For Euro pegged stablecoins, major examples include Circle’s EURC, EUR Tether, and Stasis EUR. Major examples of US dollar pegged stablecoins are Tether’s USDT, Circle’s USDC, and Binance’s BUSD. The value of a fiat-backed stablecoin is based on the value of the backing currency, which is supposedly held by a third party custodian.
Stablecoins emerged in 2014 as a method for investors in cryptocurrencies to park their money when they invest in other highly volatile cryptocurrencies. Stablecoins rely on stabilization tools such as reserve assets or algorithms that match supply and demand to try to maintain a stable value. The specified asset might refer to fiat currency, commodity, or other cryptocurrencies. These sophisticated digital instruments, with their inherent ability to adapt and self-regulate, underscore a future where financial systems are increasingly dynamic and algorithmically driven. This will create a passive yield generating currency, with an ever-increasing floor price.
- The opposite side to that would apply if the price of the rebase token falls below the $1.
- In June 2024, the Central Bank of the UAE established the Payment Token Services Regulations to regulate the use of stablecoins in the UAE.
- As of August 2025, nearly 99% of fiat-backed stablecoins are pegged to the US dollars.
- Historically, multiple stablecoins have failed to maintain their value relative to the underlying assets.
- Cryptocurrency-backed stablecoins are stablecoins using other cryptocurrencies as collateral.
Types of stablecoin
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For instance, if a stablecoin aims for a one-dollar peg and its price rises above it, the system increases the token supply, distributing additional tokens proportionally to existing holders, which in turn helps to lower the price. The operational framework of rebasing stablecoins hinges on what is termed an \”elastic supply.\” This means the total circulating tokens can expand or contract, a stark contrast to most cryptocurrencies that operate with a fixed or predictably scheduled supply. Now that you understand the high risk that comes with rebase tokens, it is up to you to do your due diligence and avoid the crypto hype-wagon. This results in lower rebase rewards, which means you would have less tokens plus less price action, so that would be a double whammy to the downside. If rebases occur while the token price is going down, you not only lose money from the token price going down, but you will also own less and less tokens after each rebase.
Understanding Rebasing Stablecoins: A Comprehensive Overview
The reason such stablecoins are created is that by utilizing smart contracts, they allow a decentralized network to track the price of US dollar as closely as possible. As of August 2025, nearly 99% of fiat-backed stablecoins are pegged to the US dollars. According to the Bank for International Settlements, the size of the global stablecoin market is approximately $255 billion as of June 2025, with near 99% of stablecoins pegged to the US dollars. A stablecoin is a type of cryptocurrency that aims to maintain a stable value relative to a specified asset, a pool or basket of assets.
Staking is an increasingly popular crypto-economic model for efficiently scaling the security of decentralized systems. Instead of a broker or a bank, DeFi will become the standard in the very near future. Decentralized Finance (or DeFi for short) allows users to trade directly amongst themselves through an algorithm; this algorithm is known as a smart contract.
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- The Retail Payment Activities Act will also be amended to enable regulation of payment service providers using stablecoins.
- Research has shown that the price of fiat-backed stablecoins can dip below the value of the pegged currency due to limited participation in the primary market and sell pressure in the secondary market.
- The comments by Bailey drawn criticism from stablecoin issuer for constraining investment in the UK.
On 16 November 2023, the regulator approved Paxos Digital and StraitsX as stablecoin issuers. The bill was passed in May 2025 with the first stablecoin issuance licenses expected in early 2026. The bill is expected to generate greater demand for US Treasuries by stablecoin issuers. In January 2024, the United Nations Office on Drugs and Crime (UNODC) published a report, directly linking USDT to cyberfraud and money laundering. According to media reports, official announcements, and academic research, Tether’s USDT is the preferred stablecoin of these criminals.
They are building upon the limitations of rebase tokens by eliminating APYs altogether. Remember, looking at price charts is not going to be all that helpful, since the number of tokens you hold will change after rebases occurs.” According to Binance, “Elastic supply tokens are highly risky and extremely dangerous investments. Once it has a larger treasury, it can make more profits in a day and send out more tokens to those stakers as rewards. Staking rewards is a profit distribution mechanism that the rebase token uses, which simply means any profits that the treasury makes are distributed to the stakers. However, the same $1 backed tokens are sold into the open market for market-value, thus putting heavy downward selling pressure on the underlying token price.
