Article from "Learning Times": The Technical Principles and Trust Logic of Stablecoins

In the context of digital finance accelerating its penetration into the global trade system, cryptocurrencies represented by Bitcoin and Ethereum have attracted widespread attention, but their severe price volatility makes them difficult to assume mainstream payment functions. Stablecoins represented by Tether (USDT) and USD Coin (USDC) establish anchoring mechanisms with fiat currencies, retaining the advantages of efficient circulation and low costs based on blockchain payments while avoiding the instability and other adverse factors of traditional cryptocurrencies, thus becoming a hot topic in current digital financial innovation. Recently, relevant bills and regulatory regulations introduced in the United States, the European Union, and Hong Kong have laid a compliance foundation for the development of stablecoins, which are increasingly favored by global compliant investors and gradually integrating into the mainstream financial system.

Currently, the total market value of global stablecoins has surpassed $280 billion, widely used in trading settlements, cross-border payments, asset tokenization, and other scenarios. Their development not only affects the digital financial ecosystem but also poses new challenges for financial risk prevention and control. The application of stablecoins relies on market trust, which stems from the transparent and verifiable mechanisms built by underlying technology, as well as the reliability of anchoring mechanisms and regulatory guarantees. Therefore, a deep understanding of the technical principles and trust logic behind their "stability" is a necessary prerequisite for grasping future digital financial innovation opportunities and potential regulatory risks.

Main Characteristics and Current Status of Stablecoins

Stablecoins are digital assets issued based on blockchain technology, maintaining their price stability relative to fiat currencies through an "anchoring mechanism." Initially, they were used as a medium for direct exchange of cryptocurrencies in cryptocurrency trading, and later developed into the underlying assets for participating in financial activities such as lending and staking within the decentralized financial ecosystem. Beyond cryptocurrency trading scenarios, stablecoins are gradually being applied in cross-border payments and trade settlements due to their near real-time settlement speed, low transaction costs, and 24/7 borderless circulation advantages.

The development of stablecoins has undergone an evolution from "exploration" to "regulation": In 2014, Tether officially launched USDT, a stablecoin aimed at a 1:1 fiat currency collateralization, bringing the value of the US dollar into the cryptocurrency market. With its intuitive anchoring model, USDT quickly achieved large-scale application, becoming the primary value stabilization tool in the crypto ecosystem. In 2017, MakerDAO issued DAI, pioneering the "over-collateralized crypto asset + smart contract liquidation" model, promoting the development of decentralized stablecoins. In 2020, the decentralized finance boom led to a surge in demand for stablecoins, introducing the concept of "stability" to the high-risk crypto market, allowing these complex financial activities to be conducted relatively safely and efficiently. In 2022, the algorithmic stablecoin UST collapsed due to algorithm failure, attracting global regulatory attention. In 2025, regulatory frameworks such as the U.S. "Guidance and Establishment of the U.S. Stablecoin National Innovation Act" (the "GENIUS Act") and Hong Kong's "Stablecoin Regulation" were introduced, laying a compliance foundation for the stablecoin industry and providing clearer expectations for its development direction. Since then, stablecoins have entered a new phase of "compliance development." The current stablecoin market presents two distinct characteristics: First, concentration at the top. As of August 2025, the total market value of stablecoins exceeds $280 billion, with USDT holding an absolute dominant position with about 60% market share, followed by other stablecoins like USDC, reflecting the market's deep trust in off-chain asset collateral models such as fiat currency; Second, reliance on mainstream public chain ecosystems. The three major public chains, Ethereum, Tron, and Solana, account for most of the market's stablecoin value and trading volume. As of August 2025, the market value of stablecoins on Ethereum exceeds $137 billion. Additionally, the accelerated entry of traditional financial institutions and the improvement of regulatory frameworks are driving stablecoins to expand into scenarios such as cross-border payments and tokenization of real-world assets (RWA).

Technical Principles of Stablecoins

The value stability and secure operation of stablecoins rely on the support of underlying technologies such as blockchain and smart contracts. Although the technical implementation paths of different types of stablecoins vary, the core logic is "anchored reliability, transparent mechanisms, and secure transactions."

First, the technical implementation differences among different types of stablecoins. Based on the anchoring mechanism, stablecoins can be divided into three main categories: off-chain asset collateralized, on-chain asset collateralized, and algorithmic stablecoins.

Firstly, off-chain asset collateralized stablecoins are the most common type of stablecoin, supported by off-chain reserves of equivalent fiat currency or equivalent assets (such as short-term bonds, gold) to maintain the stablecoin's value. The technical implementation mainly includes three aspects: asset custody, audit verification, and redemption mechanisms. USDT and USDC are representatives of this type of stablecoin.

