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The Stablecoin Bible explores risk metrics, yield models, depeg risk, regulation, liquidity, and the Solana stablecoin landscape.
Published On: Fri, 26 Dec 2025 12:48:34 GMT
Here I emphasizes on past discussion and stable coin development great mind have shared. They are mostly trying to discuss several path on how DeFi could reach global adoption through stablecoin.
This could improves global trade settlement. On-chain FX could handles cross-border payments, remittances, and conversions to local stable coins or fiat without regulation barriers. It could replaces slow systems with instant, low-cost conversions.
To achieve widespread adoption, on-chain FX requires deep AMM pools capable of handling volumes like $11 billion in 30 days. Managing slippage can quickly become a challenge, along with the need for scalable infrastructure and payment systems built on top. The stable coin ecosystem for FX swaps must also prioritize robust security.
x402 is an open-source, internet-native payment protocol developed by Coinbase. It leverages the HTTP 402 “Payment Required” status code to enable instant micropayments in stable coins like USDC.
x402 offers several advantages:
Traditional banks like Deutsch bank and auditor like Deloite, EY have faced sever charges for wrong auditing or money laundering. Many politician have been found guilty of embezzlement of public funds
A major advantage of blockchain-based stablecoins is the reduction of corruption, illegal transactions, and money laundering. Financial police will be able to track any money flow and auditor could have a better views on corporate operation. This could also open new role in wallet tracking / data analyst (DUNE). New concept, economic model could be discover due to a better understanding of money flow and precise data analysis.
For me, blockchain is more than a utility-driven revolution from a corporate perspective. It is also a way to restore trust in governments and elites by giving the public greater control and transparency.
He emphasize on the fact that Blockchain stable coin won’t be known from public. Retails don’t care about the background If they got a functional payment system. He argues that Telegram first built a messaging app. Only later did it integrate the TON network. Users gained access to wallets and payment services without realizing they were using crypto or blockchain.
This is what Circle, Tether, Coinbase, and Stripe are building. They are creating payment infrastructure that allows merchants to accept crypto without understanding it. Merchants receive dollars, the infrastructure handles the blockchain complexity, and customers get a seamless checkout experience.
Crypto’s biggest success will come when people stop talking about it. At that point, it will function as invisible infrastructure powering experiences people actually want.
Their total market capitalization has surged 13x, from $666 million in August 2023 to $8.98 billion in May 2025, with a peak of $10.8 billion in February.
They account for 3.7% of the overall stable coin market, which totals $300 billion.
Over 100 yield stable coins exist; dominant ones like Ethena’s sUSDe and Sky’s sUSDS/sDAI hold 57% of the market ($5.13 billion). Since mid-2023, they’ve distributed nearly $600 million in yield.
What drive this recent flow of new created Stablecoin ?
2 points :
New reward model can be set up during low-rate scenario like government stepping in. Gov could incentivize users by providing issuance for stable coin use. In a high interest rate environment, stablecoins, especially decentralized ones, have a clear advantage. They can generate yield or incentives from reserve assets. Simply holding the stablecoin can provide users with an annual return that helps offset inflation. Those yield interest could transform to cashback or utility advantage with firm partnership.
Stable infrastructure and corporate like Apple or Microsoft could benefit from each other. Corporate could access new revenue stream while stable coin access substantial users base for global development.
The United States is the most fertile ground for sustainable growth. Regulation is progressing steadily, and the market size is significant. In contrast, stablecoin adoption is often higher in poorer countries, where weak national currencies drive demand for more stable alternatives.
Let’s now dive into specific features on each type of stable coin to understand their risk metric and yield mechanism. I wrote this and created these visuals to provide a comprehensive view of the mechanisms that I consider more robust than others and that deliver varying levels of yield.
Stablecoins are the backbone of DeFi. Allocating all idle capital to a single protocol is not optimal. Diversification is essential, but achieving consistent yield limits the range of viable options. As a result, careful choices must be made when selecting which stablecoins to adopt.
Yield Mechanism: Users borrow against collateral (ETH, BTC) at a higher value than the stable coin issued, generating yield from lending fees, RWA interest (U.S. Treasury bills), or protocol profit. Excess collateral acts as a buffer.
Examples: USDS (from Sky, yield from RWAs and lending), GHO (from Aave, yield from borrowing fees), USR (from Resolv, yield from tokenized assets), USDe (from Ethena, yield from staked ETH and futures), USD0 (from Avalon, yield from RWA interest), cUSD (from Celo, yield from natural resources backing).
How Yield is Generated: Interest from collateral (staking rewards or RWA returns) is distributed to holders or stakers, often through modules like savings rates.
