Stablecoins: The Practitioner’s Guide

Crypto is finally exporting something beyond speculation — and stablecoins are leading the charge. Uncover the tech, the traction, and the transformative potential behind stablecoins, written by practitioners, for practitioners.

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Introduction

Crypto is finally exporting something beyond speculation: Stablecoins. 

In the last year, three major events conspired to bring stablecoins into the mainstream:

1. Tether, issuer of the world’s largest stablecoin USDT, earning nearly $13bn of profit with less than 200 employees.
2. President Trump’s inauguration and a reversal of the U.S.’ antagonistic regulatory posture towards digital assets.
3. Stripe’s $1.1bn acquisition of Bridge, a stablecoin infrastructure company orchestrating cross-border transactions.

When somebody makes a metric ton of money, in a burgeoning ecosystem gaining regulatory clarity, and Stripe - arguably the most technically competent and successful fintech of all time - slams down a billion dollar stamp of approval? People listen.

The furor around stablecoins, however, has created the typical onslaught of newsletters, conferences, and even Chamath’s top signal hidden behind a $99/mo paywall. With so much content, you might be asking yourself: why do I need yet another stablecoin thinkpiece? 

Because you want something by practitioners, for practitioners.

You want the objectivity that comes from competing in the arena, not the 10,000 foot platitudes of stablecoin tourists and venture capitalists. You want granularity because the details matter when designing your products and strategies, but you need digestibility because you must sell the future to internal and external stakeholders. Most of all, you want the insights forged only through years of relationship building, infrastructure development, careful investment, and managing volatility - across multiple vectors - effectively. 

To that end, we present: Stablecoins: The Practitioner’s Guide. 

If you are issuing or using stablecoins in your business, this guide is a window into how sophisticated operators view the landscape. To provide multiple perspectives, we have leveraged our expansive networks to draw unique insights from leading contributors at the front lines of the stablecoin insurgency. Further enhanced by Steakhouse Financial’s years of advising stablecoin issuers and building crypto-native products, we hope this guide provides a high-signal and unique read into the world of stablecoins.

Let’s get started.

Defining Stablecoins & Blockchains

Stablecoins are generally U.S. dollar-denominated liabilities and backed by an equivalent or greater market value of asset reserves. There are two main types:

• Fiat-backed: Fully collateralized by bank deposits, cash, or risk-remote cash substitutes (e.g. Treasury bills).
• Collateralized Debt Position (CDP): Overcollateralized primarily by crypto-native assets (e.g. ETH or BTC). 

The foundational determinant of a stablecoin’s utility is its “peg” to the underlying reference asset (dollars). The peg is maintained through two mechanisms: primary redemption and secondary markets. First, can I redeem my stablecoin liability, instantly, for an equivalent amount of reserve backing? If not, is there a deep and durable secondary market where market participants buy, or accept, my stablecoin liability at the peg?

Due to the unpredictable nature of secondary markets, we also view primary redemption as the more durable peg mechanism. It’s also worth noting the many attempts at undercollateralized or algorithmic stablecoins, which are primarily backed by nothing, which we will not acknowledge further in this guide.

Importantly, stablecoins do not exist in a vacuum. When you hold a dollar deposit at Chase bank, Chase is responsible for custodying your dollar, ensuring you can access it, and allowing you to transact with someone else using your dollar. Stablecoins rely on blockchains to provide these same core functions.

Blockchains are a global “system of record” of what everyone owns, who everyone transacts with, and the terms dictating how transactions occur. 

For example, Circle’s stablecoin USDC is issued through the ERC-20 token standard dictating the following rules for a successful token transfer: deduct an amount from the sender's account and add the same amount to the recipient’s account. These rules, combined with the consensus mechanism of a blockchain, ensure that no user can transfer more USDC than they own (commonly referred to as the double-spend problem). In grossly oversimplified terms, blockchains function as an append-only database or double-entry ledger, with an initial state and record of every transaction that has ever occurred in its closed-loop network. 

Every asset on a blockchain, including USDC, is custodied by either an onchain account (EOA or wallet) or a smart contract with the ability to receive and transfer assets when specific conditions are met. EOA ownership, or the ability to transact assets from the public address, is enforced through the underlying blockchain’s public-private key encryption schema binding every public address, one-to-one, with a private key. If you have the private key, you effectively own the assets in the public address (“not your keys, not your coins”). Smart contracts, which hold and transact stablecoins according to preprogrammed and transparent logic, enable onchain organizations (e.g. DAOs or AI agents) to programmatically transact stablecoins without human intervention. 

