Stablecoins: The Complete Guide

What Are Stablecoins?

Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reference asset, typically the US dollar. Unlike Bitcoin or Ethereum, which can swing 10%+ daily, stablecoins aim to hold a 1:1 peg.

They've become crypto's first mainstream use case, serving as the bridge between traditional finance and decentralized systems. The market has grown from $4 billion in 2020 to over $306 billion in 2025, processing over $1 trillion monthly in on-chain volume.

Types of Stablecoins

Stablecoins differ in how they maintain their peg. Each approach involves different trade-offs between decentralization, capital throughput, and risk.

1. Fiat-Backed (Custodial)

Backed 1:1 by dollars held in bank accounts and short-term treasuries. The issuer holds reserves and promises redemption at $1.

Lower Risk Counterparty risk to issuer and custodian banks. Regulatory risk if jurisdiction changes. Reserve composition matters (T-bills vs commercial paper).

2. Crypto-Collateralized (CDP)

Users deposit crypto assets as collateral to mint stablecoins. Over-collateralization (e.g., $150 of ETH for $100 of stablecoin) provides the buffer.

Medium Risk Smart contract risk, liquidation risk during crashes, oracle manipulation risk. More decentralized but less capital efficient.

3. Algorithmic / Synthetic

Maintain peg through market mechanisms rather than direct backing. Includes delta-neutral strategies and algorithmic supply adjustments.

Higher Risk Complex mechanisms with multiple failure points. Ethena's USDe dropped to $0.65 during Oct 2025 market stress. Not suitable for all users.

Yield-Bearing Stablecoins

A rapidly growing category where holding the stablecoin generates yield. The yield-bearing stablecoin market reached $22 billion in 2025, up 300% year-over-year.

How They Generate Yield

• Treasury yields, Investing reserves in T-bills (4-5% currently)
• Funding rate arbitrage, Delta-neutral positions capturing perp funding
• Lending yields, Deploying to DeFi lending protocols
• Restaking yields, Participating in EigenLayer and similar protocols

Key Products

Interest Rate Sensitivity

Most stablecoin revenues come from investing reserves in treasuries. This creates significant interest rate dependency:

If rates drop to zero, USDC would face significant pressure while Ethena's USDe might actually benefit as lower rates drive more speculation and leverage into crypto (supporting funding rates).

Both Circle and Tether are building blockchain infrastructure (Cortex and Plasma respectively) to diversify beyond treasury yields.

The Rise of Backend Yield Infrastructure

The stablecoin market is quietly undergoing a structural shift. Yield-bearing stablecoins have grown from 0.1% of total stablecoin supply to roughly 7.6% (peaking at 11.5% in early 2025). This isn't just a product trend, it's reshaping how protocols and chains think about stablecoin architecture.

Frontends vs Backends

DeFi is bifurcating into two layers:

• Frontend protocols, wallets, mobile apps, exchanges, and chains that users interact with directly. They need a stablecoin for their ecosystem but don't want to build yield infrastructure from scratch.
• Backend protocols, yield engines like Ethena, Ondo, and Sky that generate returns and license their infrastructure. They don't need users directly, they need distribution partners.

This is why chains and protocols are launching their own branded stablecoins at an accelerating pace:

Stablecoin-as-a-Service

Ethena pioneered the "stablecoin-as-a-service" model: instead of only issuing USDe, they license their yield backend to other protocols. A chain can launch its own branded stablecoin while Ethena handles the delta-neutral positions, custody, and yield generation behind the scenes.

This creates a new competitive dynamic. Stablecoin market share will increasingly be decided not by who has the best reserve attestations, but by who controls the best distribution channels. A chain with 10 million active wallets that launches a native stablecoin backed by Ethena's infrastructure could capture significant supply overnight, without building any yield infrastructure.

Issuer vs Distributor: Who Captures the Float?

The stablecoin market splits into three economic structures based on who captures the reserve yield. The differences matter more than they look, because they determine which equity exposure actually delivers stablecoin upside.

