The ten-year evolution of stablecoins from payment tools to financial infrastructure, from BitUSD to USDT

Author: insights4.vc

Compiled by: Deep Tide TechFlow

It has been ten years since the first stablecoin, BitUSD, was launched, marking a significant evolution in the decentralized finance (DeFi) ecosystem. Today, stablecoins have become indispensable financial instruments in this field, with a total supply exceeding $156 billion. BitUSD was introduced on July 21, 2014, on the BitShares blockchain by cryptocurrency pioneers Dan Larimer and Charles Hoskinson, aiming to maintain a stable value pegged to the US dollar at a 1:1 ratio. However, the decoupling event of BitUSD in 2018 revealed the complexities of early stable models.

In contrast, modern stablecoins like Tether (USDT) and USD Coin (USDC) rely on substantial fiat reserves and other robust mechanisms to achieve significant stability. Today's stablecoins play a crucial role in the cryptocurrency and DeFi ecosystems, providing liquidity to exchanges, supporting loans, and enabling market participants to maintain investments in digital assets without frequently converting to fiat.

Types of Stablecoins

Stablecoins can be categorized based on their methods of maintaining price stability:

• Fiat-Collateralized Stablecoins: These stablecoins are backed by fiat currency (such as the US dollar) held in reserve by a central custodian. For example, Tether (USDT) and USD Coin (USDC) are such examples. The issuer holds a fiat reserve equivalent to the issued stablecoins, ensuring that each coin can be redeemed at a 1:1 ratio, which not only stabilizes the coin's value but also enhances user trust.

• Crypto-Collateralized Stablecoins: These stablecoins are backed by other cryptocurrencies as collateral, such as MakerDAO's DAI. Users need to lock a certain amount of cryptocurrency (like Ethereum) as collateral. Due to the high volatility of cryptocurrency prices, these stablecoins typically use over-collateralization and employ automatic liquidation mechanisms to maintain their pegged value.

• Algorithmic Stablecoins: These stablecoins rely on algorithms to adjust supply based on market demand without requiring actual collateral. For example, FRAX combines algorithmic and partially collateralized mechanisms, while TerraUSD (UST) previously used a minting tax model before its collapse. Their stability largely depends on market confidence and the robustness of the algorithms.

Top five stablecoins ranked by supply (Total supply: $155.1 billion, Source: Artemis )

Stablecoin Models: Collateral and Custody Analysis

Tether (USDT)

• Collateral and Custody: Tether is backed by fiat reserves, including cash, cash equivalents, and US Treasury bonds, and is custodied by Cantor Fitzgerald. As of October 26, Tether reported holding $100 billion in US Treasury bonds, over 82,000 Bitcoins (approximately $5.5 billion), and 48 tons of high-quality gold.

• Supply and Usage Trends: The supply of USDT is $113.4 billion, which has decreased by 5.73% over the past month. Despite a 5.27% increase in transfer volume, the number of active addresses has decreased by 6.11%, indicating a decline in user activity.

USDC

• Collateral and Custody: USDC is fully backed by fiat reserves and managed by BNY Mellon, Customers Bank, and Cross River Bank.

• Supply and Usage Trends: The supply of USDC is $33.6 billion, with a decrease of 2.46%, but transfer volume surged by 29.95%. The number of active addresses increased by 23.45%, indicating strong trading demand.

DAI

• Collateral and Custody: This over-collateralized stablecoin uses ETH, BTC, private credit, and US Treasury bonds as collateral, custodied by Coinbase Custody, Sygnum Bank, and Wedbush Securities.

• Supply and Usage Trends: The supply of DAI is $5 billion. Although the supply decreased by 2.75%, transfer volume grew by 40.52%, and active addresses increased by 45.35%, reflecting rising adoption and trading activity.

USDe

• Collateral and Custody: USDe is a synthetic stablecoin that achieves delta neutrality using ETH, ETH LSTs, BTC, and USDT, custodied by Copper, Ceffu, and Cobo.

• Supply and Usage Trends: The supply of USDe is $2.7 billion. Although transfer volume slightly decreased, the number of active addresses increased slightly, indicating stability in its usage patterns.

PYUSD (PayPal USD)

• Collateral and Custody: PYUSD is issued by PayPal and is fully backed by fiat assets (such as US Treasury bonds, cash, and equivalents), custodied by State Street Bank and Trust Company and Customers Bank.

• Supply and Usage Trends: PYUSD is the smallest stablecoin by supply, with a total of $598 million. Its transfer volume increased by 58.75%, and active addresses grew by 153.79%, indicating significant user interest and expansion in usage.

Stablecoins - Supply (Source: Artemis )

The data in the charts illustrate the growth and volatility trends of stablecoin usage and transfer volume over time. Since early 2018, the supply and transfer volume of stablecoins have risen significantly, peaking in mid-2021, likely due to increased interest in decentralized finance (DeFi) and the broader cryptocurrency market. After 2021, while supply remained stable at high levels, transfer volume experienced periodic surges, particularly in early 2024, which may indicate a resurgence of market activity or volatility during that period.

