What is Stablecoin?

A stablecoin is a type of cryptocurrency pegged to fiat currency, commodities, or other assets designed to maintain relative price stability. Unlike highly volatile crypto assets such as Bitcoin and Ethereum, stablecoins are typically pegged to a stable asset (e.g., the US dollar) at a 1:1 ratio, resulting in a relatively fixed price. This stability makes them an essential tool in the crypto market, particularly in the following scenarios:

Store of Value and Medium of Exchange: The stability of stablecoins makes them a reliable store of value and medium of exchange. Especially during periods of market volatility, users can convert unstable cryptocurrencies into stablecoins to avoid the risks associated with price fluctuations.

Core Asset of the DeFi Ecosystem: In decentralized finance (DeFi), many protocols and lending platforms operate based on stablecoins. Users can use stablecoins for lending, liquidity mining, and other operations to earn returns.

Cross-Border Payments and Remittances: The global nature and stability of stablecoins make them a new choice for cross-border payments and remittances, allowing users to bypass traditional financial systems and avoid high exchange rate fees.

Types of Stablecoins

Stablecoins are primarily classified based on their value-pegging mechanisms and the underlying assets that support them. They can be categorized into the following types:

1. Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins maintain price stability by being pegged 1:1 to fiat currency and backed by fiat reserves. For example, USDT and USDC are pegged to the US dollar, with companies like Tether or Circle holding equivalent dollar reserves to ensure redemption. The advantages include price stability and simplicity, with centralized institutions managing and controlling these assets transparently. However, the drawback lies in the need to trust the issuing company, as the transparency and compliance of reserves are often questioned.

RWA stablecoins (Real-World Asset-Backed Stablecoins) are backed by real-world assets such as bonds, real estate, commodities, or fiat deposits. These stablecoins offer enhanced stability, compliance, and capital efficiency compared to traditional stablecoins. By digitizing real-world assets, RWA stablecoins ensure their value aligns with the assets and use blockchain technology for transparency and auditability.

Notable examples of RWA stablecoins include USD0 (USUSAL) and USDZ (ANZ). USD0, issued by Usual, is backed by short-term US Treasury securities, prioritizing safety and stability while catering to low-risk preference users by offering potential yields from debt returns. On the other hand, USDZ, launched by ANZ Bank, supports cross-border payments and fund management, with underlying assets comprising high-rated deposits and money market funds to ensure compliance and capital efficiency.

2. Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins achieve stability by over-collateralizing cryptocurrency assets, typically managed through decentralized smart contracts. A prime example is DAI, where users lock assets like ETH as collateral on-chain, and smart contracts automatically issue DAI, pegging it to the US dollar. The advantages of this approach include high transparency, complete decentralization, and no reliance on third parties. However, the drawbacks include the need to over-collateralize crypto assets, system complexity, and exposure to liquidation risks. For instance, DAI, introduced by MakerDAO, maintains stability by over-collateralizing cryptocurrencies like ETH.

3. Algorithmic Stablecoins

Algorithmic stablecoins maintain stability through smart contract algorithms that manage supply and demand, without requiring any collateral. These stablecoins adjust prices by issuing or repurchasing tokens during market fluctuations, keeping their value close to the target price. However, due to the lack of actual asset backing, algorithmic stablecoins carry a higher price volatility risk. The advantages include independence from collateral, the ability to adjust supply based on demand, and a high degree of decentralization. The downside is the potential for price collapse under significant market pressure, as seen in the case of UST (now defunct), which was part of the Luna ecosystem and maintained price stability through an algorithmic mechanism with LUNA. A newer entrant in 2024, USDE, represents a next-generation decentralized algorithmic stablecoin. USDE ensures solvency through over-collateralization and automated liquidation mechanisms, requiring users to lock crypto assets valued at 150% or more of the USDE generated. The system automatically liquidates if collateral value falls below the safety threshold to mitigate risks. Additionally, USDE integrates algorithmic regulation, using incentive mechanisms to increase or decrease supply when prices rise above or fall below $1, thus maintaining its stable peg to the US dollar.

4. Commodity-Collateralized Stablecoins

Commodity-collateralized stablecoins maintain price stability by being backed by physical commodities such as gold, silver, or oil. The value of these stablecoins is typically pegged to the price of the underlying commodity, making them suitable for users looking to hold traditional commodity value within the crypto market. These stablecoins are relatively stable in value, tied to real assets, and can serve as a hedge against inflation. However, similar to fiat-backed stablecoins, they come with high costs for storage, management, and transportation of the commodities, and require trust in the issuing company. An example is PAX Gold (PAXG), backed by physical gold, with each PAXG representing one ounce of gold.

