Tomorrow’s Stablecoins Will Look Nothing Like the Dollar-Pegged Tokens of Today

Key Takeaways

• Stablecoins are seeing record usage, but reliance on fiat backing is becoming unsustainable.
• Regulatory pressure is reshaping the landscape, favoring institutions over independent issuers.
• Future models will pivot to algorithmic and hybrid structures to maintain scalability and compliance.

On paper, the health of fiat-pegged tokens has never looked better. In the past year, they’ve settled more than $25 trillion in value and boast a combined market cap of over $210 billion.

From degens trading in the Solana trenches to TradFi titans such as Visa, players large and small are sure of stablecoins.

Safety in Stablecoins

Crypto is full of uncertainty.  Through thick and thin, stablecoins are the rock that provides certainty and safety whatever the weather.

Given their critical role in providing sanctuary to crypto traders and facilitating remittances, B2B global settlement, and online commerce, talk of stablecoins‘ demise sounds premature—even preposterous.

But make no mistake, the days of stablecoins as we know them — fiat-backed, centrally issued and usually bearing the ticker USDT or USDC — are running on borrowed time.

While dollar-pegged tokens aren’t going anywhere, the way in which these assets are backed — and by whom — is destined to undergo a seismic shift.

Regulators Restricting Stablecoins

We know what’s right about stablecoins: they’re globally accessible, versatile, and reliable. Despite all the criticism that’s been flung at them for the better part of a decade, the leading fiat-backed stables in USDT and USDC have performed admirably.

You’d be hard-pressed to find another financial system that’s worked flawlessly during this time; even Visa and Mastercard have the occasional outage.

But vital as the likes of USDT and USDC have been in mainstreaming stables, they may be destined to disappear, if not from global finance altogether then at least from crypto where they will become inaccessible in their current, permissionless form.

Having faded stablecoins for years, regulators now have them firmly in their crosshairs. Fortunately, they don’t seem intent on killing off stablecoins outright, recognizing their value in commerce, B2B, and payment systems.

Unfortunately, they seem intent on commandeering them and severely restricting who can issue them and to whom.

We’ve already seen the EU’s MiCA framework drastically restricting stablecoin issuance across Europe, placing onerous demands on companies by obliging them to have fiat deposits in regional banks and placing a high compliance burden upon them.

In the U.S., the GENIUS Act is adopting a similar playbook. While not necessarily adversarial, the legislation heavily favors large companies at the expense of smaller players.

The logical next step is for stablecoins to be absorbed into state financial systems, forcing independent issuers like Tether and Circle to either exit altogether or become de facto government subsidiaries that operate as a digital arm of the U.S. Treasury.

Should this vision come to pass, and the days of free-and-easy stablecoin access become heavily restricted or KYC’d into oblivion, the obvious question is what replaces them?

Stablecoins as a unit of account aren’t going anywhere. But they’ll need to evolve fast if they are to retain their status as the crypto industry’s fiat surrogate of choice.

The Shape of Stablecoins to Come

There are two obvious models for the next wave of stablecoin issuers to adopt, each with their own upsides — and challenges that must be solved if they are to operate as faithfully as good ol’ Tether.

The first is algorithmic stables that will operate as fully decentralized solutions, while the second is hybrid stablecoins that are backed by multiple assets, not just fiat. Let’s consider each in turn.

Algorithmic Stablecoins

Algorithmic stablecoins, as their name suggests, rely on algorithms and smart contracts to automatically adjust their supply and demand to stabilize their price.

If the stablecoin’s price rises above its target — typically $1 — the algorithm increases the supply by minting new tokens, diluting the value until it returns to the peg.

If the price falls below the target, the algorithm reduces the supply, typically by burning tokens or incentivizing holders to lock them up to drive the price back up.

Due to previous high-profile failures, such as TerraUSD, algorithmic stables don’t have a great rep, but past performance shouldn’t be taken as indicative that a successful system can’t be perfected.

Bitcoin, after all, wasn’t the first attempt at creating decentralized cryptocurrency — it was merely the first system that worked as prescribed. Examples such as RAI Reflex Index, backed by ETH, show that workable algorithmic stables are possible.

Where RAI has succeeded — and TerraUSD failed — is by using a low volatility “blue-chip” crypto in the form of ETH as collateral.

Significantly, ETH’s primary use case isn’t to collateralize RAI, meaning the price of the volatile collateral isn’t affected by that of the stablecoin and vice-versa — all areas in which TerraUSD went wrong.

Expect to see developers get bolder and explore new algorithms for controlling stablecoin pricing as increasing restrictions on fiat-backed stables intensify the need for fully decentralized alternatives.

Hybrid Stablecoins

The second stablecoin model that’s likely to pick up the slack from 100% fiat-collateralized is hybrid stables backed by a basket of assets. Think BTC, gold, AI assets, RWAs such as bonds, and a sprinkling of fiat.

While still inherently centralized in design, hybrid stables such as DAI and FRAX are much less reliant on the actions of regulators and big government, since their composition can be adjusted as required without causing systemic shock.

Traders are also likely to feel much more confident using a stablecoin collateralized by blue-chip cryptos such as BTC and low-volatility RWAs.

Different Formula, Same Outcome

Stablecoins may be forced to change as the crypto industry adopts less centralized and government-controlled models, but the outcome will remain the same.

With almost $2 trillion settled by stablecoins in February and the number of active wallets using them increasing by 50% in the past year, stablecoins aren’t going away. But underneath the hood, almost everything may change.

Just as the internet didn’t obsolete physical stores overnight, the rise of algorithmic and hybrid stablecoins won’t signal the death knell of USDC and USDT.

But it may mark the beginning of the end: a slow unwind that will see legacy finance adopt these fiat-backed tokens as their own and crypto seek out alternatives that remain closer to the principles the industry was founded on: open, permissionless, and decentralized.