Stablecoins are front page news. From the US Congress progressing the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act of 2025, the first comprehensive federal framework for regulating stablecoins in the US, to stablecoin issuer Circle launching a $6.8bn IPO on the NYSE on June 4, attention is being brought to THE crypto use case.
Figure 1 – Circle surged 169% on its first trading day
Source: Coindesk.
The total stablecoin market capitalization has exploded over the past few years, reaching $250bn in early May 2025, with USD Tether (USDT) comprising nearly 62% of the total value (Chart 1). This is up from $25bn at the end of 2020.
Chart 1 – Stablecoin Market Capitalization
Source: DefiLlama.
Stablecoin use cases are diverse, ranging from international payments to liquidity management to protection against currency fluctuations. These can be a large, international commodities broker using stablecoins for instant payment on delivery of an iron ore shipment, to a contract worker in Pakistan being paid for consulting work onchain in USDs, for example.
What are Stablecoins?
Stablecoins are a type of cryptocurrency or token whose value is pegged, or tied, to that of another asset. There are four primary types of stablecoins today, categorized by their collateral backing: fiat (USD or Euro), crypto (Bitcoin or Ethereum), commodity (gold) and algorithmic (math) stablecoins.
The five largest stablecoins are in the table below, with USDT and US Dollar Circle (Circle or USDC) comprising the significant majority, with all five backed by US dollar assets.
Figure 2 – Top five stablecoins by market capitalization
Source: DefiLlama.
We will use Tether or USDT as the example given it is the largest and most high profile stablecoin. Founded in 2014 as “Realcoin,” it was rebranded Tether to reflect its mission of tethering digital assets to fiat currencies. As the name suggests, the primary objective of a stablecoin is to maintain a 1:1 value (peg to 1) to the underlying asset, with any deviation is called “depegging.” Think Terra Luna. More on that later.
We note that stablecoins are onchain, meaning their existence, transactions and data are recorded, verified and stored on a blockchain. In the case of USDT, while it is on nearly different 100 blockchains, 90% of USDT is on just two blockchains, Tron ($77bn) and Ethereum ($63bn). Overall, Ethereum has just under 50% share of all stablecoins (Figure 3).
Figure 3 – Top five Ethereum stablecoins by value
Source: DefiLlama.
Benefits of Stablecoins
Stablecoins provide numerous advantages over the traditional banking system, especially for individuals that reside in countries with volatile currencies or inflation or those that are under/unbanked. These are outlined in Figure 4 below.
Figure 4 – Benefit of stablecoins
Source: Vikara Capital
How do Stablecoins Work?
How does the process of creating a new or “minting” a stablecoin work? As outlined in the diagram below, a KYC approved individual or institution that wants USDT deposits fiat to Tether’s banking partner. Once the fiat is confirmed, the USDT is minted by Tether Operations Limited, with the equivalent amount of tokenized fiat less fees sent to the customer’s digital wallet for immediate use.
Figure 5 – Minting Tether: USD to USDT process
Source: Tether.to; Vikara Capital.
If the customer wants to redeem the USDT, they deposit the USDT into their account with Tether. Once verified, Tether swaps the tokens for fiat and removes the USDT from circulation.
Note there are other ways to acquire USDT, such as using fiat to buy a token like Ethereum or Solana directly via various applications, then swapping those tokens for stables, for example.
Fiat-backed Stablecoin Collateral
Regarding collateral, Tether states that “every Tether token is 100% backed by reserves, which includes traditional currency, cash equivalents, and other assets, including receivables from loans made by Tether to third parties.” Therefore, when creating new USDT, Tether invests the fiat in assets listed in Figure 6 below.
There is a long-standing skepticism of Tether’s claim that USDT is fully backed by liquid reserves. That claim largely stems from Tether’s refusal to complete an audit, with management continuing to make statements that they are “engaging with a Big Four accounting firm” to audit the stablecoin issuers financials.
To date, they have engaged BDO to complete quarterly attestations of Tether’s reserves versus an audit, meaning the review is likely less comprehensive than a full audit. That said, as of 31 March 2025, Tether’s financials showed a net equity position of $5.6bn with assets totaling $149.3bn (Figure 6).
Figure 6 – BDO’s Q1 2025 Tether Reserve Attestation
Source: Tether.to; as of 31 March 2025.
Note that $98.5bn is in US T-bills and another $15.1bn in overnight repos. Tether is now the 19th largest holder of treasuries globally and was the seventh largest purchaser of US treasuries in 2024 (Chart 2).
Chart 2 – Tether was the seventh largest buyer of US Treasuries in 2024
Source: x.com @paoloardoino.
Stablecoin Use Cases
We briefly mentioned general use cases above, but stablecoin usage is still driven primarily by crypto, either as a crypto trading pair, including decentralized finance (DeFi) applications or on/off-ramp activities. These collectively totaled $24trn or 92% of total transaction value in 2024.
Figure 7 – Stablecoin Use Case by Transaction Value (2024)
Source: BCG: Stablecoins – Five killer tests to gauge their potential.
This is further exemplified as onchain USDT transfers reached $1trn in May 2025, demonstrating Tether’s critical role as the most widely used asset in the crypto market, underpinning the majority of crypto spot and derivative volumes.
