Bitaigen Research Recently, central banks’ research and development of sovereign digital currencies have repeatedly made headlines, and the term “stablecoin” has entered the public eye. What exactly does it refer to? Is it equivalent to the sovereign digital or electronic currency that central banks plan to launch? Below, we systematically explain the concept, operating mechanisms, practical functions, and challenges from four perspectives.
In this article we outline the core concept of stablecoins, their technical implementation, and the similarities and differences with central‑bank digital currencies (CBDCs). We also analyze real‑world use cases and regulatory challenges, helping readers quickly clear up common misconceptions, gain a deeper understanding of the value and risks of this emerging financial instrument, and provide a brief outlook on industry trends. This piece is suitable for anyone interested in blockchain‑based finance.
01 What Is a Stablecoin?
A stablecoin is a crypto token that circulates on a blockchain network while maintaining a relatively fixed exchange rate with a specific underlying asset.
In the crypto community, the most frequently mentioned example is USDT (Tether). It is issued by Tether Ltd. and promises that 1 USDT is equal to 1 USD; holders can redeem tokens for U.S. dollars on a 1:1 basis at any time.
Besides USDT, the market also hosts other dollar‑pegged variants such as TUSD, GUSD, and BitUSD, as well as products pegged to other fiat currencies—for instance, BitCNY, which is priced 1:1 against the Chinese renminbi.
It is worth clarifying that balances in mobile‑payment tools such as WeChat Pay or Alipay also achieve a 1:1 correspondence with the renminbi, but they are electronic money, not blockchain‑based assets, and therefore are not classified as stablecoins. If a future sovereign digital currency issued by a central bank remains pegged 1:1 to the current national currency, that digital currency could be regarded as a form of stablecoin.
Thus, a stablecoin is not merely a digitized version of money; it is a class of programmable crypto assets that only became possible after the advent of blockchain technology.
02 How Do Stablecoins Keep Their “Stability”?
Different stablecoins employ different anchoring methods, which can be grouped into three major categories:
- Fiat‑Collateralized Model
Represented by USDT, the issuer pledges that for every token created, an equivalent amount of fiat (e.g., 1 USD) is held in a bank account as reserve. Users can view the corresponding asset balance on the Tether platform, which aims to increase transparency. Transfers of the reserve typically occur via SEPA or SWIFT channels.
- Crypto‑Collateralized Model
Take BitCNY as an example: users lock a certain amount of digital assets (such as BTS) as collateral, and the system issues BitCNY accordingly. If the market value of the collateral falls close to the total amount of BitCNY already issued and the user does not add more collateral, the system automatically liquidates the collateral—similar to a traditional mortgage loan.
- Algorithmic Model
The classic case is Basis. The system uses smart contracts to adjust the token supply in real time, aiming to maintain a 1:1 exchange rate with the U.S. dollar, a mechanism analogous to a central bank’s monetary policy. It is important to note that the Basis project later ceased operations.
03 Functions and Shortcomings of Stablecoins
In everyday life, the transfer experience offered by WeChat Pay and Alipay far surpasses that of current stablecoin payments, so ordinary users do not feel an urgent need for stablecoins.
However, within the crypto ecosystem, stablecoins serve as a “unit of account”: they provide a relatively stable pricing benchmark for highly volatile digital assets and can act as a modest hedge when markets decline.
Despite these roles, each type of stablecoin has notable drawbacks:
- Fiat‑Collateralized (e.g., USDT) often faces criticism over the issuing company’s lack of financial transparency, raising concerns about possible over‑issuance.
- Crypto‑Collateralized (e.g., BitCNY) is heavily affected by the price volatility of the underlying collateral; a sharp decline can trigger forced liquidations, potentially causing a cascade of liquidations and heightened market turbulence.
- Algorithmic stablecoins rely solely on code and market confidence without any physical backing, making their stability more dependent on technical execution and trust, which has sparked considerable debate.
04 Conclusion
Many countries worldwide have already begun developing national digital currencies, and some, like Venezuela, have even introduced a “petro” oil‑backed token. In this wave, China’s central bank is among the frontrunners in exploring sovereign digital money.
Conceptually, a national digital currency (also called a sovereign digital currency) is essentially a stablecoin issued by the central bank and pegged 1:1 to the legal tender.
What are your expectations for the rollout of sovereign digital currencies? What changes might they bring to payments, financial inclusion, and other sectors? Feel free to share your thoughts in the comments section.
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*Disclaimer: The views expressed herein are solely those of the author and do not represent the stance of any blockchain organization. This content does not constitute investment advice.*
*Note: Gains from cryptocurrency transactions may be taxable in your jurisdiction; please consult a tax professional. U.S. users should conduct trading on Binance.US rather than the global Binance platform.*
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