The rapid growth of stablecoins in digital finance continues to draw the attention of investors and innovators alike. These purpose-built digital assets attempt to solve one of digital currencies’ biggest problems – volatility. As such, they are more popular than ever. Here’s how stablecoins continue to entice new users and reshape the market.
One Of The Fastest-Growing Segments
According to the most recent ARK Invest Big Ideas 2025 report, the stablecoin sector is among the fastest growing in the digital assets market. Impressively, stablecoins went from a $5 billion market cap in January 2020, all the way to over $190 billion this year alone. Thanks to a combination of factors, including rising investor and retailer interests, stablecoins have seen massive adoption.
Notably, 2024 was one of the biggest years for stablecoins. Last year, the sector recorded a daily volume of $270B and a monthly of $2.7T. Today, the stablecoin market is a $200B space that has nearly unlimited growth potential if certain conditions are met.
What is Stablecoin?
Stablecoins are digital assets that derive their value from a third-party asset rather than intrinsically or from market cap. These assets have been around since the first days of cryptocurrency trading and have seen many iterations. The main factor is that there’s an asset that retains a certain value, usually pegged to fiat currency like the USD, that derives its value from a reserve.
The concept of stablecoin makes sense, resembling gold-backed dollars. Today, these assets serve multiple roles in the market and economic space. They provide retailers and users with an easily accountable P2P payment method that leverages the best aspects of blockchain technology to remain secure and improve efficiency.
In countries like Brazil, Nigeria, Turkey, Indonesia, and India, stablecoins provide a secure way for citizens to store value, make payments, and quickly move value across borders in a permissionless manner. For citizens who live in nations that have high inflation on their local currency, stablecoins can be a smart way to escape the local economic woes and store value more effectively.
Types of Stablecoins
There are three main types of stablecoins, algorithmic, fiat-backed, and gold-backed. All of these approaches have similar goals, such as providing a stable reserve for the asset. However, they accomplish the task in different ways. As such, it is vital to know the difference and the risks and rewards of each approach.
Algorithmic
Algorithmic stablecoins utilize mathematical formulas and other cryptocurrencies as a reserve. These systems will automatically add and subtract value from the digital reserves to ensure that backing keeps the main asset pegged to $1.
Algorithmic stablecoins were one of the first types of stablecoins to enter the market. The first attempts tried to use new cryptocurrencies, which proved too volatile. From there, Bitcoin became a strong reserve, but its volatility was also too high at that time to be effective.
Today’s algorithmic stablecoins employ better digital assets for reserves and more accurate and responsive algorithms. These systems also leverage interest-bearing accounts and other asset-generation strategies to ensure the reserves can cover any major market shifts.
Gold-Backed
One of the first ways that developers thought to provide stability to cryptocurrencies was by backing them with gold. This approach made sense as the US dollar was backed by gold for a century and it retained its stability for the most part.
Early gold-backed stable coins would enable users to send in their gold and receive digital receipts that could be traded or transferred. This approach brought up some regulatory concerns, as trading gold internationally requires adherence to strict laws in some countries.
Gold-backed stablecoins have seen some innovations. Some projects utilize gold mines to back their project. These tokens leverage a basket of assets related to the gold mining operation including bullion, machinery, property, and other valued assets of the operation.
Fiat-Backed
The most common type of stablecoins are fiat-backed projects. Specifically, these coins account for 98%+ of the stablecoin supply. They use USD or other global currencies as reserves.
Source – Tether (USDT)
This style of stablecoin was the first to successfully take off and receive mainstream support. Today, it remains the most popular style of stablecoin due to its reliability, ease of audit, and user confidence.
History of Stablecoins
The history of stablecoins reflects the innovative and unexpected nature of the technology. The first stablecoin was a gold-backed project that launched in 2009 called E-gold. The platform was founded by Douglas Jackson and Barry Downey to provide an easier way to facilitate gold sales and transfer.
Users would send their gold to the company, which would then issue them a digital receipt. The digital receipt could be traded as easily as cryptocurrencies internationally. Of course, not everyone was on board with the idea of being able to send millions globally without oversight.
The project was going well, according to its founders, until they started to receive complaints regarding the use of their services to launder money and conduct illicit activities. The team made many changes to its approach to prevent these risks. However, it was ultimately shut down by regulators, marking the end of the first gold-backed stablecoin.
2014 BitUSD
In 2014 BitUSD entered the market. This algorithmic stablecoin utilized a reserve currency called Bitshares to retain its dollar peg. The problem with this approach was that the reserve currency was too obscure and lacked any validity. As such, it quickly became impossible to keep the reserve value up.
NuBits was another popular crypto-collateralized project that launched that year. Unlike its predecessor, the developers choose to use Bitcoin as the reserve asset. This maneuver ultimately didn’t solve the problem because Bitcoin was still in its infant stages. As such, it was too volatile to provide true backing in a manner that made traders confident.