The USDC case is the most economically interesting and the most under-discussed. Coinbase's share of revenue from the Circle agreement climbed from 32% in 2022 to roughly 50% in each of the last two years, and that share grows mechanically with Coinbase's USDC distribution footprint. Average USDC held in Coinbase products reached $17.8B at end of Q4 2025, an all-time high. Under the agreement, Coinbase keeps essentially 100% of the yield on USDC sitting inside its own products, plus a meaningful share of off-platform balances under what is publicly described as a Payment Base waterfall.

The framing matters for how the equity exposures price. Circle (CRCL) trades at a high earnings multiple as the regulated issuer. Coinbase (COIN) trades closer to brokerage comps despite running a USDC revenue line that materially rivals Circle's at the issuer-attributable level. Per Artemis Research, the Circle Agreement is structured as a continuation lock with three threshold renewals (Product, Company, Reseller). Public filings reportedly indicate that, if those thresholds are satisfied, the Circle Agreement cannot be unilaterally terminated. If accurate, the lock changes how the USDC revenue stream should be discounted: the share is durable across Circle leadership changes and not subject to a renegotiation cliff.

The takeaway for users tracking stablecoin growth as a thesis: USDC is structurally a Circle-plus-Coinbase economic, not a Circle-only one. If stablecoin supply scales 10x, the issuer-attributable revenue is collected by both parties, not just the public issuer. The wider lens is that "who captures the float" is becoming the most important question in stablecoin economics, more important than the brand on the ticker.

Source: Artemis Research, "Coinbase as the AI-native finance platform" (May 2026); Coinbase 10-Q filings; Circle S-1. Last verified: 2026-05-10.

What's Driving the Shift

Three forces are accelerating backend yield demand:

1. Fed rate cuts erode T-bill yields, As traditional reserve income declines, issuers need alternative yield sources. Private credit, real-estate debt, and GPU financing are filling the gap.
2. Chain competition demands stickiness, L1s and L2s competing for users need a native stablecoin with yield to keep capital in their ecosystem rather than on Ethereum.
3. Users expect yield by default, Holding a zero-yield stablecoin feels increasingly irrational when yield-bearing alternatives exist with similar convenience and risk profiles.

GENIUS Act: US Stablecoin Regulation

The GENIUS Act (Guiding and Establishing National Novelty for U.S. Stablecoins) became law in July 2025, the first comprehensive federal framework for stablecoins in the US.

Key Requirements

• 1:1 Reserve backing, Must hold $1 of permitted reserves for each stablecoin
• Permitted reserves, Cash, T-bills, repos, money market funds, insured deposits
• Monthly attestations, Public reports on outstanding stablecoins and reserve composition
• Annual audits, Independent audits required for issuers >$50B
• AML/KYC compliance, Subject to Bank Secrecy Act as financial institutions

Who Can Issue

1. Subsidiaries of FDIC-insured banks (federal banking agency supervision)
2. Non-bank institutions supervised by the OCC
3. State-chartered entities with "substantially similar" state regulation

Issuers under $10B can remain state-regulated. Above $10B triggers mandatory federal oversight or a waiver requirement.

Important Classifications

• Not a security, Payment stablecoins aren't subject to SEC/CFTC oversight
• Foreign stablecoins, Can trade on US secondary markets if they can freeze transactions per Treasury orders

Recent reserve-eligible filings (May 2026)

Two early-May 2026 SEC filings positioned tokenized money market funds as GENIUS-eligible stablecoin reserve substrates:

• BlackRock OnChain Shares (filed 8 May 2026, per CoinDesk): two related filings, including the BlackRock Daily Reinvestment Stablecoin Reserve Vehicle (holds cash, short-duration T-bills, and overnight Treasury repos) and a digital share class for the $7B BlackRock Select Treasury Based Liquidity Fund (BSTBL) at a $3M institutional minimum. The "OnChain Shares" framework targets multiple public chains. Securitize is again the tokenization partner.
• JPMorgan JLTXX (filed 12 May 2026, per Bloomberg and CoinDesk): the JPMorgan OnChain Liquidity-Token Money Market Fund. $100M JPM-seeded, 100% U.S. Treasury bills/bonds/notes plus overnight Treasury repos, $1.00 NAV money-market structure, ≤93-day maturity, ≤60-day weighted average maturity. Custodian partner Anchorage Digital; tokenization via JPM's Kinexys Digital Assets platform. JPM's second tokenized fund after MONY (December 2025).

