The Rise of Stablecoins: A Comprehensive Analysis of Their Mechanisms, Impact, and Future in the Global Financial Landscape

Abstract

This paper provides a comprehensive examination of stablecoins, a class of cryptocurrency designed to mitigate the price volatility inherent in major digital assets like Bitcoin and Ethereum. By pegging their value to stable assets such as fiat currencies, commodities, or through algorithmic manipulation, stablecoins aim to serve as a reliable medium of exchange, unit of account, and store of value within the digital economy. Through systematic literature review methodology, this research traces the evolution of stablecoins, dissects their underlying mechanisms, and categorizes them into four primary types: fiat collateralized, commodity-collateralized, crypto-collateralized, and algorithmic. The paper analyzes their expanding use cases, from powering decentralized finance (DeFi) and revolutionizing cross-border payments to enhancing corporate treasury functions, while scrutinizing the significant risks they present, including de-pegging events, regulatory uncertainty, and systemic financial risks. The catastrophic collapse of the Terra/LUNA ecosystem serves as a critical case study, offering profound lessons on the vulnerabilities of algorithmic models. The research navigates the complex global regulatory landscape, comparing approaches from major jurisdictions including the United States GENIUS Act, European Union MiCA regulation, and UK FCA frameworks. By synthesizing market data, growth projections, and doctrinal analysis, this paper concludes with a forward-looking perspective on stablecoins' enduring role in the ongoing digitalization of finance and provides normative recommendations for balanced regulatory approaches that foster innovation while ensuring financial stability.