Stablecoins are gaining momentum, but key questions are unanswered

Stablecoins have gone mainstream. Transaction volume exceeded $34 trillion last year, according to Visa. Market capitalization jumped from less than $50 billion to roughly $300 billion over the past five years. The US adopted stablecoin legislation in mid-2025, joining other jurisdictions such as Japan, the European Union, Hong Kong, Singapore, and the UAE with purpose-built legal regimes. Major banks, payment processors and fintech firms are racing to launch stablecoin products.

Despite all the attention, basic questions remain surprisingly unsettled. What exactly is a stablecoin? How does it fit into the broader world of money and payments? And why does the answer matter for business leaders and policymakers?

A new report from the Wharton Blockchain and Digital Asset Project, The Stablecoin Toolkit, which was developed with more than 20 global experts from academia, industry and government, tackles these questions head-on. What it reveals is a market far more varied and complex than the headlines suggest, or regulators have contemplated.

Most people think of stablecoins as digital assets pegged one-to-one to the US dollar and backed by Treasury bills sitting in a bank account somewhere. That describes Tether’s USDT and Circle’s USDC, which together hold roughly 85% of the market. It’s also the model at the centre of legislation such as the US GENIUS Act.

But this picture is incomplete. Well over a hundred stablecoins are now in circulation. Some don’t hold any off-chain collateral at all. Some aren’t pegged to the dollar. Some pay yield directly to holders; others funnel it through distributors or keep it entirely. Some are governed by traditional corporate structures; others by decentralized communities voting through blockchain-based protocols. Lumping them together obscures critical differences in how they work, what risks they carry and what they’re useful for.

Even the term “stablecoin” lacks a consensus definition. Regulatory regimes define what falls under their jurisdiction (“payment stablecoins” in the US, “e-money tokens” in the EU) but none describe the concept from first principles. And there are stablecoins – or at least, what everyone in the market calls stablecoins – with billions of dollars of assets, which don’t fit those categories.

The Stablecoin Toolkit proposes a working definition: a publicly available, non-central bank issued digital asset, aiming to serve as a stable unit of account through economic mechanisms.

"Publicly available" distinguishes stablecoins from private bank tokens. "Non-central bank issued" separates them from Central Bank Digital Currencies. The term "unit of account" emphasizes two critical points. Stablecoins aspire to, but do not guarantee, stability. And the point of stability is to serve as a common measuring stick for transactions. Lastly, "economic mechanisms" captures the full range of approaches developers use to maintain a peg, and how they are different than the way government-issued fiat currencies operate.

The toolkit identifies four mechanisms for maintaining a stablecoin’s peg, along with hybrids.

Off-chain fully collateralized stablecoins, such as USDT and USDC, hold traditional financial assets (cash, Treasury bills, repos) in custody to back each token. This is the model most regulators have in mind, and it’s conceptually the simplest. But it depends entirely on centralized entities effectively serving the trusted custodial function.

Programmatic overcollateralized stablecoins like DAI/USDS operate entirely on blockchains. Users lock up more collateral than the stablecoins they mint, leaving a buffer when that collateral, usually volatile digital assets, drops in price. Smart contracts automatically liquidate positions when needed to avoid shortfalls. This approach sacrifices capital efficiency for decentralization and transparency.

Supply-based algorithmic stablecoins try to maintain their peg by expanding and contracting token supply. This was the model behind the catastrophic collapse of Terra Luna’s UST in 2022, which wiped out over $40 billion. Given this history and deep skepticism about their viability, these designs are explicitly excluded from major regulatory frameworks. While there are algorithmic stablecoins in the market today, they have not regained meaningful market traction.

Synthetic hedged stablecoins, most prominently Ethena’s USDe, hold crypto collateral while hedging it with offsetting short positions in derivatives markets. The result is a “delta-neutral” position that stays stable regardless of underlying price movements, while generating yield from staking rewards and funding rates. This model has grown quickly, but introduces dependence on derivatives market dynamics.

The point is not that all four approaches are equally sound. It’s that the stablecoin market involves a range of choices. Each has distinct risk profiles, governance structures and use cases. An Appendix in the Toolkit provides detailed categorization of 40 prominent stablecoins. Stablecoins also need to be understood in relation to the broader universe of money and money-like instruments. The toolkit maps out ten categories, from cash and bank deposits to tokenized money market funds and CBDCs. Stablecoins sit alongside these alternatives, competing in some contexts and complementing in others. Effective regulatory and business strategies will account for these distinctions rather than treating stablecoins in isolation.

A closer look shows that stablecoins, despite all the excitement, still have a ways to go. That $34 trillion figure from Visa includes high-frequency trading activity and bots; stripping that out brings the volume down 80%. Even of that number, roughly 99% involves digital asset trading rather than payments or other uses. Yet there is active innovation both on the supply side of stablecoins and in the infrastructure for new use cases. How the market evolves will depend not only on technology and regulation, but on macroeconomic conditions, geopolitical dynamics and the competitive response of traditional financial firms.

For business leaders, the diversity of stablecoin approaches matters because different designs serve different purposes. A stablecoin optimized for global treasury management will look very different from one designed for digital asset trading, micropayments in emerging markets or programmable transactions by AI agents. For policymakers, understanding these differences is essential to crafting rules that protect consumers and financial stability without foreclosing legitimate innovation.

One thing is clear: Stablecoins will be part of the future of money. Getting them right requires looking past the hype to understand what they actually are, in all their variety.