Original author: Luke, Mars Finance

Introduction: The New Battlefield: A War of Dollars and Code

Circle CEO Jeremy Allaire's recent remarks on USDC's competitive advantages in emerging ecosystems like the decentralized exchange Hyperliquid, along with his grand vision of a "digital dollar" as a tool for technological and geopolitical competition, offer a highly relevant perspective on the stablecoin market. Allaire's definition of stablecoins as a "technological weapon" for competing with markets like China and solidifying the dollar's global dominance, elevating the topic from a simple crypto trading tool to the level of global financial strategy.

The current state of the stablecoin market—a multi-front battleground with a total market capitalization exceeding $283 billion—did not emerge overnight. It represents a decade-long epic of remarkable innovation, hubristic failure, regulatory wrangling, and ideological clashes over the very nature of money. This report deconstructs this history, revealing the forces that shaped today's giants and the ghosts of fallen empires. We will chronologically explore the stablecoin landscape, from its flawed genesis, to the rise of Tether's opaque empire, to USDC's compliance-focused challenges, the apocalyptic Terra algorithmic experiment, the regulatory retreat of BUSD, PayPal's mainstream entry, and ultimately the opening of new frontiers in decentralization and synthetic design.

To provide a clear framework for readers, the following table outlines several core stablecoin models that this article will explore in depth. This table will serve as a key reference to help understand the technical evolution and design philosophy throughout the history of stablecoins.

Comparative Overview of Stablecoin Core Models

Chapter 1: Genesis — Early Exploration and Failure in the Search for Stability (2014-2017)

The birth of stablecoins stems from a fundamental problem: the extreme volatility of early cryptocurrencies like Bitcoin prevented them from serving as reliable mediums of exchange or stable units of account. For traders seeking to park their funds during market turmoil without completely exiting the traditional financial system, this volatility was unacceptable. It was against this backdrop that the exploration of the first generation of stablecoins began.

The original experiment: BitUSD (2014)

On July 21, 2014, the world's first stablecoin, BitUSD, launched on the BitShares blockchain, marking the dawn of the stablecoin era. The project boasts a strong intellectual pedigree, backed by future industry giants including Charles Hoskinson, the founder of Cardano, and Dan Larimer, the founder of EOS.

BitUSD utilizes a crypto-asset collateralization model, backed by BitShares' native token, BTS. Its stability relies on a "seigniorage arbitrage" mechanism—a mechanism later replicated and amplified almost identically by Terra/UST. In theory, when BTS prices fall, users can use BitUSD to purchase cheaper BTS, thereby propping up the price. However, this mechanism suffers from a fatal flaw. While the protocol incorporates a response to falling collateral (BTS) prices, it lacks an effective mechanism to mitigate against declines in the value of BitUSD itself, nor can it handle the volatile price fluctuations of BTS. The root cause of its failure lies in the inherently low liquidity and high volatility of the collateral. Ultimately, BitUSD decoupled from its USD peg in 2018 and has never recovered.

Second attempt: NuBits (2014)

NuBits, also launched in 2014, attempted to improve on the BitUSD model by using a more mature and liquid crypto asset—Bitcoin—as collateral. However, this did not fundamentally resolve the issue. While Bitcoin possessed greater market depth than BTS, its price volatility remained too high to provide reliable value support for a stablecoin. NuBits' collapse was particularly dramatic: in 2016, as the Bitcoin market entered a bull run, a large number of NuBits holders, chasing Bitcoin's gains, collectively sold their NuBits, breaking its peg.

These early failures revealed a profound lesson that runs throughout the history of stablecoins: unstable assets cannot support stable assets. Relying on a single, highly volatile cryptoasset as collateral, even with sophisticated arbitrage mechanisms, is inherently fragile by design.

However, the significance of this history goes far beyond this. The arbitrage mechanisms of BitUSD and NuBits were not merely failed experiments; they were the genetic forefathers of later algorithmic stablecoin models. The idea of maintaining a peg through economic incentives to guide market arbitrage, rather than relying on a 1:1 real-world asset reserve, was born here. BitUSD's "seigniorage arbitrage" model mirrors the later "burn and mint equilibrium" mechanism of Terra/UST. BitUSD's failure stemmed from the "violent volatility" of its collateral price, directly foreshadowing the "death spiral" experienced by UST when LUNA's price collapsed under extreme selling pressure. Therefore, Terra's collapse wasn't a "black swan" event stemming from a novel concept, but rather the inevitable outcome of a decade-old, known-to-be-fragile model, amplified to catastrophic proportions by unsustainable yields and market frenzy. The entire industry appears to have failed to fully learn the lessons of 2014.