Stablecoins - Transfer Volume (Source: Artemis )

USDT and USDC dominate the stablecoin market, constituting the majority of supply and trading volume. Other stablecoins like DAI, BUSD, and the emerging PYUSD, while having smaller shares, are continuously growing, reflecting a trend towards market diversification.

Distribution of USDC and USDT

There are significant differences in the distribution of USDC and USDT across decentralized finance (DeFi) and centralized finance (CeFi) platforms, as well as various wallets. For USDC, the largest holdings are concentrated in externally owned accounts (EOAs), totaling $16.8 billion, followed by CeFi with $2.3 billion, and bridging assets holding $1.8 billion. Treasury accounts hold $438 million, decentralized exchanges (DEXs) hold $388 million, and lending protocols hold $195 million. Yield farming usage is minimal, at only $3 million, while other miscellaneous holdings total $3.2 billion.

USDC Distribution

In contrast, the distribution of USDT is more concentrated, with $81.5 billion held in externally owned accounts (EOAs) and $26.3 billion in centralized finance (CeFi). Bridging assets hold $5.1 billion, decentralized exchanges (DEXs) hold $473 million, and lending protocols hold $439 million. Treasury accounts hold a smaller amount, at only $54 million, yield farming is just $10 million, and other holdings total $2.5 billion.

USDT Distribution

As of October 2024, Ethereum, Tron, Arbitrum, Coinbase's Base, and Solana are the primary blockchains for stablecoin settlements. Although Ethereum leads in overall settlement value, its monthly sending address count is lower than networks like Tron and Binance Smart Chain due to higher network transaction fees. Since sending addresses are harder to manipulate than raw transaction counts, these metrics reveal a complex landscape where Tron, Polygon, Solana, and Ethereum lead in stablecoin activity.

Stablecoin Transfer Volume on the Network (in Trillions of USD) Market Trends for 2024

Stripe Acquires Bridge Network

On October 20, 2024, Stripe acquired Bridge Network for $1.1 billion, marking a significant milestone in the stablecoin and crypto payments market. Bridge is dubbed the "Stripe of crypto," focusing on helping businesses use stablecoins for payments without directly handling digital tokens. Major investors, including Index Ventures and Haun Ventures, have seen Bridge's valuation grow by 200% since August, when top firms like Sequoia participated in its funding round. Bridge's annual revenue is estimated between $10 million and $15 million, and Stripe's acquisition reflects its emphasis on stablecoin infrastructure, with CEO Patrick Collison likening it to a "room-temperature superconductor in financial services."

Emerging Markets and Currency Stability

In emerging markets facing severe currency devaluation, stablecoins have become tools to combat local currency instability. Residents in countries like Argentina, Turkey, and Venezuela are increasingly adopting stablecoins to cope with local currency depreciation. For instance, Argentina's stablecoin trading volume far exceeds the global average, reaching 61.8%, primarily driven by inflation and demand for alternatives to the US dollar.

Stablecoin trading volume on Bitso (in millions of USD) compared to the purchasing power of the US dollar against the Argentine peso (ARS)

Retail trading volume by asset type in selected countries compared to the global average (July 2023 - June 2024)

Cross-Border Transactions and Remittances

Stablecoins are revolutionizing cross-border payments, especially in Africa and Latin America. In sub-Saharan Africa, stablecoins are crucial for businesses facing foreign exchange shortages and high remittance costs. For example, in Nigeria, using stablecoins can reduce remittance fees by about 60% compared to traditional methods. Similarly, in Latin America, stablecoins enable lower-cost and faster cross-border transactions, with Circle recently expanding its operations in Brazil to meet this demand.

Regulatory Developments and Challenges

The regulatory environment varies significantly across regions, impacting the growth of stablecoins. The EU's Markets in Crypto-Assets (MiCA) regulation, effective from June 2024, provides a comprehensive regulatory framework for stablecoin projects in Europe, creating a conducive development environment. In contrast, regulatory uncertainty in the US has led some stablecoin activities to shift to non-US markets, with issuers like Circle emphasizing that clear regulations are crucial for maintaining the US's competitiveness in the stablecoin space.

Institutional and Retail Demand

The use of stablecoins is increasing among both retail users and institutions. In Nigeria, stablecoins are widely used for everyday transactions and cross-border payments, while in the EU, they are more commonly used for B2B transactions, such as invoice settlements and remittances. Additionally, in high-inflation countries like Turkey, retail users are highly adopting stablecoins as a means to hedge against inflation.

Proportion of GDP spent on purchasing stablecoins with fiat currency by country (July 2023 - June 2024)

Global Stablecoin Regulation

Stablecoin regulation varies globally due to factors such as financial stability, investor protection, anti-money laundering compliance, and innovation. Here are the approaches of major countries and regions regarding stablecoin regulation:

European Union

• MiCA Regulation: Effective from mid-2024, MiCA regulation requires stablecoins to hold sufficient reserves and ensure market integrity and consumer protection.

• Innovation Initiatives: The EU supports innovation through blockchain regulatory sandboxes and distributed ledger technology (DLT) pilot programs, helping businesses test within a compliant framework.

