Why the Next Generation of Stablecoins Is Moving Beyond Fiat

Stablecoins are many things – non-volatile tokens; hedging instruments; payment solutions – but at their core, they’re a bridge between crypto and fiat. Pegged to fiat currencies (usually the US dollar), they are a reminder that no matter how far blockchain comes, it remains umbilically linked to the traditional financial system.

More than $60 trillion in stablecoins were moved onchain in the last 12 months – a colossal figure, even if this number shrinks to closer to $400B when only payments and transfers are counted, of which B2B payments amount to $230 billion – 60% of all transfers. Regardless of the metric you use to measure them, stablecoins have become the bedrock of the cryptoconomy, with assets such as USDT and USDC dominating.

But while on the surface stablecoin usage is steadily growing, powering everything from institutional capital flows to correspondent banking, underneath, a seismic shift is occurring. The assets used to back stablecoins – traditionally fiat currency and cash equivalents – are being radically altered as issuers endeavor to do more with these programmable assets.

Phase One – prove that stablecoins can remain stable and operate at scale – has been a resounding success. We’re now entering Phase Two in which stables are expected to be more than mere static assets. The bootstrapping is over and the market is shifting toward yield-bearing, asset-backed instruments such as Tharwa’s thUSD that put capital to work.

Up until now, stablecoins have been “dumb” but reliable. Now they’re about to get smart by inheriting properties that allow them to do more than merely hold their dollar peg.

The Structural Limits of Fiat-Backing

While fiat-backed models provided the necessary trust to mainstream stablecoins, they carry inherent systemic risks. Centralization is the obvious one, leaving issuers vulnerable to banking partner failures or sudden regulatory shifts. But the greatest issue with the fiat model concerns capital inefficiency.

Traditional stablecoins represent billions in idle cash that sits in reserves, benefiting the issuer through interest on T-bills while the holder gains nothing but price stability. For institutional players especially, this model looks increasingly outdated. In a high-utility environment, after all, holding a non-productive asset is a missed opportunity.

Unfortunately, beyond enhancing payments and trading liquidity, stablecoin innovation at the asset layer has been modest, with few mechanisms emerging in Phase One to directly connect stables to broader economic productivity.

Phase Two, however, is poised to change all that as crypto-collateralized and hybrid designs take center stage. These models are making fiat-backed stables look almost archaic.

The Rise of Productive Backing

Stablecoin issuers are gravitating towards mechanisms that combine onchain assets with offchain collateral to diversify backing. Not only does this diversity reduce risk by minimizing reliance on a single source of collateral, but it maximizes opportunity, since it allows stablecoins to accrue yield derived from the underlying assets.

We’re now seeing instruments such as short-duration credit, tokenized treasuries, and other real-world assets being added into the mix. Commodity- and asset-backed tokens are also coming onstream, enabling stable value representations tied to tangible economic inputs rather than purely monetary reserves. Tharwa’s thUSD, for example, is backed by Sukuk (Islamic bonds), real estate, and gold. Other issuers are incorporating a combination of US Treasuries with yield-generating crypto assets such as ETH, providing diversity coupled with consistent earning opportunities.

What’s equally significant is that to qualify for this yield, holders don’t necessarily need to stake their stables – which was a requisite in Phase One, when the first yield-bearing stables were piloted. After all, what’s the point of creating a yield-bearing stablecoin if you have to park it to benefit from it? Doing so vitiates the capital efficiency that is stables’ core value proposition.

Engineering Sustainable Stables

The next generation of stablecoins is backed by a diverse range of assets, both traditional and crypto-based, but one commonality they share is their modularity. Their architecture enables distinct properties such as stability, liquidity, and yield to be tuned independently. This allows issuers to design products that cater to the needs of specific user groups, be it institutions or DeFi traders.

As a result, the boundary between stablecoins and tokenized funds is becoming blurred as reserve assets increasingly resemble managed portfolios rather than static cash pools. This allows issuers to align incentives with users through shared yield or enhanced capital utilization while still maintaining predictable price behavior.

Due to this shift, it’s now more accurate to view stablecoins as composable building blocks within a wider financial stack. Through interoperating with everything from lending protocols to payment networks and institutional settlement systems, stables are capable of serving as much more than dumb dollars.

Smarter But Still Stable

Fiat-backed stablecoins have carried the industry this far. They’ve supplied the trust layer that’s allowed crypto markets to scale. But these fully reserve-backed models hold large pools of idle collateral that generate minimal yield. As digital finance evolves, the focus is shifting to designs that are more capital-efficient and yield-rich.

Not only is this the logical way forward, but it’s arguably the only way forward if stablecoins are to realize their full potential as digital money that maintains purchasing power while incentivizing usage. Fiat isn’t going anywhere, but its value as a primary form of stablecoin backing is falling out of favor. The smart approach is to peg stablecoins to fiat currency by backing them with anything that will add – rather than simply maintain – value.

RWAs. Commodities. Crypto. Metals. You name it, it’s all being programmed into stablecoins as we speak. Once passive units of account, stablecoins are becoming active yield-bearing, treasury management instruments. You can do a lot with stablecoins today. Soon, you’ll be able to do it all.