Chapter 2: Dominance: Tether’s Controversy and Hegemony (2014-Present)

Amidst the ruins of BitUSD, a project called Tether learned from its mistakes and chose a radically different path. Instead of complex algorithms and volatile crypto collateral, it proposed a simple, rudimentary solution: for every USDT issued, one dollar was deposited in a bank account. This model directly addressed the core issue of unstable support.

Origins and early development

Originally called "Realcoin," Tether was founded in July 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. It was built on the Bitcoin network's Mastercoin protocol (later renamed Omni). In November 2014, the project was renamed Tether. In January 2015, USDT was first listed for trading on the Bitfinex exchange, a relationship that later became central to its story and controversy. Both Tether Limited and Bitfinex are owned by iFinex. This close connection facilitated its early development, but also created potential conflicts of interest.

Bull Market Engine and King of Global Liquidity

USDT's explosive growth stems from its role as a crucial "bridge" connecting the fiat and crypto worlds. In its early days, many cryptocurrency exchanges lacked stable banking relationships, limiting fiat deposit and withdrawal channels. USDT perfectly filled this gap, becoming the de facto "on-chain dollar," providing vital liquidity to the global crypto market and supporting the vast majority of trading volume. Its application scenarios quickly expanded beyond trading to include cross-border remittances and value storage. In many countries with unstable fiat currencies, USDT, with its lower fees and faster settlement times than traditional banking systems, has become an attractive alternative.

Lingering doubts: the reserve issue

However, its hegemonic position has been accompanied by ongoing controversy, the core of which is the authenticity of its 1:1 US dollar reserve. Although Tether has always claimed that its tokens are fully backed by reserves, it has never provided a complete independent audit report issued by a top accounting firm.

In 2021, the U.S. Commodity Futures Trading Commission (CFTC) fined Tether $41 million. An investigation revealed that between 2016 and 2018, Tether held sufficient fiat reserves only 27.6% of the time, confirming long-held market suspicions that its "100% backing" claims were often false. Since then, the composition of Tether's reserves has evolved from its initial claim of pure cash to a mix of "cash equivalents," commercial paper, and other assets, further increasing the opacity of its reserves. However, in recent years, Tether's reserve strategy has shifted significantly, with a large allocation to U.S. Treasuries, making it one of the largest holders of U.S. Treasury bonds. This has, to a certain extent, enhanced the quality of its assets and market confidence.

Resilience and governance amidst controversy

Despite its controversies, USDT not only survived but also became the undisputed market leader. By the end of 2024, its market capitalization reached nearly $120 billion, with over 350 million users, and further grew to over $159 billion by July 2025. It has demonstrated remarkable resilience throughout various market crises. Even during the panic sell-off triggered by the Terra crash, USDT briefly deviated from its peg but quickly regained stability.

Tether's success is no accident; it profoundly reflects the "original sin" of the early crypto industry. Its dominance wasn't built on transparency and compliance, but rather on regulatory ambiguity and opaque operations. In the wild and unregulated days of cryptocurrency, exchanges generally faced difficulties accessing banking services and managing the inflow and outflow of fiat currency. USDT offered a perfect solution: a digital dollar that could flow freely between these exchanges operating in a regulatory gray area, avoiding the hassle of the traditional banking system for every transaction. Its relatively relaxed Know Your Customer (KYC)/Anti-Money Laundering (AML) requirements and registration in jurisdictions like the British Virgin Islands made it the path of least resistance for a global, often pseudonymous user base to transact. Therefore, Tether's success can be seen as a direct product of the semi-lawless nature of the early crypto market. It thrived in a regulatory vacuum. The rise of a regulatory-embracing competitor, such as USDC, was an inevitable reaction to the industry's maturation and quest for legitimacy.