Both filings are explicitly positioned for stablecoin issuer reserves under GENIUS. Neither has been approved by the SEC as of this writing. The strategic read: tokenized money market funds are competing to become the reserve substrate, not just on-chain Treasury wrappers. Distribution , issuer relationships with stablecoin issuers, custodians, and treasury desks , increasingly looks like the differentiation surface, displacing the underlying-yield differentiation that defined the 2023-2025 phase.

Second-Order Effects: Treasury Markets, Banking, and Global Capital

The headline GENIUS rules cover what stablecoins can hold. The more interesting question is what those rules do to the rest of the financial system once stablecoin supply scales into the trillions. The short version: GENIUS reshapes Treasury demand, bank funding margins, and global dollar access in ways that are mostly additive for the US and mostly subtractive for emerging markets with weaker monetary credibility or capital controls.

Forecast dispersion is wider than the headlines suggest

Several major sell-side desks have published stablecoin supply forecasts. The dispersion across them is the most important context. Anyone citing a single "$2 trillion by 2028" number without acknowledging the range is over-stating the consensus.

Take the dispersion at face value: 13x range between JPM's floor and BPI's ceiling for the same 2028 horizon. The right read is "GENIUS could produce anywhere from $500B to $2T+ in 2028 supply depending on offshore adoption velocity and the interest-pass-through question." Investors should treat any single point estimate skeptically.

Sources: Citi "Stablecoins 2030" (Apr + Sept 2025); Standard Chartered "Stablecoins, USD Hegemony and UST Bills"; Coinbase "New framework for stablecoin growth"; JPMorgan stablecoin research; Bank Policy Institute Baumol-Tobin stress analysis (TBAC April 2025). Compiled in Galaxy Research, "GENIUS, Stablecoins, and the Funding Structure of the Dollar Economy."

Treasury market: ~3-5 bps T-bill yield compression, ~$3B/year US taxpayer savings

Under GENIUS Section 4, permitted reserve assets are tightly defined: US currency, Federal Reserve Bank deposits, demand deposits at insured depository institutions, Treasury bills or notes with remaining maturity ≤93 days, overnight Treasury-backed repo, and government money market funds invested solely in those instruments. Approximately 85-95% of new GENIUS-compliant reserves end up in short-dated US government paper in practice.

Bank for International Settlements and Coinbase research has estimated the T-bill yield response to stablecoin supply shocks: a 2-standard-deviation weekly inflow (~$3.1B) historically tightens 3-month T-bill yields by 2.5-3.5 basis points, and 5-8 bps in periods of short-end scarcity. Applied to Galaxy Research's base-case $1T/2028 → $1.5T/2030 supply trajectory, the implied effect through 2030 is ~3-5 bps of structural compression at the front of the curve, approaching 10 bps in stress conditions.

Five basis points on the US Treasury's $6T+ T-bill stock translates to ~$3B/year in reduced US borrowing costs. That is the politically-relevant number behind the administration's framing of GENIUS as a strategic policy: stablecoins become a structurally embedded, price-insensitive buyer of the most refinancing-sensitive segment of the Treasury curve.

Foreign vs domestic flows: GENIUS is net-additive to US banking

The most counterintuitive finding in the analysis: stablecoin growth under GENIUS is likely net-additive to total US bank deposits, not subtractive, because the majority of demand is offshore.

• Citi base case: only ~33% of incremental stablecoin demand comes from US bank deposits. The rest splits across foreign capital (~33%), physical currency (~12%), money market funds (~10%), and other sources.
• Standard Chartered: assumes ~70% of stablecoin demand is offshore, including remittance demand, capital flight from less stable jurisdictions, and cross-border treasury management.
• Reserve recycling: ~75-85% of stablecoin reserves stay within the broader US financial system (bank deposits, government MMFs, repo, custody balances), per the GENIUS Act's narrow reserve whitelist.

Net of those flows, Galaxy Research's model implies each $1 of stablecoin issuance generates roughly $0.32 in incremental US credit creation. Across a $1T/2028 → $1.5T/2030 supply path, that's about $400B of credit expansion through 2030. The credit story is therefore a reallocation, not a contraction: regional and community US banks lose some low-cost deposit funding (and the implicit non-interest-deposit subsidy that comes with it), but US GSIBs absorb concentrated stablecoin-issuer balances and gain from imported foreign capital.