Yield Mechanism: Stability is maintained through algorithms that adjust supply (mint/burn) based on demand, with yield from seigniorage (fees from minting) or incentives ( governance tokens).
Examples: USDF (from Falcon, hybrid with perpetual futures for yield), USDO (from Avalon, algorithmic elements with RWAs).
How Yield is Generated: Dynamic adjustments create opportunities for arbitrage or rewards, often amplified by DeFi integrations like staking or liquidity provision.
Yield Mechanism: Backed 1:1 by fiat or equivalents, yield from reserves ( Treasuries). Base yield is usually not delivered to users but kept for corporate purposes.
Examples: USDC (Circle), USDT (Tether)
How Yield is Generated: Low-risk interest from reserves, but less decentralized.
Depegging occurs when a stablecoin fails to maintain its intended $1 peg, often due to extreme market stress, imbalances in supply and demand, or significant drops in the value of underlying collateral. This risk is inherent to the stablecoin model, as they depend on economic incentives, algorithmic mechanisms, or reserves that can falter during crypto market crashes or broader financial turbulence. Collateralized stablecoins may depeg if reserves are insufficient or illiquid, while algorithmic ones rely on fragile arbitrage mechanisms that can break under panic selling.
Additional Important Points:
Types of Depegging Mechanisms: there are different type of depeg and it’s important to distinguish between temporary depegs (due to short-term liquidity squeezes) and permanent failures (death spirals in undercollateralized systems). Metrics to monitor include peg deviation percentage (tracking how often the price strays beyond ±0.5% over 24 hours), reserve ratio transparency via on-chain audits, and redemption speed during stress tests.
Market Contagion Effects: Depegging in one stablecoin can trigger cascading effects across DeFi ecosystems “bank run”, as stablecoins are often used as collateral in lending protocols, amplifying losses.
Mitigation Strategies: Regular audits of reserves, over-collateralization ratios above 100%, and hybrid models combining fiat backing with algorithmic adjustments can reduce risks. However, even well-backed stablecoins aren’t immune. For instance, during high volatility, arbitrageurs may delay interventions due to high gas fees or network congestion.
Recent Developments: As of 2025, with increased adoption, depegging risks have been highlighted in predictive models using factors like collateral volatility, issuance volume, and macroeconomic indicators (interest rate changes affecting Treasury-backed reserves).
Example Event: The TerraUSD (UST) depeg in May 2022, where UST lost its $1 peg, dropping to near zero, triggering a $40B+ ecosystem collapse due to algorithmic failure and market panic.
Code bugs or exploits in protocols can lead to hacks or losses. The longer the stable have been running the better it is resistant to those vulnerabilities. Newer stable protocol faces higher smart contract deal (not battle tested).
Smart contracts the skeleton of stablecoins protocols can contain code bugs, logic flaws, or exploitable weaknesses, leading to unauthorized access, fund drains, or protocol failures. Older, battle-tested protocols generally fare better due to extensive auditing and real-world exposure, while newer ones carry higher risks from unproven code.
Additional Important Points:
Audit and Testing Practices: Emphasize the role of multiple independent audits (by Quantstamp or Trail of Bits), formal verification tools, and ongoing bug bounty programs to identify issues pre-launch and after launch. Metrics include the number of audits, time since last major update, and historical exploit incidents.
Oracle Dependencies: Reliance on external data feeds (oracles) for pricing collateral can lead to manipulation. For example, flash loan attacks can temporarily skew prices, triggering unwarranted liquidations (and thus temporary depeg).
Ecosystem-Wide Implications: Vulnerabilities aren’t isolated. A hack in one protocol can affect integrated stablecoins triggering a cascade liquidation through out all stable protocol (because they support each other / use similar collateral) , leading to loss of trust and reduced adoption. This is what happened with SVB defaulting leading to USDC temporary depeg, impacting the whole DeFi ecosystem.
Example Event: The Ronin Network hack in March 2022, where attackers exploited a vulnerability, stealing $620M in ETH and USDC from the Axie Infinity bridge.
Stablecoins face increasing government scrutiny over anti-money laundering (AML), KYC requirements, securities classification, and fiat backing transparency. This can result in operational restrictions, asset freezes, or outright bans, particularly for those with real-world asset (RWA) integrations or international operations. Risks are amplified in jurisdictions with evolving crypto policies, affecting global usability.
Additional Important Points:
Example Event: Tornado Cash sanctions by OFAC in August 2022, blacklisting its addresses and prohibiting U.S. persons from interacting, freezing $437M in assets.
Liquidity risks arise when users cannot buy or sell stablecoins without significant price slippage, worse in thin markets, during panics, or on low-volume exchanges. Established stablecoins with high TVL and deep liquidity pools tend to perform better, as longevity builds network effects and reduces slippage.