Secondly, on-chain asset collateralized stablecoins support their value by over-collateralizing on-chain assets (such as Ether). Taking MakerDAO's DAI as an example, users need to collateralize cryptocurrencies like Ethereum into a smart contract, and the system generates a corresponding amount of stablecoins based on the collateralization ratio requirement (e.g., 150%). When the value of the collateralized assets drops, leading to a low collateralization ratio, the system automatically triggers a liquidation mechanism to sell part of the collateralized assets to maintain the value support of the stablecoin. The purpose of over-collateralization here is to mitigate the risks brought by the volatility of on-chain assets.

Thirdly, algorithmic stablecoins support their value through an algorithm-driven supply and demand adjustment mechanism. The core principle is to automatically adjust the supply of stablecoins through smart contracts: when the price exceeds the pegged value, the protocol increases the supply through methods such as issuance; when the price falls below the pegged value, the protocol reduces the supply through buybacks, bond issuance, etc., guiding the price back to the target.

Second, blockchain provides a trust infrastructure for stablecoin operations. Blockchain is a distributed ledger technology where each newly generated block is tightly linked to the previous block through cryptographic hashing (a unique digital fingerprint), forming a chain of interconnected data. Any slight modification to historical data will cause a chain reaction of changes to the "fingerprints" of all subsequent blocks, making such tampering easily identifiable and rejected. At the same time, the integrity of the data is ensured by having multiple or all nodes hold the same copy of the ledger, allowing participants to trust the data recorded on the blockchain. Blockchain can issue its native coins, such as Ether being the native coin of the Ethereum blockchain Stablecoins are typically issued and managed based on smart contracts on specific blockchains, and native coins are often required to pay transaction fees on the blockchain in transactions involving stablecoins.

The consensus mechanism is the core mechanism of blockchain, allowing multiple or all nodes to participate in the generation of data on the blockchain through a decentralized consensus mechanism. For example, Ethereum adopts a "Proof of Stake (PoS)" mechanism, determining transaction validation rights based on the scale of compliant assets held by nodes and their credit status; Tron and Solana adopt a "Delegated Proof of Stake (DPoS)" mechanism, where a trusted validation group is elected through node voting to be responsible for transaction validation and block generation. Because the process and results of data generation on the blockchain are transparent and traceable, it can be summarized as "full participation, transparent process," thus gaining high trust from all parties involved in the blockchain ecosystem.

Third, smart contracts are the "automation hub" for stablecoin operations. Smart contracts are automated execution codes deployed on the blockchain that can complete operations such as asset issuance, transfer, and destruction according to preset rules. Stablecoin suppliers have automated the minting and burning functions through smart contracts, ensuring the matching relationship between the supply of stablecoins and the collateral assets. At the same time, smart contracts are also responsible for managing the locking and liquidation of collateral assets, triggering liquidation processes in a timely manner to prevent systemic risks when the market experiences severe fluctuations. Different types of stablecoins have varying focuses on the application of smart contracts: in off-chain asset collateralized stablecoins, smart contracts are mainly used for on-chain issuance, redemption, and audit records; in on-chain asset collateralized stablecoins, smart contracts undertake core functions of collateral management and risk control; in algorithmic stablecoins, smart contracts are responsible for automatically adjusting supply based on market price changes to achieve price anchoring. The transparency and multi-center execution of smart contracts not only enhance user trust but also reduce the risk of human manipulation, achieving safety and efficiency in the issuance and management of stablecoins.

The Trust Logic of Stablecoins

The core competitiveness of stablecoins lies in "trust," meaning users believe they can exchange them for fiat currency at their pegged price at any time.

First, the anchoring and reserve mechanism: the foundation of trust. In terms of the reliability of the anchoring and reserve mechanism, the three types of stablecoins present different characteristics.

Off-chain asset collateralized stablecoins rely on the authenticity and liquidity of reserve assets, as well as the compliant operation and transparent auditing of the issuing institution. Taking USDC as an example, its reserves mainly consist of cash and short-term U.S. Treasury bonds, verified by a third party every month, thus having relatively high credibility. Factors such as the scope of verification, audit frequency, institutional independence, and the proportion of highly liquid assets in reserves are key to risk control for this type of stablecoin.

On-chain asset collateralized stablecoins rely on the dual protection of over-collateralization and automated liquidation. Tokens like DAI set a collateralization rate of no less than 150%, reserving buffer space for price fluctuations, while the smart contract-driven liquidation mechanism ensures that when the price of pledged assets reaches the liquidation threshold, the auction process triggered automatically can quickly recover funds. The degree of diversification of collateral assets (to avoid excessive concentration of a single asset), the accuracy of oracle price feeds, and the emergency response capability of governance mechanisms are key to risk control for this type of stablecoin The price stabilization mechanism of algorithmic stablecoins has structural flaws. Its design, which lacks actual asset collateral, makes its stability entirely dependent on the effectiveness of supply-demand adjustment algorithms and market arbitrage behavior.