“Trust” in the system’s accuracy stems from the underlying blockchain’s execution and consensus mechanisms (e.g. Ethereum Virtual Machine or EVM and proof-of-stake, respectively). Accuracy can be proved through the blockchain’s open and auditable history of the initial state and every subsequent transaction. Transaction settlement is managed by a globally distributed network of node operators, 24/7/365, enabling stablecoins to settle without regard to traditional banking hours. To compensate node operators for this service, transactions are processed for a transaction fee (gas) that is typically denominated in the underlying blockchain’s native currency (e.g. ETH).

These definitions may be pedantic - perhaps even treasonous to some - but this narrow, functional overview provides a suitable common foundation for our readers. So let’s start with the more interesting stuff: how did we get here? 

History of Stablecoins

12 years ago, stablecoins were a figment of the imagination. Today, Circle, issuer of the world’s second largest stablecoin USDC is readying for a sale or an IPO. Jeremy Allaire, the founder of Circle, provides a first hand history of USDC’s creation in Circle’s S-1. 

We called our friends Phil Potter and Rune Christensen, creators of the largest (USDT) and third largest (DAI/USDS) stablecoins, to add their founding stories to the canon.

Tether: Birth of the King

Back in 2013, with crypto firmly in its wild west era, the primary venues to access and trade crypto were crypto exchanges like Mt. Gox and BitFinex. Given the nascency of crypto, the regulatory landscape was even more nebulous than today: exchanges were counseled to follow a “best practice" of only accepting crypto deposits and issuing crypto withdrawals (e.g. BTC in and BTC out). This meant that traders were forced to convert dollars into crypto on their own, an imposition that strangled wider adoption. In addition, traders had nowhere to hide from crypto’s wild price volatility without leaving the exchange. 

Phil Potter came to crypto with a Wall Street resume and a pragmatist’s eye for bottlenecks. His solution was simple: a “stablecoin,” a one dollar crypto liability backed by one dollar in reserve, that enabled traders to practically navigate exchanges and market volatility with dollars. In 2014 he took this idea to one of the largest exchanges at the time, BitFinex. He eventually secured a partnership to create Tether, a separate organization with the necessary money transmission licenses to integrate with the wider financial network of banks, auditors, and regulators. These providers were necessary for Tether to custody reserve assets, shouldering the messy fiat plumbing in the background, while enabling BitFinex to stay “crypto-only.”

The product was simple but the structure was radical: Tether issued dollar denominated liabilities (USDT) and only certain trusted, KYC’d entities could mint or redeem USDT for its underlying reserve assets directly. USDT, however, lived on permissionless blockchains, meaning that any holder could freely transfer or exchange USDT for other assets in open secondary markets.

For two full years the concept seemed stillborn. Then, in 2017, Phil noticed that USDT adoption was growing in regions like Southeast Asia. Upon investigation, he realized that export businesses began viewing USDT as a faster and cheaper alternative to regional dollar payment networks. Eventually, those businesses started to post USDT as collateral for facilitating imports and exports. Around the same time, crypto-natives began to notice USDT’s growing liquidity and began posting USDT as margin for cross-exchange arbitrage. At this point, Phil realized that Tether had conjured a parallel dollar network that was faster, simpler, and open 24/7.

Once the flywheel spun, it never slowed. Because issuance and redemption stayed inside a regulated perimeter while tokens circulated freely on blockchains like Tron and Ethereum, USDT hit escape velocity. Every new user, merchant, or exchange that accepted USDT only increased the power of its network effect, growing the utility function for USDT as a store of value and payment method. Today, nearly $150 billion worth of USDT is in circulation, dwarfing USDC’s $61 billion outstanding, and many call Tether the most profitable business per employee in the world. 

Phil Potter is a crypto luminary and driven by a fair share of ideology. It would be impossible, however, to call him an “outsider” to the world of traditional finance; he is the type of person that you would expect to create the world’s largest stablecoin. Rune Christensen, on the other hand, was not. 

Download the full white paper to explore the evolving landscape of stablecoins.