A Stablecoin History Lesson: The Messy Origins of the Internet’s ‘Digital Dollar’

Stablecoins take the most trusted thing in finance, the dollar, and put it onto an open, programmable, always-on network, the blockchain.

Over the past 11 years, stablecoins have evolved from a niche workaround for traders into the backbone of cryptocurrency markets and, increasingly, have become a candidate for global payments infrastructure. Today, policymakers, banks and FinTech firms are racing to define stablecoins’ role as future “digital dollars for the internet.”

That future, however, cannot be understood without examining the messy, improvised and at times catastrophic path that got stablecoins here. Understanding their evolution matters because it reveals the trade-offs that cannot be wished away. Speed versus safety. Decentralization versus efficiency. Innovation versus regulation.

Stablecoins, after all, did not emerge from an elegant theory of money. They emerged from necessity in the crypto space. And only time will tell if they ultimately become similarly necessary across traditional payments and financial services.

Read also: The Stablecoin Market Is $220 Billion. Are Businesses Actually Using Them?

The Accidental Invention of On-Chain Cash

Stablecoins have packed a lot of history into the past 11 years of their existence. As crypto markets grew, traders needed a stable, on-chain substitute for cash that could move quickly without touching banks, which led to Tether being created in 2014 under the name “Realcoin.”

When Tether launched, cryptocurrency markets faced a basic operational problem. Bitcoin could be transferred globally without banks, but dollars could not. Exchanges struggled to maintain banking relationships, cross-border transfers were slow and traders needed a way to move in and out of volatile assets without touching the traditional financial system.

Tether’s proposition was simple: each token would represent one U.S. dollar held in reserve. The execution, however, was anything but clean. Tether has faced persistent questions about whether it actually holds sufficient reserves, due to opaque disclosures and fragile banking relationships, and also faced questions around its role in market manipulations.

Still, despite the controversies, or perhaps because it was the only option, Tether grew rapidly. Liquidity matters more than trust when markets are moving fast, and Tether today boasts a roughly 60% share of the stablecoin market.

Transparency and Decentralization Form a Growth Paradox

Fast forward four years, to 2018, and crypto had grown enough to support alternatives to Tether. Circle and Coinbase launched USD Coin (USDC) together with a different pitch: regulatory compliance and transparency. Reserves would be audited. Banking partners would be disclosed. The token would be redeemable at par under clear legal frameworks.

At the same time, stablecoins were no longer just a trader’s tool. They became the unit of account for crypto markets themselves. Bitcoin, ether, and thousands of other tokens increasingly traded against stablecoins rather than fiat. In effect, stablecoins became cryptocurrency’s base layer of money.

By the 2020–2021 bull market, stablecoins surpassed bitcoin in transaction volume. They were used not only for trading, but also for lending, borrowing, yield farming and remittances. Entire decentralized finance (DeFi) ecosystems ran on stablecoin liquidity.

Of course, stablecoins also ran against the die-hard crypto ethos of decentralization. Not everyone in the Web3 space was comfortable relying on centralized issuers holding dollars in banks to issue stablecoins. That discomfort fueled experiments in decentralized stablecoins, most notably MakerDAO’s Dai.

Dai was backed not by dollars, but by cryptocurrency collateral locked in smart contracts. Its value stability was enforced through incentives, liquidations and governance decisions rather than bank accounts. For crypto purists, this was the holy grail: money that was stable, censorship-resistant, and independent of the traditional financial system.

But decentralization came at a cost. Dai required overcollateralization, making it capital-inefficient. As markets evolved, Dai increasingly relied on centralized assets like USDC as collateral, blurring the line between decentralized idealism and practical compromise.

Other projects pushed even further. Basis attempted a fully algorithmic, non-collateralized stablecoin, adjusting supply dynamically to maintain its peg. It shut down in 2018 after regulatory pressure. Ampleforth (AMPL) experimented with elastic supply rather than price stability, redefining what “stable” could mean.

Stress Tests and Systemic Risk

The most dramatic stablecoin failure came in 2022 with the collapse of TerraUSD (UST), an algorithmic stablecoin that relied on market confidence and arbitrage incentives rather than collateral. When confidence broke, UST entered a death spiral, wiping out tens of billions of dollars and triggering contagion across crypto markets, ultimately leading to the collapse of FTX and the exposure of its leadership team’s criminal acts.

Centralized stablecoins were not immune either. In March 2023, USDC temporarily de-pegged after Silicon Valley Bank, where Circle held a portion of its reserves, collapsed. The peg was restored, but the episode underscored an uncomfortable truth: stablecoins inherit the risks of the financial system they depend on.

Stablecoins are promises. When the mechanism enforcing that promise fails, the damage can propagate quickly.

Read more: Big Banks Push Stablecoins Into a New Cross-Border Fight

It is tempting to see stablecoins’ future as a straight line toward mainstream adoption. But their history suggests something more complex.

Stablecoins did not succeed because they were well-designed from the start. They succeeded because they solved immediate problems faster than traditional finance could.

Stablecoins settle instantly, operate 24/7, and move at internet speed. They can be embedded in software, automate compliance, and reduce reliance on correspondent banking networks. For emerging markets, they offer dollar access without dollar accounts.

But achieving this vision may depend on lessons learned the hard way.