Purpose of Stablecoin Investment

Achieving Stable Returns
Amid the extreme volatility of the cryptocurrency market, stablecoin yield products offer investors a more reliable source of income. Users can earn interest, platform tokens, or compound returns by depositing stablecoins into decentralized finance (DeFi) protocols or centralized exchange investment products. These yields are often higher than traditional financial institutions’ deposit rates, making them attractive to investors.

Hedging Against Market Volatility
Since the value of stablecoins is pegged to fiat currencies (e.g., the US dollar) and experiences minimal price fluctuations, they avoid the high-risk characteristics of the crypto asset market. During uncertain or volatile market conditions, investors can use stablecoins as a safe haven while waiting for better entry opportunities.

Increasing Capital Utilization Efficiency
Stablecoin yield products allow idle stablecoin assets to be put to productive use. For holders of highly liquid crypto assets, stablecoins can provide liquidity while also generating returns, improving capital efficiency. By depositing stablecoins into liquidity pools or lending protocols, investors can earn interest and benefit from compound growth.

A Frictionless Tool for Global Returns
The decentralized and cross-border nature of stablecoins makes them especially suitable for investors seeking to earn returns globally. The openness of crypto finance enables investors worldwide to easily participate in diverse yield products, achieving 24/7 wealth growth.

A Low-Risk Component in Portfolio Strategies
For investors aiming to balance risk within their crypto portfolios, stablecoin yield products serve as a conservative asset allocation option. As a low-risk component of a portfolio, stablecoins can help diversify risk while enhancing overall returns.

Stablecoin Yield Strategies

Liquidity Mining

Stablecoin liquidity mining involves earning trading fees and platform token rewards by depositing stablecoins into liquidity pools on decentralized exchanges. This strategy includes various methods such as single-asset pool mining, paired-asset mining, leveraged mining, yield aggregation mining, and participating in emerging protocols. The benefits include diverse income sources, flexible investments, and relatively low risk, making it suitable for long-term stablecoin holders. However, it also carries risks such as impermanent loss, smart contract vulnerabilities, market volatility, capital concentration, and high fees.

Single-Asset Liquidity Mining

Single-asset liquidity mining allows users to deposit a single cryptocurrency into a liquidity pool to provide liquidity and earn rewards. This approach avoids the impermanent loss risk found in dual-asset pools since users only provide one asset, such as ETH or USDT. Platforms use automated market maker (AMM) mechanisms to ensure pool liquidity and reward users proportionally to their contribution. While simple and low-risk, it requires attention to market fluctuations and platform security, making it ideal for risk-averse users.

Paired-Asset Liquidity Mining

Paired-asset liquidity mining involves providing liquidity for a pair of assets on a decentralized exchange, earning a share of trading fees and platform token rewards. Users deposit two assets into a liquidity pool and receive LP tokens representing their share. While generating rewards, this strategy carries risks such as impermanent loss from market fluctuations and potential smart contract vulnerabilities. Paired-asset mining offers diverse income sources but comes with associated risks.

Leveraged Liquidity Mining

Leveraged liquidity mining amplifies returns by borrowing additional funds through lending platforms and reinvesting them into liquidity pools. Users can collateralize assets to borrow more stablecoins, maximizing trading fee returns and token rewards. The core strategy relies on leverage to increase potential earnings. However, it also entails higher risks, including borrowing costs that may erode profits, especially if dynamic interest rates rise. Falling collateral value may trigger liquidation, resulting in asset loss. Additionally, platform vulnerabilities and operational risks can jeopardize fund safety.

Innovative Liquidity Mining

Innovative liquidity mining focuses on early-stage platforms and protocols that offer high returns to attract liquidity. These projects often provide significant token rewards while implementing innovative mechanisms such as Balancer’s multi-asset dynamic pools or DeFi 2.0’s protocol-owned liquidity (POL). While these mechanisms enhance capital efficiency and reduce reliance on external liquidity providers, they come with high risks, including price volatility of new tokens, technical issues, and unaudited contracts. Intense industry competition can lead to reduced rewards or project failure after initial hype.

A recent example of innovative liquidity mining is Pendle, which offers a novel stablecoin staking strategy by enabling users to tokenize their stablecoin yields through Yield Tokens (YT) and Principal Tokens (PT). Users convert stablecoins into YT, representing future yields, and PT, representing the principal. Pendle also provides compounding strategies, allowing users to reinvest earnings or participate in liquidity mining to earn additional YT. Rewards primarily come from trading fee shares and Pendle’s native token rewards, with potential YT value appreciation as market recognition grows. Pendle’s staking mechanism and compounding strategies offer an efficient yield growth pathway while enhancing liquidity providers’ capital returns.