Chapter 3: Challengers’ Conspiracy — USDC and the Road to Compliance (2018-Present)

In 2018, the stablecoin market welcomed a radically different challenger. The Centre Consortium, co-founded by Circle (led by Jeremy Allaire) and Coinbase, launched USD Coin (USDC). From its inception, USDC's strategy was the polar opposite of Tether's: it embraced regulation, pursued transparency, and prioritized earning institutional trust.

"Compliant" stablecoins

USDC's core competitive advantage lies in its compliance credentials. Circle has actively worked with regulators to obtain money transmission licenses in various US states and has implemented stringent anti-money laundering (AML) and know-your-customer (KYC) protocols. In stark contrast to Tether's opacity, USDC promises the highest level of transparency. It regularly publishes attestation reports from top accounting firms (initially Grant Thornton and later Deloitte), publicly certifying that its reserves are comprised of 100% cash and short-term U.S. Treasury bonds. This not only directly challenges Tether's model but also paves the way for institutional investors seeking a secure and reliable on-chain USD.

Growth Engine: DeFi and Institutional Adoption

If Tether is the lifeblood of liquidity for centralized exchanges, USDC has found product-market fit in the booming decentralized finance (DeFi) sector. Due to its high level of transparency and trustworthiness, USDC has quickly become the most popular collateral asset and trading pair in mainstream DeFi protocols like Aave and Uniswap. This regulatory-first approach has made it the preferred stablecoin for institutions, corporate treasuries, and fintech companies entering the crypto space, effectively mitigating the reputational risks associated with USDT.

Trial by Fire: The Collapse of Silicon Valley Bank (SVB) (March 2023)

USDC's development hasn't been smooth sailing. Its most severe test occurred in March 2023. Following the collapse of Silicon Valley Bank (SVB), Circle disclosed that it held approximately $3.3 billion in cash reserves, a significant portion of its total reserves. This news instantly triggered market panic, shattering USDC's image as the "safest" stablecoin. Its price briefly depreciated, plummeting to around $0.87.

This crisis was an extreme stress test for the USDC model. Market panic and massive redemption requests challenged Circle's liquidity management capabilities. Ultimately, the crisis's resolution depended on external forces: the US government announced a deposit guarantee for all SVB depositors, enabling Circle to fully recover its funds and quickly restore USDC's 1:1 peg to the US dollar.

While this depegging incident may seem like a devastating blow, its outcome, paradoxically, significantly reinforces the legitimacy of the USDC model. It reveals a profound reality: while deep integration into the regulated traditional financial system introduces new risks (such as bank failures), it also provides access to that system's ultimate safety net. The risks of this crisis stem from traditional finance (bank failures), and the solution also comes from traditional finance (government guarantees). A purely crypto-native or offshore entity, such as Tether, would likely face permanent loss of funds if its partnered Bahamian bank collapsed, with no recourse to similar government bailouts.

This incident forced the market to reassess risk. Which outweighed the risks of Tether—its opaque, offshore, and unaudited reserves—or USDC—its transparent reserves held in a potentially failing US bank subject to government intervention? For institutional participants, the answer was clear: the known and manageable risks posed by a regulated US banking system far outweighed the unknown counterparty risk of an offshore, unregulated entity. Therefore, far from destroying USDC, this crisis, in the long run, validated Circle's core strategic bet on regulatory consolidation, which had been in place from the outset.

Chapter 4: The Big Crash — Terra/UST’s Algorithmic Purgatory (2022)

In the stablecoin landscape, Terra and its founder, Do Kwon, have been hailed as pioneers of "true decentralization," promising to create a stablecoin free from the constraints of fiat collateral. Its core mechanism is the UST-LUNA "burn and mint equilibrium": 1 UST can always be exchanged for 1 USD worth of LUNA, and vice versa. This design maintains the UST-USD peg through arbitrage incentives.

Growth Flywheel: The Allure of the Anchor Protocol

However, arbitrage alone is not enough to drive mass adoption. The true catalyst for the Terra ecosystem is the Anchor Protocol, a lending platform that offers nearly 20% annualized yield (APY) on UST deposits. This unsustainably high yield, far exceeding the market rate, has created massive, artificial demand for UST.

