[author]HAN Weili

[content]

The technical principles and trust logic of stablecoins

HAN Weili

a professor and doctoral supervisor at the College of Computer Science and Artificial Intelligence, and the vice dean of the Software School of Fudan University

Against the backdrop of digital finance's accelerated penetration into the global trade system, cryptocurrencies represented by Bitcoin and Ether have drawn widespread attention. However, due to their sharp price fluctuations, they are difficult to fulfill the mainstream payment function. Stablecoins represented by Tether (USDT) and US dollar stablecoins (USDC) have become a hot spot in current digital financial innovation by establishing an anchoring mechanism with fiat currencies. This not only retains the advantages of efficient circulation and low cost of blockchain-based payments but also avoids the unfavorable factors such as instability of traditional cryptocurrencies. Recently, relevant laws and regulations introduced by the United States, the European Union, and Hong Kong, China, have laid a compliance foundation for the development of stablecoins. Stablecoins are now favored by compliant investors worldwide and are gradually integrating into the mainstream financial system.

At present, the total market capitalization of global stablecoins has exceeded 280 billion US dollars, and they are widely used in scenarios such as transaction settlement, cross-border payment, and asset tokenization. Their development not only affects the digital financial ecosystem but also poses new challenges to the prevention and control of financial risks. The application of stablecoins relies on the market's trust in them. This trust stems not only from the transparent and verifiable mechanism constructed by the underlying technology but also from the reliability and regulatory guarantee of the anchoring mechanism. In this regard, a thorough understanding of the technical principles and trust logic behind its "stability" is a necessary prerequisite for seizing the future opportunities of digital financial innovation and potential regulatory risks.

1.The main features and current situation of stablecoins

Stablecoins are digital assets issued based on blockchain technology, maintaining their price stability relative to fiat currencies through an "anchoring mechanism". It was initially used as a medium to directly exchange cryptocurrencies in cryptocurrency transactions, and later developed into the underlying asset for participating in lending, staking and other quasi-financial activities in the decentralized financial ecosystem. Beyond the cryptocurrency trading scenario, stablecoins are gradually being applied in cross-border payments and trade settlements due to their advantages such as nearly real-time settlement speed, low transaction costs, and 7× 24-hour borderless circulation.

The development of stablecoins has undergone an evolution from "exploration" to "standardization" : In 2014, Tether Company officially launched USDT, a stablecoin aimed at 1:1 fiat currency collateral, introducing the value of the US dollar into the cryptocurrency market. With its intuitive anchoring mode, USDT has rapidly achieved large-scale application and has become the most important value stabilization tool in the crypto ecosystem. In 2017, MakerDAO issued DAI, pioneering the "excess crypto asset collateral + smart contract clearing" model and promoting the development of decentralized stablecoins. In 2020, the decentralized finance boom drove a sharp increase in the demand for stablecoins. Stablecoins introduced the concept of "stability" to the high-risk crypto market, enabling such complex financial activities to be carried out relatively safely and efficiently. In 2022, the algorithmic stablecoin UST collapsed due to algorithmic failure, drawing global regulatory attention. In 2025, regulatory laws such as the "GENIUS Act" guiding and Establishing the National Innovation Act for Stablecoins in the United States and the "Stablecoin Ordinance" of Hong Kong, China, were introduced, laying a foundation for compliance in the stablecoin industry. At the same time, it also gave all market participants a clearer expectation of its development direction. Since then, stablecoins have entered a new stage of "compliant development".

The current stablecoin market presents two distinct features: First, there is a concentration of top players. As of August 2025, the total market capitalization of stablecoins exceeds 280 billion US dollars, with USDT holding an absolute dominant position with approximately 60% of the share, followed closely by other stablecoins such as USDC, reflecting the market's deep trust in off-chain assets like fiat currency collateral models. Second, it relies on the mainstream public chain ecosystem. The three major public chains, Ethereum, Tron, and Solana, carry the majority of the market capitalization and trading volume of stablecoins. As of August 2025, the market capitalization of stablecoins on Ethereum exceeded 137 billion US dollars. In addition, the accelerated entry of traditional financial institutions and the improvement of regulatory frameworks are promoting the in-depth expansion of stablecoins into scenarios such as cross-border payments and the tokenization of real-world assets (RWA).

2.The technical principle of stablecoins

The value stability and safe 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 all "reliable anchoring, transparent mechanism, and transaction security".

