In the world of digital assets, few topics spark as much debate as the stability of so-called "stablecoins." Recently, a sharp drop in the value of USDT—the most widely used stablecoin—against the Chinese yuan sent shockwaves across the crypto market. From 6.70 CNY to as low as 6.20 CNY, the 8% plunge triggered massive volatility, exchange inflows, futures liquidations, and a surge in alternative stablecoin trading volumes. This event reignited a crucial question: Are stablecoins truly stable?
To unpack the mechanics, risks, and future of stablecoins, we turn to insights from two blockchain veterans: Gu Qianfeng, a founding member of IPFS Force and blockchain advisor, and Li Tianfang, founder of Hydro Protocol and former tech VP at Innovation Works. Their expert analysis reveals that behind the promise of price stability lies a complex web of trust, centralization, and systemic risk.
The Illusion of Stability: How USDT Works
At its core, USDT (Tether) claims to maintain a 1:1 peg with the U.S. dollar. For every USDT in circulation, Tether Limited allegedly holds one U.S. dollar in reserve. This mechanism enables arbitrage—if USDT trades below $1, traders can buy it cheaply, redeem it for $1 via Tether, and profit from the difference.
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However, this system hinges on a single point of failure: Tether’s ability and willingness to honor redemptions. If users cannot redeem their tokens due to banking issues or lack of reserves, the arbitrage mechanism collapses—and so does confidence.
As Li Tianfang explains:
"If you send 100 USDT to Tether and they say, 'Sorry, our bank has issues—come back later,' the entire model breaks down."
This dependency on a centralized entity contradicts the decentralized ethos of blockchain technology and exposes users to counterparty risk.
Why Trust in USDT Is Eroding
Gu Qianfeng highlights several long-standing concerns:
- Lack of Transparency: Tether has not provided a comprehensive, independently audited financial report for years.
- Reserve Uncertainty: There is no verifiable proof that all issued USDT are fully backed by USD.
- Centralized Control: The close ties between Tether and Bitfinex raise conflict-of-interest concerns.
- Risk of Manipulation: Without oversight, there’s potential for unbacked minting ("printing money") to manipulate markets.
These issues culminated in the recent crisis, which was triggered by the near-collapse of Noble Bank in Puerto Rico—the financial institution holding Tether’s reserves. When banking instability threatened redemption capabilities, panic selling followed.
Stablecoins: More Than Just Price Anchors
While marketed as "stable," these digital assets serve a deeper role: they function as de facto pricing units across crypto exchanges. Most trading pairs are quoted in USDT, making it the lingua franca of crypto markets.
But Gu Qianfeng argues this dominance isn’t based on intrinsic stability—it’s a product of early adoption and exchange support.
"If every exchange puts a coin on the right side of trading pairs, it becomes a 'stablecoin' by default."
When Binance listed TUSD but placed it on the left side (as the base currency), its price spiked—an irony that underscores how artificial this stability really is.
The Rise of Alternatives and Exchange Competition
The USDT crisis accelerated interest in alternatives like DAI, USDC, and exchange-issued stablecoins. In response, major platforms like OKX, Huobi, and FCoin began launching their own versions.
This trend reflects more than innovation—it signals intensifying competition among exchanges. By issuing or endorsing a stablecoin, an exchange gains:
- Increased user lock-in
- Cross-platform influence
- Potential revenue from controlled issuance
In bear markets, when trading volumes shrink and profitability drops, owning a widely adopted stablecoin becomes a strategic advantage—even a lifeline.
Can Decentralized Stablecoins Solve the Problem?
Enter DAI, a decentralized stablecoin built on Ethereum. Unlike USDT, DAI is over-collateralized with crypto assets (like ETH) locked in smart contracts. Its key advantages:
- Transparency: Reserves are publicly verifiable on-chain.
- Censorship Resistance: No single entity controls redemption.
- Trustless Operation: As long as code is secure, users retain control.
Yet challenges remain:
- Volatility in collateral (e.g., ETH crashes) can threaten solvency.
- Complexity may deter mainstream adoption.
- Incentives must align to ensure continuous participation.
Still, DAI represents a paradigm shift—using code instead of corporations to enforce monetary policy.
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What Makes a Truly Stable Coin?
According to Gu Qianfeng, real stability requires two pillars:
- Asset Backing – Real-world value support.
- Regulatory Oversight – Legal accountability and auditing.
Without both, any "stablecoin" is merely a speculative instrument masquerading as safety.
Moreover, stability is contextual. In hyperinflation economies, even local fiat fails. In prisons, cigarettes become currency. In deserts, water holds value. The reference point matters.
Thus, investors should focus not on perfection but on practical reliability—choosing stablecoins backed by transparency and strong institutional support.
FAQs: Your Stablecoin Questions Answered
Q: Is USDT going to collapse completely?
A: While full collapse isn’t inevitable, ongoing opacity increases systemic risk. Regulatory pressure may force greater transparency or hasten its decline.
Q: Are all stablecoins centralized like USDT?
A: No. While many are issuer-dependent (e.g., USDC), decentralized models like DAI exist. They rely on smart contracts rather than banks.
Q: Can stablecoins replace traditional money?
A: Not yet. For widespread use in payments or cross-border settlements, they must overcome usability hurdles like easy on/off ramps.
Q: Do stablecoins threaten national monetary sovereignty?
A: Current models don’t challenge central banks—they’re typically dollar-pegged and reliant on existing financial systems.
Q: Is there a truly “safe” stablecoin?
A: None are risk-free. However, those with regular audits, legal clarity, and decentralized safeguards (like DAI) offer stronger trust guarantees.
Q: Could stablecoins be used for money laundering?
A: While possible, centralized stablecoins are easier to monitor than Bitcoin. Authorities can freeze accounts or shut down issuers—unlike with decentralized networks.
The Future: Regulation, Innovation, and Real-World Use
For stablecoins to mature, three developments are essential:
- Regulatory Clarity: Governments must define rules around reserves, audits, and licensing.
- Interoperability: Seamless transfer across chains and platforms will boost utility.
- User-Centric Design: Simplified access and redemption processes will drive adoption.
In cross-border payments, stablecoins offer promise—but only if they integrate smoothly with real economies. As Gu Qianfeng notes from his experience with Ripple in trade finance: speed often trumps absolute stability.
Ultimately, the goal isn’t to replicate fiat in digital form—but to build a new financial layer grounded in transparency, accessibility, and code-based trust.
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Final Thoughts
Stablecoins occupy a paradoxical space—they’re neither fully stable nor entirely trustworthy. Yet they remain indispensable to crypto markets. The path forward lies not in blind faith in any single token, but in demanding accountability, embracing decentralization where possible, and recognizing that true stability comes from robust systems—not just dollar pegs.
As blockchain evolves, so too must our understanding of what it means for money to be "stable."