Second, the verifiability of technical guarantees: the transparent support of trust. Technology is not the only source of trust, but it provides tools that are "verifiable and traceable" for trust. On one hand, the transparency of blockchain allows stablecoins to have "key data that can be checked," without relying on the "unilateral statements" of the issuing institution; on the other hand, the open-source nature of smart contracts allows "mechanism rules to be audited," enabling global developers to collectively audit code vulnerabilities and propose repair plans through community governance after discovering issues (such as DAI optimizing its liquidation mechanism through community voting), forming a "technical consensus supervision" that reduces the risk of "opaque operations." In addition, compliance rules can be embedded in smart contracts to provide timely supervision of stablecoin activities directly at the contract level.

Third, the constraints of regulatory laws: institutional guarantees of trust. If technology and reserves are "intrinsic trust," then regulation is an "external trust supplement." The construction of trust in stablecoins cannot be separated from clear and robust regulatory legal constraints. By clarifying rules to reduce market chaos, users can have more confidence in the compliance and safety of stablecoins.

Currently, major jurisdictions around the world are actively exploring ways to incorporate stablecoins into effective regulation to maintain financial stability, protect user rights, and provide clear normative expectations for healthy market development. Whether it is the U.S. "GENIUS Act," the European Union's "Markets in Crypto-Assets Regulation" (MiCA), or Hong Kong's "Stablecoin Regulation" effective from August 1, 2025, they all fundamentally construct a rigorous regulatory framework from aspects such as issuer access licensing, reserve asset management, user rights protection, and comprehensive information disclosure, implementing the principle of "same activities, same risks, same regulation." These regulatory measures not only prevent "issuing institutions from violating regulations" (such as over-issuance and misappropriation of reserves) but also provide "institutional safety nets" for user rights, transforming stablecoins from "unregulated innovative attempts" to "compliant financial instruments."

Challenges and Outlook

From a practical perspective, the development of stablecoins faces severe challenges in three areas: regulatory technology, currency value stability, and institutional governance.

First, the challenge of regulatory technology. Many stablecoin transactions occur between decentralized platforms or personal wallets, bypassing compliance procedures such as KYC (Know Your Customer) required by traditional financial industries. Currently, there is still a lack of large-scale regulatory infrastructure for stablecoins and on-chain transactions globally, making it difficult to trace and handle funds entering the stablecoin and blockchain ecosystem. This situation has effectively facilitated illegal activities such as ransomware, money laundering, and fraud within the stablecoin and blockchain ecosystem.

Second, the challenge of currency value stability. For fiat-collateralized stablecoins, their value support heavily relies on the transparency of reserve assets and regular audits. However, past markets have seen multiple occurrences of opaque reserve information and stablecoin price decoupling, triggering widespread market panic Third, the challenges of systems and governance. The global operational characteristics of stablecoins sharply contradict the fragmented regulatory status of various countries, and an effective international regulatory coordination mechanism is still lacking, making it difficult to address the cross-border risks they bring. In addition, stablecoins are a completely new concept for the majority of the domestic population, and ordinary people are easily susceptible to various scams, thus there is an urgent need to strengthen knowledge dissemination and risk warning publicity at the social level.

Looking ahead, thanks to the expansion of cross-border payment scenarios, the supply of stablecoins may continue to rise significantly from the current scale of hundreds of billions of dollars to trillions of dollars. First, stablecoins are expected to gradually penetrate into areas such as supply chain finance and real estate tokenization, transforming from a single payment tool into mainstream financial infrastructure; second, the regulatory environment is becoming increasingly mature, and the regulatory frameworks of major economies such as the United States, the European Union, and Hong Kong will provide clear compliance guidelines for stablecoin issuers, further attracting various institutions to participate in market layout; third, technological innovation is accelerating breakthroughs, and some solutions that effectively enhance the scalability of the underlying network while balancing regulatory privacy protection capabilities are expected to be implemented.

To address the various challenges in the development of stablecoins, a multi-dimensional comprehensive response strategy needs to be established: at the regulatory technology level, efforts should be increased in research and development investment to promote the construction of regulatory infrastructure for the global blockchain ecosystem, ensuring the orderly compliance and innovation of the stablecoin ecosystem through big data and artificial intelligence technologies. Promote the development of standardized smart contract systems, introduce AI-driven auditing tools to achieve automated detection of code vulnerabilities, and integrate regulatory rules more extensively into contracts to effectively reduce systemic risks. In terms of enhancing the reliability of anchoring mechanisms and reserve management, measures such as establishing real-time reserve proof systems and introducing independent third-party auditing institutions should be taken to urge issuers to proactively and transparently disclose asset details and operational data, thereby strengthening user trust in stablecoins and consensus in the market ecosystem. In terms of systems and governance, promote international cooperation, establish consistent regulatory collaboration processes, and reduce cross-border compliance barriers; at the same time, strengthen domestic user education, enhance public digital financial literacy, and increase users' risk prevention awareness to curb fraud and other illegal activities.

Author of this article: Han Weili, Vice Dean of the School of Software, Fudan University, Source: "Learning Times", Original Title: "The Technical Principles and Trust Logic of Stablecoins"

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