The growth flywheel operates as follows: users, attracted by high returns, purchase LUNA, then burn LUNA to mint UST, which they then deposit into Anchor. This process reduces the circulating supply of LUNA, driving up its price. This rising LUNA price, in turn, reinforces expectations of the ecosystem's value and stability, attracting even more users. This is a classic positive feedback loop. At its peak, of the total $18 billion in UST supply, a staggering $16 billion was locked in the Anchor protocol, demonstrating its central role in driving the entire system.

Crash: Death Spiral Timeline (May 2022)

In May 2022, this seemingly perfect system collapsed. The trigger for the crisis was the large-scale UST withdrawals on the Anchor Protocol and the decentralized exchange Curve Finance between May 7 and 9, which caused the price of UST to fall below $1 for the first time.

Once the peg occurred, the arbitrage mechanism began to reverse course, quickly devolving into a disaster. Arbitrageurs purchased UST for less than $1, then exchanged it for $1 worth of LUNA through the protocol and immediately sold the LUNA on the market for a profit. This process caused the supply of LUNA to surge at an alarming rate, exerting significant downward pressure on its price. As the price of LUNA plummeted, the amount of LUNA required to be minted for each UST increased exponentially, further exacerbating the selling pressure on LUNA—a phenomenon known as a "death spiral."

To mitigate the crisis, Terra's nonprofit organization, Luna Foundation Guard (LFG), mobilized billions of dollars in Bitcoin reserves to defend the peg. However, this effort proved ineffective against the massive market sell-off, exacerbating panic across the crypto market. Within a week, over $45 billion in market capitalization was wiped out from the Terra ecosystem.

The aftermath: market contagion and regulatory alarm bells

Terra's collapse triggered a chain reaction across the crypto industry, leading to the bankruptcy of prominent institutions like Celsius and Three Arrows Capital and plunging the market into a prolonged "crypto winter." This incident also brought algorithmic stablecoins into the spotlight of global regulators, emphasizing in a stark way the inherent fragility of such models and the potential systemic risks they pose. The lessons of BitUSD in 2014 were forgotten, and this time, the price was a disaster for the entire industry.

A deeper analysis reveals that the Terra ecosystem is essentially a financial perpetual motion machine, doomed from the outset. The 20% yield offered by the Anchor protocol isn't derived from any sustainable economic activity, but rather is subsidized by Terra's reserves and the inflation of the LUNA token. The entire system is a closed loop, completely dependent on a continuous inflow of new capital and a persistent rise in the price of LUNA to pay interest to existing depositors. While automated through smart contracts, it's functionally no different from a Ponzi scheme.

A stable system cannot consistently pay out a 20% return in an environment with risk-free rates near zero. This return must come from somewhere. When Anchor's lending income is insufficient to cover the interest payments, the difference is covered by Terra's reserves. The value of the entire system is built on the price of LUNA, which is driven by demand for UST, which in turn is driven by Anchor's high returns. This is a completely self-referential, self-circulating system. It requires continuous growth to sustain itself. If demand for UST falters (as in this large withdrawal), the growth flywheel reverses, and the system's inherent logic forces it to self-destruct. This "death spiral" isn't a flaw in the system, but rather the inevitable consequence of its core design under pressure.

Chapter 5: Dividing Destinies: The Regulatory Hammer and the Embrace of Traditional Finance (2023)

2023 marked a watershed year for the stablecoin market. Two landmark events—the forced delisting of BUSD and the high-profile debut of PYUSD—clearly outlined two distinct paths for the future of stablecoins, heralding the advent of a new era.

Part 1: The Fall of BUSD

Binance USD (BUSD) is a stablecoin issued by Paxos, a New York State-regulated trust company, but branded and primarily used by Binance, the world's largest cryptocurrency exchange. This partnership led to its rapid rise to become the third-largest stablecoin in the market.

However, in February 2023, the regulatory hammer fell. The New York Department of Financial Services (NYDFS) ordered Paxos to cease minting new BUSD. The regulator cited Paxos's failure to conduct adequate due diligence on its partner, Binance, which had been found to have systemic anti-money laundering compliance vulnerabilities and to have processed a large number of illicit transactions. Paxos was subsequently fined $26.5 million. This regulatory action effectively sealed the death sentence for BUSD.