The framing matters because it inverts the standard "stablecoins will hollow out the banking system" critique. Galaxy's central claim: stablecoins reallocate rather than destroy bank credit capacity, and the US Treasury and US banking system as a whole are net winners; the losers are smaller US regional banks heavily reliant on demand-deposit funding, and foreign banking systems that lose deposits to dollar-stablecoin alternatives.

Emerging-market vulnerability: weak institutions are the structural losers

The clearest negative-incidence group from GENIUS sits outside the US: countries with weaker monetary credibility, fragile banking systems, or binding capital controls. When holding US credit becomes "as simple as downloading an application," domestic deposits in vulnerable jurisdictions face accelerated dollarization pressure.

Vulnerability factors per the IMF and Standard Chartered analyses:

• Poor monetary credibility (high inflation expectations, currency depreciation, arbitrary policy)
• Banking-system fragility (undercapitalization, operational risk, weak deposit insurance)
• Capital controls or restricted foreign-currency access. Stablecoins specifically circumvent these frictions.
• High remittance dependence + shallow capital markets + large informal savings sectors
• Large current-account or fiscal imbalances that make deposit flight self-reinforcing through FX channels

For investors: emerging-market bank equities in jurisdictions exposed to dollar-stablecoin substitution face a structural funding-cost headwind that mostly does NOT apply to US institutions. Conversely, US-domiciled stablecoin issuers (Circle, Paxos, future GENIUS-compliant entrants) and US GSIBs sit on the receiving end of the offshore-to-onshore capital migration.

Source: Galaxy Research, "GENIUS, Stablecoins, and the Funding Structure of the Dollar Economy" (Nov 2025), synthesizing Citi, Standard Chartered, Coinbase, JPMorgan, BPI, and BIS analyses. Treat all forecasts as model-dependent. Galaxy's preferred base-case numbers ($1T/2028, ~$0.32 credit/$1 stablecoin) assume 75-85% reserve recycling and ~70% offshore demand; both are defensible but not consensus. Last verified: 2026-05-11.

Global Regulatory Field

Stablecoin regulation is accelerating worldwide. Four major frameworks now define the rules for issuers and users:

MiCA's Impact on DeFi

The EU's Markets in Crypto-Assets (MiCA) regulation has specific implications for stablecoins:

• Daily volume caps: Non-EUR stablecoins face transaction limits if daily volume exceeds 1 million transactions or EUR 200 million, designed to prevent USD stablecoins from undermining euro monetary sovereignty
• USDT compliance uncertainty: Tether has struggled with MiCA compliance, leading some EU exchanges to delist USDT
• Euro-denominated opportunity: Circle launched EURC (euro stablecoin) to capture EU-compliant market share
• Algorithmic stables restricted: MiCA effectively prohibits unbacked algorithmic stablecoins in the EU

Crypto-Native Stablecoin Novelty: RAI

Not all stablecoins peg to the dollar. RAI (by Reflexer Labs) pioneered a fully decentralized, governance-minimized stablecoin using a PID (Proportional-Integral-Derivative) controller, the same feedback mechanism used in industrial automation:

• No dollar peg: RAI floats around a "redemption price" that adjusts algorithmically based on market demand
• PID controller: When RAI trades above redemption price, the controller lowers the redemption rate (making RAI less attractive to hold), and vice versa, maintaining stability without relying on any fiat reference
• Purely crypto-native: ETH-only collateral, no governance token, no admin keys
• Significance: RAI proved that stable (not necessarily dollar-pegged) crypto-assets can exist without any fiat dependency, important for censorship resistance

Real-World Use Cases

Cross-Border Payments

Traditional remittances cost ~13% on $200 transfers. Stablecoin alternatives deliver equivalent transactions in seconds for under 1%. Bitso now handles over 10% of US-Mexico remittance flows.

B2B Treasury

21% of US commercial deposits earn zero interest,$154B annual spread for banks. Yield-bearing stablecoins let businesses capture this yield directly while maintaining liquidity.