One is the technical implementation difference among various types of stablecoins. According to the differences in anchoring mechanisms, stablecoins can be classified into three major categories: off-chain asset-backed, on-chain asset-backed, and algorithmic stablecoins.

Firstly, off-chain asset-backed stablecoins are the most common type of stablecoins, which support the value of the stablecoin by holding an equivalent amount of fiat currency or equivalent assets (such as short-term bonds or gold) off-chain reserves. The technical implementation mainly includes three links: asset custody, audit verification and redemption mechanism. USDT and USDC are representatives of this type of stablecoin.

Secondly, on-chain asset-backed stablecoins support the value of stablecoins by over-collateralizing on-chain assets (such as Ether). Take MakerDAO's DAI as an example. Users need to collateral crypto assets such as Ethereum into the smart contract, and the system will generate the corresponding amount of stablecoins based on the collateral rate requirement (such as 150%). When the value of the collateral assets drops, resulting in an excessively low collateral ratio, the system will automatically trigger the liquidation mechanism and sell off some of the collateral assets to maintain the value support of the stablecoin. The purpose of over-collateralization here is to address the risks brought about by the sharp fluctuations of on-chain assets.

Thirdly, algorithmic stablecoins support the value of stablecoins through an algorithm-driven supply and demand regulation mechanism. The core principle is to automatically adjust the supply of stablecoins through smart contracts: when the price is higher than the anchor value, the protocol increases the supply through methods such as additional issuance; When the price drops below the anchor value, the agreement reduces the supply through means such as repurchase and bond issuance, thereby guiding the price back to normal.

Second, blockchain provides a trust infrastructure for the operation of stablecoins. Blockchain is a distributed ledger technology. Each newly generated block is closely linked to the previous one through a cryptographic hash (a unique digital fingerprint), forming a chain of interlocking data. Any minor alteration to historical data will cause a chain change in the "fingerprint" of all subsequent blocks. Such tampering can be easily identified and rejected. Meanwhile, by holding the same copy of the ledger through multiple or all nodes, the integrity of the data is guaranteed, enabling participants to trust the data recorded on the blockchain. Blockchain can issue its native currency. For instance, Ether is the native currency of the Ethereum blockchain. Stablecoins are usually issued and managed based on smart contracts of specific blockchains. In transactions involving stablecoins, native coins are often required to pay transaction fees on the blockchain.

The consensus mechanism is the core mechanism of blockchain. Through the decentralized consensus mechanism, multiple or all nodes can participate in the generation of data on the blockchain chain. For instance, Ethereum adopts the "Proof of Stake (PoS)" mechanism, determining the transaction verification authority of a node based on the scale of compliant assets it holds and its credit status. Tron and Solana adopt the "Delegated Proof of Stake (DPoS)" mechanism, where a trusted verification community is elected through node voting, which is responsible for transaction verification and block generation. Because the generation process and results of data on the blockchain are transparent and traceable, and the process can be summarized as "full participation and transparent process", it has gained high trust from all parties involved in the blockchain ecosystem.

Third, smart contracts serve as the "automated hub" for the operation of stablecoins. Smart contracts are automated execution codes deployed on the blockchain, capable of completing operations such as the issuance, transfer, and destruction of assets according to preset rules. Stablecoin providers have automated the minting and burning functions through smart contracts, ensuring the matching relationship between the supply of stablecoins and the collateral assets. Meanwhile, smart contracts are also responsible for managing the locking and liquidation of collateral assets. When the market experiences sharp fluctuations, they can promptly trigger the liquidation process to prevent systemic risks. The application focus of smart contracts varies among different types of stablecoins: In off-chain asset-backed stablecoins, smart contracts are mainly used for on-chain issuance, redemption and audit records; In on-chain asset-backed stablecoins, smart contracts undertake the core functions of collateral management and risk control. In algorithmic stablecoins, smart contracts are responsible for automatically adjusting the supply based on changes in market prices 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 operation, achieving the security and efficiency of stablecoin issuance and management.

3.The trust logic of stablecoins

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

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

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

On-chain asset-backed stablecoins rely on the dual protection of over-collateralization and automated clearing. Currencies such as DAI set a collateral ratio of no less than 150% to reserve a buffer space for price fluctuations. Meanwhile, the clearing mechanism driven by smart contracts ensures that when the price of the pledged assets reaches the clearing threshold, the automatically triggered auction process can quickly recover funds. The dispersion of collateral assets (to avoid an excessively high proportion of a single asset), the accuracy of oracle price feeding, and the emergency response capability of governance mechanisms are the keys to risk control for this type of stablecoin.

