More and more people have been asking lately what stablecoins are and what different types of stablecoins exist. Honestly, I think stablecoins are something beginners often overlook, but they’re actually extremely important.

Simply put, stablecoins are cryptocurrencies whose prices don’t fluctuate up and down like BTC or ETH. Their core role is to give you a safe harbor when the market is in chaos. Imagine you’re a bakery owner: today you receive 1 Bitcoin worth $10,000, but tomorrow it might be worth only $5,000. Who can handle days like that? That’s why stablecoins came about. In 2014, Tether launched USDT, and later institutions like MakerDAO and Paxos rolled out their own stablecoin products one after another.

When it comes to the specific types of stablecoins, I divide them into four main categories. First are fiat-collateralized stablecoins, which are issued using real currencies like the US dollar and the euro as collateral. USDT, USDC, and BUSD all fall into this category, and they are currently the most mainstream in the market. Next are crypto-collateralized stablecoins, such as DAI and MIM, which are generated by collateralizing other crypto assets—the risk being that if the collateral’s price crashes, it may be subject to forced liquidation. There are also commodity stablecoins, such as PAXG, which are pegged to gold. Finally are algorithmic stablecoins, which rely entirely on algorithms to adjust the supply in order to maintain their price—these carry the highest risk, and the UST collapse in 2022 is a typical lesson.

Why are stablecoins so important? There are three core reasons. First is payment efficiency: cross-border transfers are fast and low-cost, far better than traditional bank remittances. Second is the need for hedging: when the market experiences extreme volatility, investors can quickly convert to stablecoins to lock in gains. Third is DeFi infrastructure: almost all lending and liquidity mining projects operate with stablecoins as their core assets.

But stablecoins aren’t perfect, either. The issue of reserve transparency has always existed, and investors generally question whether USDT truly has 100% US dollar reserves. Centralization risk is also very real. For example, the US SEC directly halted BUSD, which shows that regulators can change the rules at any time. I mentioned the liquidation risk of crypto stablecoins earlier. Another problem that’s easy to overlook is geopolitical risk: currently, more than 90% of stablecoins are pegged to the US dollar, which may expose users in non-US areas to foreign exchange controls or impacts from monetary policy.

As for the current market situation, as of August 2025, the total market cap of stablecoins exceeds $2681.8 billion, and this figure has continued to grow. Regulatory frameworks across countries are also being rapidly improved. The US, Hong Kong, Japan, and the European Union have all introduced or revised stablecoin regulations in succession. Hong Kong’s stablecoin regulations are the first comprehensive piece of legislation globally, requiring issuers to obtain a license from the Hong Kong Monetary Authority. This trend is clear: in the future, compliance will be a key factor in whether stablecoin projects can survive.

I think there are several clear directions for the future of stablecoins. First is the rise of diversified stablecoin ecosystems—no longer dominated solely by the US dollar. Hong Kong is promoting offshore renminbi stablecoin pilot programs; Japan has launched JPY stablecoins; and countries in South America are also exploring stablecoins based on their own currencies to combat high inflation. Second is expansion of use cases—not just as a trading medium. There is huge potential in areas like RWA tokenization and cross-border payment settlement. Technically, multi-chain deployment and privacy technologies such as zero-knowledge proofs will also make stablecoins more flexible.

If you want to make money from stablecoins, honestly, the opportunities are limited, but they do exist. Because their price volatility is small, there are generally two approaches. First is trading volatility. For example, if you hold a large amount of USDC and see the USDT/USDC price fall, you buy USDT and then sell after it recovers for arbitrage. But this kind of short-term strategy requires sharp market instincts, and black swan events are hard to catch—like the USDC de-pegging triggered by the Silicon Valley Bank crisis in 2023. Second is earning yield by providing collateral or liquidity, especially when new stablecoins launch. Project teams typically offer high returns to attract participants. However, keep in mind that stablecoin trading isn’t suitable for long-term holding, as it can waste capital efficiency.

Overall, stablecoins have evolved from fringe tools into foundational infrastructure for crypto finance. If you haven’t yet delved deeply into the application scenarios and risk characteristics of stablecoins, now is a good time to catch up. The market is changing rapidly, and regulatory frameworks are improving. Understanding these fundamentals is important for your future investment decisions.