Additional Important Points:
Example Event: The FTX collapse in November 2022, causing an $8B liquidity shortfall, halting withdrawals, and leading to bankruptcy amid massive outflows.
Stablecoins often depend on third parties like custodians for RWAs, oracles for price data, or bridges for cross-chain functionality, triggering failure points from bankruptcy, fraud, or operational errors.
Additional Important Points:
Example Event: Celsius Network’s bankruptcy in June 2022, freezing $4.7B in user funds due to illiquid investments and counterparty defaults.
Yields on stablecoins, often derived from lending protocols or treasury investments, fluctuate with market conditions, borrowing demand, and interest rates, lowering predictability for users seeking stable passive income.
Additional Important Points:
Example Event: Yield drops in Aave/Compound during 2022 winter, where rates fell from 10%+ to under 2% due to low borrowing demand.
Specific risks: Smart Contract Vulnerabilities (due to complex borrowing modules), Regulatory Risks (RWA exposure to U.S. government-backed securities invites scrutiny), Yield Variability (dynamic savings rate can drop).
Specific Risks: Borrowing Mechanism Vulnerabilities (over-collateralization can lead to liquidation cascades), Yield Generation Failure (if borrowing demand drops, yield falls to zero).
Specific Risks: Under-collateralization Risks (if RWAs devalue), Liquidation Thresholds (high volatility in underlying ETH/BTC), Safety Module Failures (insurance-like buffer can be insufficient).
Specific risk: yield from auto-compounding staking rewards make it vulnerable to ETH slashing events or low-yield periods, unlike fully overcollateralized coins
Specific risk: crvUSD’s CDP model (150-167% health ratio, backed by BTC/ETH LST) emphasizes borrowing, making liquidation cascades a key risk during volatility, with yield from fees being flexible but often >3.5% APY
Specific Risks: Market Volatility in Underlying Assets (futures can cause rapid losses), Regulatory Compliance Issues (as a PPI pegged coin), Counterparty Risks from Exchanges.
Specific risk: USDA’s transmuter is designed to protect against depegs by allowing minting and burning with limited fees, regardless of whether TVL is one million dollars or one billion. However, this autonomy introduces risk. Governance enabled mechanisms operate without direct intervention. This increases exposure to hacks and collateral failures, especially given the roughly 85 percent steakUSDC backing.
specific risk : csUSD’s three-sided marketplace (holders, generators, restakers) with rebasings for yield (from T-bill/LST) makes it unique but risky for balance changes, leading to compatibility issues in DeFi protocols.
Specific risk : USDA’s fixed borrowing rate of 8 percent and its BTC only CDP model generate more than 5 percent APR from revenues. However, this design exposes the system to Bitcoin price volatility. Unlike diversified collateral models, there is no clearly defined overcollateralization buffer.
Specific risk : GPU CDP are non liquid asset
Specific Risks: Interest Rate Sharp Rate Hikes (futures positions can lose value), Funding Rate Volatility (negative rates erode yield), Perpetual Futures Risks (liquidation from market crashes).
Specific risk : Custody-Specific Risks (RWA management by “hashnote”).
Specific Risks: Hybrid mechanisms amplify peg failures in economic shifts.
Specific risk : cUSD emphasizes decentralization, yield generation, and risk isolation through a three sided marketplace involving holders, generators, and restakers. This structure introduces unique slashing risks for restakers, as yields around an 8 percent APY benchmark depend on loan protection mechanisms failing.
Stable are starting to develop on Solana, following rumors on it’s ETF emission.
Solana is top 5 on top transfer Volume per Chain
Solana is top 3 on active address network concerning stable coin
Notable native stablecoin are emerging ( jupUSD from Jupiter, USX from Solstice and hyUSD from Hylo ). They all have clever algorithm mechanism to keep their stable peg. Keep an eyes on them
Here is about Hylo hyUSD yield mechanism :
I’ll share more on xp farming campaign and hyUSD collateral mechanism this later
Sometimes, yield and collateral do not add up. This was the case with Terra Luna. APYs remained stable at around 20%, while actual revenue was clearly much lower. Keep an eye on correlation between yield provided and collateral, this is where suspicion emerge.
As example here our friend is raising an interesting point on USDai stable :
USDai have communicated on this matter signaling a delay in GPU loan. There are a gap between borrower intention to get USDai and lenders struggle shipping their collateral “NVIDIA B200s sat in French customs after leaving Taiwan”
I hope you enjoyed this piece. I believe DeFi could one day become the foundation of the financial system. In this work, I share strategies, core concepts, and protocols that introduce compelling new ideas.
Thanks for reading & have a nice day
@panterafii
Finance & DeFi - Yield wizard | Stablecoin risks & LP strats | Macro analysis
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