Automated Yield Optimization

Automated yield optimization, or Yield Aggregator, is a strategy that uses smart contracts to automatically deploy users’ crypto assets into high-yield liquidity pools or lending platforms, reinvesting the returns to enhance compound growth rates. The core of this strategy lies in leveraging automation to reduce manual operations and help users maximize returns.

The strategy works through capital aggregation, strategy execution, yield reinvestment, and strategy switching. Users can select various options, including single-asset deposits, multi-asset liquidity pools, leverage optimization, and compound rewards. Income sources include liquidity mining rewards, trading fee shares, lending interest, and the compounding effect. Prominent platforms offering such services include Yearn Finance, Beefy Finance, Autofarm, and Convex Finance. Key advantages of this strategy are automation, yield maximization, efficient resource utilization, diverse options, and risk diversification. However, it also comes with risks such as smart contract vulnerabilities, centralization issues, fee erosion, lack of transparency, and market volatility. It is particularly suitable for beginner users, long-term investors, and small-scale investors sensitive to gas fees. To minimize risks, investors should prioritize well-known and secure platforms, diversify investments, regularly monitor performance, and consider management and performance fees. With proper selection and execution, users can simplify operations while maximizing long-term returns.

Compound Reward Strategy

The Compound Reward Strategy involves reinvesting liquidity mining reward tokens into the original asset pool or other high-yield strategy pools, achieving rolling growth of returns. The core concept leverages the compounding effect, converting reward yields into principal to significantly enhance long-term gains. Users can reinvest manually or use platforms like Beefy Finance or Convex Finance to automate the process. Revenue sources include liquidity mining rewards, trading fee shares, and compound growth. The strategy’s advantages include yield maximization, automation, flexibility, and reduced opportunity costs.

Comparison of Investment Plans Across Different Platforms

Risk Reminder

Stablecoins, as an important investment tool, have attracted many users for financial management. However, despite their apparent appeal due to price stability and high yields, investing in stablecoins is not without risks.

Platform risk is one of the foundational concerns for stablecoin investments. Operational instability or security vulnerabilities in lending platforms or DeFi protocols can threaten the safety of funds. For example, smaller or emerging DeFi platforms, due to a lack of mature management and technical support, may face operational issues or even fund loss as user assets grow. Furthermore, platforms themselves may become targets for hackers. Notable incidents in recent years, such as the $600 million Poly Network hack in 2021 and the $190 million Nomad cross-chain bridge theft in 2022, demonstrate that even major platforms cannot eliminate these risks. Therefore, investors should prioritize well-established, reputable platforms with thorough security audits, such as Aave and Curve, which are trusted for transparency and security.

Market interest rate volatility is another key factor affecting stablecoin investment returns. Stablecoin interest rates are often influenced by market supply and demand dynamics, changes in platform reward policies, and the broader crypto market environment. For instance, in lending markets, changes in fund utilization rates directly impact interest rates. Rising borrowing demand may increase rates, while excess liquidity can lead to reduced yields. Additionally, platforms may adjust reward policies to address inflation, potentially reducing users’ actual returns. For example, Aave’s deposit rates depend entirely on supply and demand, resulting in significant uncertainty in yields. To mitigate the risk of interest rate fluctuations, investors can diversify their assets across multiple protocols to balance returns and stay alert to platform policy changes, adjusting investment strategies as needed.

Liquidity risk is another major concern for stablecoin investors. Insufficient liquidity can prevent investors from withdrawing assets promptly, especially during periods of high market volatility or when protocols face redemption pressure. For instance, during the Terra collapse in 2022, several DeFi protocols experienced liquidity exhaustion as users rushed to withdraw funds. Additionally, some platform designs may restrict liquidity; for example, Curve’s stablecoin pools may make withdrawals difficult in unbalanced market conditions. To minimize liquidity risk, investors should select platforms with ample liquidity and well-designed liquidity pools, avoiding over-concentration of investments in a single asset or protocol.

To mitigate these risks, investors should implement several key strategies. First, select mature platforms that have undergone multiple security audits to reduce platform and technical risks. Second, diversify investments across different protocols and asset pools to minimize exposure to any single point of failure. Third, monitor market trends and platform announcements—particularly those concerning reward adjustments or policy changes—to optimize investment portfolios promptly. Finally, investors must carefully assess their personal risk tolerance, allocate funds, and choose lock-up periods that align with their investment goals.