DeFi Collateral & Trading

Stablecoins serve as the base currency for DeFi. They're used for:

• Trading pairs on DEXs
• Lending/borrowing collateral
• Yield farming base assets
• Derivatives margin

Card-Based Payments

Stablecoin-linked debit cards scaled from ~$250M monthly volume (early 2023) to over $1B monthly (early 2025). Gnosis Pay reported 57% YoY monthly volume growth.

AI Agent Payments

Emerging use case: AI agents making autonomous micropayments. The x402 protocol enables HTTP 402 "Payment Required" responses with stablecoin settlement, critical for the agentic economy.

Understanding Stablecoin Risks

Depeg Risk

The risk that a stablecoin trades below $1. Causes include:

• Bank runs, Mass redemptions overwhelming liquidity (USDC March 2023)
• Reserve issues, Inadequate or illiquid backing
• Mechanism failure, Algorithmic models breaking under stress (UST, USDe)
• Smart contract exploits, Bugs allowing unauthorized minting

Counterparty Risk

Fiat-backed stablecoins depend on issuers and their banking partners. If Tether's banks fail or Circle faces regulatory action, redemption could be impaired.

Regulatory Risk

Jurisdictions can ban or restrict stablecoins. MiCA in Europe required compliance by June 2024. The GENIUS Act creates US requirements. Non-compliant stablecoins face delisting risk.

Smart Contract Risk

All on-chain stablecoins depend on smart contracts. Bugs can enable exploits. Even audited contracts have vulnerabilities discovered post-deployment.

Yield-Specific Risks

• Funding rate reversal, Ethena's strategy fails if funding turns persistently negative
• Exchange failure, Centralized exchange bankruptcy could trap collateral
• Liquidation cascades, Leveraged positions unwinding during market stress

The Rise of Payment Chains

Major stablecoin issuers are building dedicated blockchain infrastructure for payments:

Circle Arc

• Gas fees payable in USDC (no need for native tokens)
• Regulated institutions as validators
• 3,000-10,000 TPS throughput
• Built-in refund and dispute mechanisms
• Tokenized treasury (USYC) support

Tether Plasma

Tether's own chain optimized for stablecoin settlement, focusing on speed and cost throughput for high-volume payment flows.

Why Payment-Specific Chains?

General-purpose blockchains aren't optimized for payments. Dedicated chains can:

• Eliminate native gas token friction
• Achieve payment-grade throughput (10,000+ TPS)
• Build compliance hooks at the protocol level
• Create differentiated revenue streams beyond treasury yields

As AI agents drive 10-100x transaction volume growth, general-purpose chains may struggle to keep pace.

Investment Implications

Stablecoin Issuers as Investments

Circle filed for IPO in 2025. Stablecoin issuers are extremely profitable, essentially earning treasury yields on customer deposits with minimal operational costs. However, most are not directly investable yet.

Infrastructure Plays

Chains that become stablecoin hubs capture transaction fees. Ethereum, Solana, Base, and Tron dominate current stablecoin volumes. Payment-specific chains could disrupt this.

DeFi Protocols

Protocols that integrate stablecoins for lending, trading, or yield generation benefit from stablecoin growth. Aave, Compound, and Curve see direct volume increases.

Yield-Bearing Stables as Yield Sources

For investors seeking stable yield without crypto volatility, yield-bearing stablecoins offer an alternative to money market funds, but with additional risks.

Key Takeaways

1. $300B+ market dominated by USDT and USDC (85% combined share), but challengers like Ethena's USDe are gaining traction.
2. Three main types: fiat-backed (lowest risk), crypto-collateralized (medium), and synthetic/algorithmic (highest risk).
3. Yield-bearing stablecoins hit $22B,yields above ~5% mean taking additional risks beyond treasuries.
4. GENIUS Act creates US federal framework: 1:1 reserves, monthly attestations, AML compliance. Legitimizes the space while creating compliance barriers.
5. Interest rate sensitivity varies: USDT has massive buffer, USDC more exposed, USDe may benefit from lower rates.
6. Payment chains emerging: Circle Arc and Tether Plasma aim to capture payment infrastructure revenue beyond treasury yields.
7. Depeg risks are real: UST ($40B collapse), USDC (March 2023), USDe (Oct 2025),even "stable" coins can break.