After the ban was issued, Binance began to gradually cancel its support for BUSD and encouraged users to switch to other stablecoins, such as the new FDUSD, causing the market value of BUSD to shrink rapidly.

Part 2: The Rise of PYUSD

In stark contrast to BUSD's dismal exit, payments giant PayPal launched its stablecoin, PayPal USD (PYUSD), in August 2023, also issued by Paxos. This milestone marked the official entry of a mainstream, publicly traded, and strictly regulated US fintech giant into the stablecoin space. This marked the beginning of a new era for stablecoins, driven by both traditional finance (TradFi) and fintech, aiming for mass mainstream adoption.

PayPal's strategy is clear and powerful: leveraging its massive user base (over 426 million active accounts) and merchant network to drive adoption of PYUSD in everyday payments, cross-border remittances, and in-app scenarios, aiming to bypass traditional bank card networks, thereby reducing transaction costs and improving efficiency.

The starkly different fates of BUSD and PYUSD in the same year provide a profound insight into the "Great Divergence" in the stablecoin market. BUSD's model relies on access to a large, but regulatory gray area, global crypto exchange. By cracking down on its regulated US-based issuer (Paxos), regulators (NYDFS) demonstrated their ability to stifle this model, regardless of the size of the underlying exchange. PYUSD's model, on the other hand, relies on access to a large, but strictly regulated, global payments company.

This shift suggests that the key to future stablecoin success will no longer be the network effects of crypto-native development, but rather the ability to access mainstream distribution channels within regulatory frameworks. Power is shifting from offshore cryptocurrency exchanges to onshore, regulated financial institutions. This is the future that Jeremy Allaire and Circle have been betting on.

Chapter 6: Innovation Frontiers — Decentralization and Alternatives to Synthetic Assets

While fiat-collateralized stablecoins dominate, a parallel path of innovation continues to explore alternatives to centralized reliance. From the earliest decentralized stablecoins to the latest synthetic dollars, the competition on this front is equally fierce, fraught with profound reflections on risk, efficiency, and the spirit of decentralization.

The Resilient Decentralized Choice: MakerDAO (DAI)

Launched in 2017, DAI is the oldest and most successful decentralized stablecoin. It utilizes an overcollateralized cryptoasset model: users lock volatile cryptoassets like Ethereum (ETH) in smart contracts (called "vaults" or CDPs) and use this collateral to borrow DAI. To mitigate the risk of collateral price declines, the value of the collateral must significantly exceed the value of the borrowed DAI (for example, the collateralization ratio is typically required to be above 150%).

DAI's governance is overseen by a decentralized autonomous organization, MakerDAO. Holders of its governance token, MKR, vote on the system's risk parameters, such as the stability fee (interest) and collateral types. DAI's development has also undergone a significant evolution: initially accepting only ETH as collateral, it has evolved to accept a variety of crypto assets as collateral. More controversially, to enhance stability and scale, MakerDAO later began accepting centralized stablecoins (such as USDC) and real-world assets (RWA) as collateral. While this move improved DAI's robustness, it also sparked heated debate within the community over whether it sacrificed its inherent decentralization.

Hybrid Experiment: Frax Finance (FRAX)

As the first "partially algorithmic" stablecoin, Frax seeks to strike a balance between capital efficiency and security. FRAX's peg is a unique hybrid model: it is partially backed by real collateral (such as USDC) and partially algorithmically stabilized by its governance token, Frax Shares (FXS).

At its core lies a dynamic Collateralization Ratio (CR). As market confidence in FRAX grows, the protocol can reduce the CR, shifting it toward algorithmic stability, thereby improving capital efficiency. When users mint FRAX, the algorithmic component destroys a corresponding amount of FXS tokens. While Frax's model is more complex and robust than purely algorithmic stablecoins, avoiding the fate of Terra, its long-term stability under extreme market pressure remains an open question.

A New Paradigm: Ethena’s Synthetic Dollar (USDe)

Ethena's USDe represents a more radical innovation. It's not a traditional stablecoin, but rather a "synthetic dollar." USDe isn't directly backed by the US dollar, but rather aims to synthesize and replicate the dollar's value on-chain through financial engineering.