The price stabilization mechanism of algorithmic stablecoins has structural flaws. Its design without actual asset collateral makes its stability entirely dependent on the effectiveness of supply and demand adjustment algorithms and market arbitrage behaviors.

Second, the verifiability of technical support: transparent support for trust. Technology is not the sole source of trust, but it provides a "verifiable and traceable" tool for it. On the one hand, the transparency of blockchain enables stablecoins to have "key data accessible" without relying on the "unilateral statement" of the issuing institution. On the other hand, the open source nature of smart contracts enables "verifiable mechanism rules", allowing global developers to jointly audit code vulnerabilities. Once problems are identified, they can propose repair solutions through community governance (for instance, DAI once optimized its clearing mechanism through community voting), forming "technical consensus supervision" and reducing the risk of "under-the-table operations". In addition, compliance rules can be embedded in smart contracts to directly and promptly supervise stablecoin activities at the contract level.

Third, the constraints of regulatory laws and regulations: Institutional guarantees of trust. If technology and reserves are "internal trust", then regulation is "a supplement to external trust". The trust construction of stablecoins cannot do without clear and stable regulatory and legal constraints. By clarifying rules to reduce market chaos, users can have more confidence in the compliance and security of stablecoins.

At present, major legal jurisdictions around the world are actively exploring the inclusion of stablecoins on an effective regulatory track to maintain financial stability, protect user rights and interests, and provide clear regulatory expectations for the healthy development of the market. Whether it is the "GENIUS Act" in the United States, the "Crypto Assets Market Regulation Act" (MiCA) in the European Union, or the "Stablecoin Regulation" in Hong Kong, China, which will come into effect on August 1, 2025, they have basically all established a strict regulatory framework from aspects such as issuer access licensing, reserve asset management, user rights protection, and comprehensive information disclosure. Implement the principle of "same activities, same risks, same supervision". These regulatory measures not only prevent "illegal operations by issuing institutions" (such as over-issuance and misappropriation of reserves), but also provide a "system safety net" for users' rights and interests, transforming stablecoins from "innovative attempts lacking regulation" to "compliant financial tools".

4.Challenges and Prospects

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

The first is the challenge of regulatory technology. Many stablecoin transactions take place between decentralized platforms or personal wallets, bypassing compliance procedures such as KYC (Know Your Customer) that are required in the traditional financial industry. At present, there is still a lack of large-scale regulatory infrastructure for stablecoins and blockchain on-chain transactions on a global scale. Funds entering the stablecoin and blockchain ecosystem are difficult to track and dispose of. This situation actually provides convenience for illegal activities such as ransomware, money laundering, and fraud in the stablecoin and blockchain ecosystem.

The second is the challenge of currency stability. For fiat currency-backed stablecoins, their value support is highly dependent on the transparency of reserve assets and regular audits. However, in the past, there have been multiple incidents in the market such as opaque reserve information and stablecoin price de-anchoring, which have triggered widespread market panic.

The third is the challenge of systems and governance. The global operational characteristics of stablecoins are in sharp contradiction with the current regulatory situation of each country governing separately. An effective international regulatory coordination mechanism is still lacking, making it difficult to deal with the cross-border risks it brings. In addition, stablecoins are a brand-new concept for the majority of the domestic public. It is very easy for ordinary people to fall into various scams. Therefore, it is urgent to enhance the popularization of knowledge and risk warning publicity at the social level.

Looking ahead, thanks to the expansion of cross-border payment scenarios, the supply of stablecoins is likely to continue to rise significantly from the current scale of hundreds of billions of US dollars to trillions of US dollars. First, stablecoins are expected to gradually penetrate into areas such as supply chain finance and real estate tokenization, promoting their transformation from a single payment tool to a mainstream financial infrastructure. Second, the regulatory environment is becoming increasingly mature. The regulatory frameworks of major economies such as the United States, the European Union, and Hong Kong, China, will provide clear compliance guidelines for stablecoin issuers, further attracting various institutions to participate in market layout. Third, technological innovation is accelerating its breakthroughs. Some solutions that effectively enhance the scalability of the underlying network and can also take into account the privacy protection capabilities of supervision are expected to be implemented.

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