Why Do Stablecoins Exist?

Explains the background of stablecoins and how they fill the 'cash layer' gap in the crypto world.

Stablehunter · Published: 2025-12-14 · Updated: 2026-01-05

Preface

To understand “what exactly is a stablecoin,” the first step isn’t memorizing abbreviations like USDT or USDC. Instead, ask: What was missing in the crypto world before stablecoins existed? Only by clearly seeing this “gap” can you understand later why various stablecoin designs, expansions, or failures exist — they’re trying to fill a specific hole, not just invent a new buzzword for hype.

In this article, we won’t talk about specific products or returns yet. We just answer one question:

Given that traditional finance already has a “cash layer,” why does the crypto world need to recreate an “on-chain money” system, and why must it be “stable”?

1. The Cash Layer in Traditional Finance: Looks Boring but Everyone Depends on It

In the traditional financial system, there has long been a full set of “base-layer” instruments, collectively called the cash layer, including:

• Bank demand deposits
• Money market / cash management funds
• Short-term government bonds or short bond funds

These have several common features:

• Low volatility: Net value rarely jumps 10% or drops 20% in a day.
• Always accessible: Can be withdrawn, paid, or transferred anytime.
• Easy to account for: Used by companies, banks, and clearing systems as a valuation basis.

A simple comparison:

In short:

In traditional finance, the need for a “safe place to park money” is already handled by these products, so ordinary people don’t have to worry daily.

2. The Early Crypto World's Dilemma: Assets but No Cash Layer

Looking at the early crypto world, the scene was completely different.

2.1 Too Much Volatility: Can't Be Used as 'Money'

The earliest tradable assets were limited: BTC, later ETH.

• Gains could be huge;
• Losses could be brutal.

You could use them for speculation or long-term holding, but it was hard to use them as payroll or as a “unit of account”—1 ETH might equal $3,000 today and only $2,500 tomorrow:

• Paying employees could mean “losing value” overnight;
• Accounting for costs and gross profits would fluctuate wildly.

The result: the crypto world initially only had a “high-volatility asset layer” with no stable cash layer.

2.2 Confusing Valuation: Every Platform Has Its Own 'Unit'

Early exchanges and wallets often worked like this:

• Some platforms priced in BTC;
• Others in ETH;
• Some used internal points;
• The same asset displayed differently on each platform.

This created real problems:

• Users couldn’t easily see their fiat gains;
• Comparing prices across platforms was cumbersome;
• Institutions could not generate unified reports for risk management or accounting.

Without a “widely recognized stable ruler,” each platform measures its own way.

2.3 Deposits and Withdrawals Are Slow and Expensive, Making the On-Chain World an 'Island'

Connecting crypto assets to real-world money relied on:

• Bank transfers
• Payment institutions
• OTC channels

Problems:

• Cross-border is slow: Often takes days, longer during holidays;
• High cost: Exchange rate spreads, fees, hidden costs accumulate;
• Fragmented experience: One side is a 24/7 blockchain, the other is 9–5 banking.

Thus, the on-chain world became:

A “volatile asset island,” with no stable cash on it, and narrow, expensive bridges to the real world.

3. The Market's Own Demand: I Need a 'Stable Chip'

Many financial infrastructures weren’t born from a sudden idea of a genius, but forced by real business needs. Stablecoins are no different.

3.1 Exchanges Were the First to Sense Something Was Wrong

For early exchanges, the pain points were specific:

1. Pricing only in BTC / ETH, users had no sense

• New users couldn’t tell how much “CNY / USD” they earned;
• Risk management and accounting were very challenging.

1. Converting to USD every time was tedious

• Users needed frequent deposits and withdrawals;
• Banks and regulators were sensitive to high-frequency large transfers.

Naturally, a question emerged:

Could there be something “token-like on-chain like Bitcoin, but priced close to the USD”?

Exchanges could use it for pricing and settlement, and users could instantly see the approximate value of their balance.

Simply put:

“Give me an on-chain, relatively stable unit of account.”