The main advantage of stablecoins is they provide convenience for investors in cryptocurrencies, allowing investors to park their money while buying and selling other more volatile cryptocurrencies. This triggered the minting of the linked token to burn the stablecoin, causing the supply of the linked token to increase exponentially, further causing a decrease in price. Major examples of cryptocurrency-backed stablecoins are DAI and Wrapped Bitcoin (WBTC). Another use case of cryptocurrency-backed stablecoins is to convert a cryptocurrency into ERC20 compatible standard to enable trading on another blockchain.
“Death spiral” of algorithmic stablecoin
As cryptocurrency investors, we are often pulled into the hype, and promises of exponential gains. Here is an example, if the price of the rebase token is going up and the amount of token holdings you have is going up, then you are getting a double whammy and you’re winning two times. This obviously builds up the rebase DAO treasury, which in turn builds up the investor’s rewards. Rebase tokens are still very experimental and there are many risks involved.
Instead of being backed by dollars, UST was designed to keep its peg by linking it with another Terra network token, LUNA. Stablecoins are now mainly used for buying or selling cryptoassets, and for making cross-border payments. Insights, news and analysis of the crypto market straight to your inbox
Commodity-backed stablecoins
The regulation is set to apply to stablecoins used for day-to-day payments and those used for settling tokenized financial transaction. Issuers of stablecoins are required to maintain a portfolio of reserve assets denominated in the currency of the stablecoin peg. In September 2025, a consortium of nine European banks announced the planned launch of a MiCAR compliant stablecoin in response to the dominance of US denominated stablecoins on the market. The reason most stablecoins with centralized issuers do not provide interest return is because that would potentially make them financial securities, thus falling under regulatory regime. Reserve-backed stablecoins require a third party custodian to hold the reserve assets to maintain price stability. In 2020, the intergovernmental anti-money laundering Financial Action Task Force (FATF) issued a report on stablecoin, calling out the risk of money laundering using stablecoins.
The digital renminbi is a CBDC that has been in limited operation in China since 2022. However, in October 2021, it failed to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin. In particular, the anonymity, global reach, and layering using “chain-hopping” technique are cited as risk factors. Stablecoins became tools for trading and distributing humanitarian aid in financially repressed countries in Africa.
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European Union
The Hong Kong Monetary Authority, the regulatory body of stablecoins in Hong Kong, warned the public to “rein in the euphoria”. While issuers may not directly provide interest return, decentralized financial platforms are another possible avenue for earning interests. The US’s GENIUS Act, Europe’s MiCAR, and Hong Kong’s Stablecoin Bill all explicitly prohibit the provision of yield-bearing stablecoins by regulated issuers. Christine Lagarde, president of European Central Bank, called it a “strategic priority” for Europe in response to US legislation of stablecoins. The CFTC found that Tether only had enough fiat reserves to guarantee their stablecoin for 27.6% of the time during 2016 to 2018. The concentration of reserve deposits creates a counterpart risk in which the custodian may fail in the case of a bank run.
Defunct stablecoin projects
This scenario causes a downward selling pressure as the tokens are minted and pegged to $1 by its treasury. For instance, let’s say we have an elastic supply token (i.e. rebase token) that wants the value to remain at $1 (price target). There is a history of de-pegged stablecoins and stablecoin projects that have been abandoned by the issuer. In particular, guidelines require stablecoin issuers to have strict rules on anti-money laundering, risk management, and corporate governance. The regulation became applicable to asset-referenced tokens and e-money tokens on 30 June 2024. By providing stablecoins for liquidity on decentralized platforms, holders of stablecoins can get a share of the fees paid by liquidity takers.
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Their objective is to grow its treasury and use the funds to effectively expand the value of ORCL, its native token. The fact is that they can manipulate the price data any way they want because they have total control over the circulating supply. Whatever the treasury makes in profit is what is distributed amongst the stakers, and generally the main goal of rebase DAOs is to improve the treasury. There are several ways a project can distribute staking rewards to investors.
Stablecoin
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All is not gloom and doom, there are projects that are working on innovative solutions to the vulnerable issues facing rebase DAOs. In short, those high APYs are not always accurate, as it depends on how much the treasury is making in profit. This increases the ratio of OHM staked to sOHM outstanding, and results in a rebase to correct the difference. However, the increase is not backed by any substantial growth in the treasury. Currently, most Olympus Forks provide extremely high APYs to investors.
