. The development of stablecoins allows fiat currency (such as the US dollar) to ride on the coattails of Bitcoin's market capitalization expansion.

In summary, with the arrival of a new era of payment - the era of digital payment, the development of stablecoins can help bridge the divide between digital money and fiat currency. It allows payment demands that originally sought to escape the dollar currency system and avoid the digital money system to don a layer of stablecoin and return to the centralized currency system.