• Scope Limitations: MiCA currently does not cover decentralized finance (DeFi) or non-fungible tokens (NFTs), limiting its application in the broader cryptocurrency space.

United States

• Multi-Agency Regulation: Multiple agencies, including the SEC, CFTC, and FinCEN, share regulatory responsibilities, creating a complex regulatory environment.

• Federal Legislation: Proposed legislation like the Lummis-Gillibrand bill and FIT21 aims to establish a unified legal framework for stablecoin regulation.

• State-Level Innovation: States like New York and Wyoming are leading in legal innovation, with Wyoming recognizing decentralized autonomous organizations (DAOs) as legal entities.

United Kingdom

• Stablecoins under Existing Framework: Stablecoins are incorporated into existing financial regulations, with the Financial Conduct Authority (FCA) setting standards for anti-money laundering (AML), know your customer (KYC), and promotion.

• Digital Securities Sandbox: This sandbox allows businesses to experiment with digital asset solutions in a controlled environment, supporting secure innovative experiments.

Singapore

• Comprehensive Guidelines from MAS: The Monetary Authority of Singapore (MAS) implements strict AML, consumer protection, and licensing standards for stablecoins.

• Regulatory Sandbox: Provides a secure testing environment to support innovation while requiring stringent KYC, security, and reserve management.

Japan

• FSA-Led Regulation: The Financial Services Agency (FSA) enforces KYC/AML requirements and mandates stablecoin issuers to obtain licenses.

• Leader in International Standards: Japan allows internationally regulated stablecoins to operate domestically, promoting global interoperability.

• Updates to Payment Services Act: Recent updates ensure security while adapting to new digital asset trends.

United Arab Emirates (UAE)

• VARA Licensing Requirements: The UAE's Virtual Assets Regulatory Authority (VARA) requires businesses engaging in stablecoin-related activities to obtain licenses.

• Focus on Security: Strict KYC and AML frameworks protect consumers and promote responsible development in the stablecoin space.

Switzerland

• FINMA Oversight: The Swiss Financial Market Supervisory Authority (FINMA) adopts a principles-based regulatory approach, enforcing AML and data protection laws.

• Support for DeFi: Its regulatory framework encourages innovation while ensuring safety and transparency.

Key Regulatory Themes and Requirements

AML and KYC Compliance:

Global AML and KYC compliance must meet FATF standards, requiring stablecoin issuers to verify user identities and monitor transactions, with recommendations to use innovative tools like zero-knowledge proofs for privacy-preserving KYC.

Regulatory Sandboxes

Regulatory sandboxes provide a secure testing environment for digital asset products, balancing innovation and compliance. Major jurisdictions, including the UAE, UK, and Japan, utilize sandbox frameworks and often engage in international cooperation to coordinate regulatory practices.

Privacy and Security Protocols

Stablecoin providers need to implement robust cybersecurity measures, as data privacy and asset custody regulations become increasingly important, with regions like Hong Kong requiring secure storage of assets.

Integration and Exclusion of DeFi

Decentralized finance (DeFi) remains largely outside the regulatory scope for stablecoins, but countries like the UK and Japan are exploring how to integrate DeFi with traditional finance, while the EU's MiCA currently excludes DeFi from regulation, which may be revised in the future.

Outcomes and Unintended Consequences

Positive Outcomes

• Enhanced consumer protection and market integrity have increased confidence in stablecoins, fostering market growth in regions with clear regulatory frameworks.

• Clear regulatory policies in places like Singapore and Switzerland have attracted digital asset companies, driving economic development and positioning these regions as global digital asset hubs.

Challenges and Unintended Consequences

• Regulatory Arbitrage: Some companies may choose regions with looser regulations, posing risks of regulatory arbitrage. Regions like Gibraltar and the UAE face challenges in balancing innovation with strict regulation.

• Privacy Concerns: The transparency requirements of MiCA may conflict with privacy-focused blockchain technologies, potentially impacting user privacy.

• Innovation vs. Regulation: Strict regulatory frameworks may hinder new market entrants; for instance, the decentralized regulatory approach in the US has led some companies to relocate overseas due to regulatory uncertainty.

Conclusion

Over the past decade, stablecoins have rapidly evolved from the initial concept of BitUSD into a crucial component of decentralized finance, with a total supply now exceeding $156 billion. Modern stablecoins like Tether (USDT) and USD Coin (USDC) have achieved widespread adoption through ample fiat reserves, with USDT leading in supply at $113.4 billion. Emerging markets are increasingly using stablecoins as a hedge against currency devaluation, with stablecoin trading in Argentina accounting for 61.8% of its retail trading volume. Global responses to stablecoin regulation vary: the EU's MiCA regulation encourages innovation through clear guidelines, while regulatory uncertainty in the US has prompted some issuers to shift to other markets. Institutional interest in stablecoins is rapidly growing, exemplified by Stripe's acquisition of Bridge Network for $1.1 billion. As stablecoins continue to bridge traditional finance and cryptocurrency, their future will depend on finding a balance between innovation and effective regulation.