Chart 3 – Monthly onchain USDT transfer volume reached an all-time high >$1trn in May
Source: Token Terminal.
We summarize several crypto specific use cases below:
- Trading/investing: USDT acts as a pair against most traded tokens, allowing users to buy, sell or hold assets without worrying about fiat currency conversion.
- Flight to safety: USDT can act as a safehaven during market volatility and/or as investors move in and out of stables without having to leave the crypto ecosystem.
- DeFi: USDT plays a leading role in defi platforms, enabling lending, borrowing and yield farming. Users can earn rewards by providing liquidity or staking USDT while benefiting from its stability.
While usage outside crypto remains relatively small, it is growing. Take Latin America (Latam) for example, where 86% of firms report having already established partnerships to support stablecoin integration and 71% say their infrastructure is established, including wallets and APIs.
In terms of applications, 71% of Latam firms use stablecoins for cross border payments (Figure 8).
Figure 8 – Latin America Leads in Real-World Use of Stablecoins
Source: Fireblocks: State of Stablecoins 2025.
Further, what began largely as a more efficient way to pay remote technology workers while avoiding often volatile currencies and high inflation that plagues some Latin American countries, has expanded to the broader population.
This adoption led Mastercard and Visa to recently launch payment cards that allow users in Latin America to spend stablecoins at any merchants that accept their cards.
As an aside, the CEO of Tether Paolo Ardoino recently shared photos of consumer items for sale priced in USDT at the Viru Viru International Airport in Bolivia. Make you wonder how many actually know what USDT is (Tether claims to have 430m customers!)
Figure 9 – Items priced in USDT at Bolivia’s international airport
Source: x.com @paoloardoino.
What is clear is that the US dollar via USDT is penetrating markets that have their own home country currency. If access to stablecoins continues to grow, particularly in regions with monetary instability and/or a volatile currency, one can assume a USD-backed stablecoins will remain an attractive alternative.
Stablecoin Risks
Depegging
Depegging, or when a stablecoin’s value falls below the 1:1 collateral ratio, is the primary risk. High profile depeggings have occurred whereby the stablecoin goes to zero as was the case with Terra Luna, an algorithmic stablecoin that collapsed in May 2022.
We note that Terra Luna was not backed by hard collateral such as fiat currencies or commodities and instead used algorithms and smart contracts to manage the peg. Specifically, the tokens LUNA and TerraUSD (UST) were linked through an algorithmic mechanism designed to maintain UST’s peg to the US dollar. LUNA’s price movements were directly tied to UST’s value whereby LUNA was used to regulate the supply of UST to maintain a $1 peg.
While there are multiple allegations as to what led to the collapse, including a “concerted, intentional effort” by hedge funds including Citadel Securities who benefitted financially from it’s collapse to the use of Anchor Protocol to incentivize UST depositors with 19.5% yields that led to significant subsidies to pay the depositors and hence significant token issuance.
Eventually, the house of cards collapsed, driven by the underlying design whereby users could exit UST by either selling UST directly or exchanging UST for LUNA and then selling LUNA at the prevailing market price. As users exchanged UST for LUNA and sold, the price of LUNA precipitously fell leading to increasing dilution, which further depressed the price of LUNA and resulted in a dramatic “death spiral” the LUNA supply increased from 1 billion to 6 trillion and the LUNA price decreased from $80 to effectively zero in only three days. Lesson. Avoid stablecoins with no collateral.
Centralization
Due to the nature of stablecoins whereby a central group controls the issuance and redemption of tokens and manages the underlying collateral, one must ensure the issuer is trustworthy and has sufficient reserves to meet any calls on the stablecoins.
US Government + Tether = BFFs
Bitcoin, the first cryptocurrency, was created as a decentralized, peer-to-peer transaction system that eliminated the need for intermediaries. Yet stablecoins are doing the opposite as they become more linked to the government bureaucracies and corporatocracies that Bitcoin was created to avoid.
Take the GENIUS Act, short for the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act of 2025. It is the first comprehensive federal framework for regulating stablecoins in the United States and aims to provide clarity on what a stablecoin is and who can issue them.
One of the key measures of the bipartisan legislation is the requirement for full reserve backing meaning stablecoin issuers are mandated to maintain a 1:1 reserve ratio, backing each stablecoin with US dollars or similarly liquid assets like short-term Treasury securities. Pretty cheeky way to create underlying demand for US government securities when other buyers, namely China, are shunning them.
If the chart below is even close to correct, the fact is the US government and Tether’s future are wedded together.
Chart 4 – Standard Chartered forecast stablescoins to be largest holder of UST’s by 2028
Source: Jon Egilsson; data from US Department of the Treasury.
Imagine a scenario where Tether collapses and must liquidate the US Treasuries. Or at that stage are they too big to fail? Likely the latter.
How to Invest in the Stablecoin Theme?
Given that we manage a liquid digital asset fund, we look to benefit from the adoption of blockchain technology and the associated liquid tokens that trade on exchanges.
We will follow this primer with a report sent to our LPs on three tokens that we believe may benefit from increasing adoption of stablecoins.
If you would like to be added to distribution list, please contact mark.riccio@vikara.com.
Mark Riccio, CFA
Vikara Capital
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