Its core mechanism is a "Delta-neutral" hedging strategy: for every dollar of collateral (e.g., staked Ethereum stETH) received by Ethena, it will open a short perpetual swap position of the same value on a derivatives exchange. This way, regardless of whether the price of the collateralized ETH rises or falls, gains or losses on the spot position are offset by gains or losses on the futures position, thus maintaining a stable dollar value for the total position.

USDe's high yield is primarily driven by funding rates in the perpetual swap market. During a bull market, when bullish sentiment is high, long traders often need to pay funding fees to short traders. As the holder of short positions, Ethena can continuously collect these fees and distribute them as income to users who stake USDe.

From USDT to DAI, and then to Frax and USDe, the evolution of stablecoin design is actually a history of risk transfer and reshaping. The emergence of each new model does not simply eliminate risk, but rather transforms one type of risk into another.

USDT/USDC eliminates the collateral volatility risk of BitUSD, but introduces huge centralization and counterparty risks (are Tether's reserves real? Will SVB go bankrupt?).

DAI solves the centralization risk of USDT/USDC through on-chain collateralization and decentralized governance, but it reintroduces collateral volatility risk (managed through over-collateralization) and increases smart contract and oracle risks, while its capital efficiency is extremely low.

Frax attempts to address DAI’s capital inefficiencies through its partially algorithmic model, but in doing so introduces reflexivity and algorithmic risk, a milder version of the risk that destroyed Terra.

Ethena (USDe) addresses both DAI's capital efficiency and direct collateral volatility risk through delta-neutral hedging. However, it introduces a new set of risks, potentially more systemic: funding rate risk (what if funding rates remain negative for a prolonged period?), exchange counterparty risk (what if derivatives exchanges like Binance go bankrupt?), and custody risk with its off-chain settlement partners. The risk hasn't disappeared; it's simply moved from the balance sheet to the derivatives market.

The Current State and Future Battle of Stablecoins

Looking back over the past decade, stablecoins have evolved from fragile early experiments in 2014 to an industry with a market capitalization of hundreds of billions of dollars and significant political and economic significance. After a brutal elimination cycle, the market landscape has become highly concentrated in the fiat-collateralized model, with USDT and USDC accounting for nearly 90% of the market share. The specter of algorithmic stablecoins remains a perpetual warning for the industry.

Current market landscape

By the end of 2025, the total market capitalization of stablecoins had exceeded $283 billion, a 128% increase since the beginning of the year. The chart below clearly illustrates the historical market share evolution of major stablecoins, providing a visual account of this Game of Thrones.

Future battlefields

The first decade of the stablecoin war was about finding product-market fit within the crypto ecosystem. The next decade will be about breaking through this boundary and becoming the underlying rails of a new, internet-native global financial system. This war will unfold on the following key battlefields:

Regulatory Moat: With the implementation of regulatory frameworks such as the US GENIUS Act and the EU MiCA Act, compliance is no longer an option but a must-have for any stablecoin hoping for mass adoption. This provides a significant first-mover advantage for players like Circle and PayPal who have already established a compliance advantage.

The trillion-dollar payments market: The industry's focus is shifting from crypto transactions to real-world applications, particularly in cross-border payments and remittances. In this massive market, stablecoins offer overwhelming speed and cost advantages over traditional systems. This is precisely where PayPal is focusing its efforts.

The battle for the soul of DeFi: Despite the current dominance of centralized stablecoins, the need for a truly decentralized, censorship-resistant store of value remains a core ideal in the crypto world. Models like DAI, Frax, and Ethena will compete to determine who will become the native currency of the decentralized internet.

The blockchain platform war: Competition exists not only between stablecoins, but also between the Layer 1 and Layer 2 networks that support them. Currently, the majority of stablecoins circulate on the Ethereum and Tron networks, but with the rise of new public chains and second-layer solutions, the battle for who will become the preferred settlement layer is intensifying.

The saga of stablecoins is far from over. With the entry of traditional financial giants and sovereign nations, the competition will intensify, and the stakes will be higher than ever. The outcome of this battle will not only determine which token will become the reserve currency of the digital world, but will also likely reshape the global financial landscape for decades to come.