3.2 Market Makers and Institutions Also Need a 'Stable Base'

Both in traditional and crypto markets, market making and strategy trading share one thing: they need a stable base.

• Traditional: market makers use cash or bonds as a base, able to act quickly;
• Crypto: if the base is BTC / ETH, adjustments amplify volatility.

From this view, stablecoins are:

A “digital cash base” accessible 24/7 on-chain.

For them, having or not having stablecoins determines whether they can manage risk and funds in a precise and fast way.

4. Why Not Just Put the Dollar Directly on the Blockchain?

Many people first think:

Everyone trusts the USD anyway, so why not put bank accounts directly on-chain?

Reality is harsh: Technically and regulatorily, this won’t work in the short term.

4.1 Technically: Two Completely Different Systems

Simplified:

• Bank system:
• Closed, high-permission;
• Centralized ledger internally;
• Few external interfaces, heavily regulated.
• Public blockchain:
• Anyone can initiate transactions;
• Ledger is public and transparent;
• Data cannot be arbitrarily changed.

Making bank accounts like wallets on-chain means:

• Banks must open large parts of core systems;
• Accept requests from any global IP, essentially a foundation-level surgery for traditional finance.

4.2 Regulatorily: Authorities Won't Allow 'Anonymous Global Dollar Accounts'

Regulators focus on:

• Who is using the money?
• Where does it come from?
• Where is it going?

Allowing anyone to open “USD accounts” on-chain:

• Anonymous / semi-anonymous;
• Globally accessible, 24/7;
• Makes KYC, AML, and sanctions enforcement very difficult.

Risk is too high for the current monetary system. So a more realistic approach:

Traditional rules run on the “bank / compliant institution” side, while an intermediary institution/protocol maps these “off-chain dollars” into on-chain tokens.

This intermediary layer is the stablecoin issuer and related arrangements.

5. Three Things Stablecoins Aim to Solve

Combining the factors above, stablecoins target three goals:

5.1 A 'Stable Ruler' Everyone Can Agree On

• Provides exchanges, protocols, market makers, and users with a USD-like unit of account;
• Makes it easy to create balance sheets, calculate returns, and generate reports.

5.2 Enable Smooth Flow of Funds in the On-Chain World

• Once funds are on-chain, they flow freely between wallets, protocols, and platforms;
• 24/7 operations, settlement no longer depends on bank hours;
• On some public chains, single transaction costs can be very low.

5.3 Provide a 'Relatively Stable Underlying Asset' for All Future Financial Activities

• Lending protocols need stable pricing and collateral;
• Decentralized exchanges need stablecoin pairs;
• Various “low-risk finance” and “cash management” modules need stablecoins as a base.

Without stablecoins, these could not scale to today’s level.

In short:

Stablecoins are the “cash layer” the crypto world lacked, turning a “high-volatility casino” into a system where you can account, settle, and manage funds prudently.

Summary

If you remember one thing:

Stablecoins are not about “creating a new coin,” but about filling a necessary layer in crypto — a stable, unified, always-available cash layer.

Traditional finance already had its cash layer: demand deposits, money market, short-term bonds, government bonds; early crypto only had BTC and ETH — high-volatility assets, with no universally recognized stable token.

Stablecoins exist because:

• Exchanges, market makers, and institutions need a stable unit of account;
• Users and funds need an on-chain USD substitute;
• All subsequent lending, trading, and finance protocols need a relatively stable base.

Once you understand this, looking at “what stablecoins are,” “their types,” and “how to use them” becomes much easier.

Resources

The links below are clean (no tracking) and mainly for referencing official or authoritative sources. Replace them with more precise links as needed.

• BIS (Bank for International Settlements) Official Site
• IMF (International Monetary Fund) Official Site — Research & Reports
• Circle Official Site (USDC Issuer)
• Fireblocks Official Site (Institutional Custody & Stablecoin Resources)
• Coinbase Official Site (Compliant Exchange & Research)

If you find this article helpful, feel free to share it with friends so more people understand the underlying logic before deciding whether to engage with stablecoins.

Research methodology & corrections