Realcoin (Tether USDT) Launches
Realcoin entered the market in 2014 with some hefty goals. Unlike the others on this list, Tether achieved its aspirations and is recognized as the market leader today. The project was founded by Brock Pierce, Craig Sellars, and Reeve Collins. The goal was to create a fiat-pegged stablecoin with hard cash reserves.
Realcoin rebranded into the name everyone knows today, Tether USDT. The rebranding came as the project championed the fiat currency model. Notably, it was originally 100% backed by fiat reserves. However, the project has since changed its policies to state that the reserves are now a combination of fiat currency and other assets.
Tether is the most successful stablecoin to date. It has millions of active users and has helped to attract retail and commercial investment interests. Despite the project undergoing scrutiny on several occasions due to questions regarding its reserves, ownership, and other factors, USDT remains the dominant stablecoin on most blockchains.
2017 MakerDAO
MakerDAO entered the market in 2017. This algorithmic stablecoin operates on a hybrid model. Specifically, the algorithm protects against volatility by requiring $1.70 of Ethereum to withdraw $1 for the stablecoin DAI. MakerDAO leverages DeFi yield-bearing pools to deepen liquidity and reserves.
2022 TerraUSD Crash
May 2022 saw one of the most publicized stablecoin crashes in history. TerraUSD decimated its holders after losing 96% of its value in less than two days. The crash came about due to the token’s stable reserve temporarily losing some value. This maneuver required the project to replenish its reserves at a pace that it wasn’t able to keep, creating a lost value peg, which was never recovered.
Yield-Bearing Stablecoins
A new style of stablecoin has emerged as one of the fastest-growing options. Yield-bearing stablecoins share the reward the projects secure via DeFi passive income strategies with users. Notably, yield-bearing stablecoins are found mostly outside the US.
How Stablecoins Continue to Reshape the Market
Stablecoins are an innovation that continues to impact the market. These digital assets fall in line with the global trend toward deglobalization and de-dollarization. They are also seen by many as one of the best ways to get USD in and out of their countries and store value.
Retail Interest
Retailers continue to turn towards stablecoins as a way to conduct global commerce more efficiently and with reduced overhead. The cost of sending value via a stablecoin versus traditional methods is hard to compare as digital assets are much less expensive to use.
Interestingly, ARK’s study revealed that the main factors driving retail adoption are cost and convenience. The same report shows that Ethereum was the preferred blockchain for transactions over $100. It’s also the preferred stablecoin network for institutional traders and whales.
New Opportunities
Stablecoins have had an upending effect on the market. They continue to create new opportunities for smaller networks to ascend the market. Blockchains like Arbitrum, Base, and Optimism all have seen their market cap pushed higher by stablecoin demand. Notably, these networks are more commonly used for transactions under $100.
Transaction Volume vs. Visa & Mastercard
ARK also sheds some light on how stablecoins compare to traditional methods of payment like the major credit card providers. Impressively, stablecoin transaction volume reached 0.41% and 0.72% of those processed by Visa and Mastercard, around 110 million monthly transactions.
In 2024, the annualized transaction value of stablecoins hit a record high of $15.6T. This milestone represents massive growth and means that stablecoins were used for higher-value transactions versus credit cards. Specifically, they outpaced VISA and MASTERCARD by 119% and 200%.
Regulatory and Security Considerations
Serious regulatory and security considerations need to be taken into account when dealing with stablecoins. These assets are still fairly new to the economy. As such, they lack the regulatory framework of other assets. Consequently, there is a patchwork of fast-changing policies that shift based on the region, leading to future regulatory implications if laws change.
In the United States, it would appear as though this is about to change, as the current administration has made it explicitly clear that it is actively developing an approach to the issue, and will soon unveil framework for stablecoins.
Transparency
Transparency is among the main concerns for stablecoin holders. You need a project that provides in-depth auditing by a third party. This data needs to be gathered and shared frequently to ensure the asset remains pegged. In the past, transparency issues have led to stablecoin failing and traders losing their holdings.
In the case of the TerraUSD crash, the developers needed to make token holders aware of the risks sooner. This maneuver could have helped to save thousands of users their holdings. Since then, transparency has been a primary concern for developers, traders, and regulators.
Investment Considerations
There are several conditions that investors should think about when entering the stablecoin arena. For one, they should examine the underlying blockchains as a way to enter the market. Projects like Solana, Tron, Ethereum, and Base are leading the charge.
Another interesting investment consideration is how stablecoins continue to drive demand for US Treasury securities. Projects like Tether and Circle utilize these assets for reserves. Notably, they are already the 20th largest holder of these assets.
As demand for their tokens increases, there will be more buying pressure focused on treasury bonds as a means to provide stable backing. This pressure could result in billions in revenue.
Stablecoins’ Future as a Mainstream Financial Tool
From the data provided by ARK, it’s easy to see that stablecoin integration is in full swing. These assets have found a home across the retail market and will continue to be used to save on transfer fees and time. All of these factors demonstrate why you should expect to see even more stablecoins in the future.
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