Stablecoins are a type of cryptocurrency designed to mimic the role of traditional fiat currencies like the US Dollar or New Taiwan Dollar in the digital world.
While most cryptocurrencies can experience significant price swings within a single day, stablecoins aim to maintain a steady value, making them attractive to risk-averse investors.
What Is a Stablecoin?
A stablecoin is a cryptocurrency pegged to a reserve asset such as a fiat currency (e.g., the US dollar or euro) or a commodity like gold. Its stability comes from the underlying value of the asset it is tied to.
Among the most widely recognized are USD-pegged stablecoins. Since the US dollar is denoted as USD, many refer to dollar-backed stablecoins as USDT, often called "U" in casual conversation.
Unlike more volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins experience minimal price fluctuation, hence the name "stablecoin."
For example, if the exchange rate between the New Taiwan Dollar and the US dollar is 33, then the rate for purchasing the dollar-backed stablecoin USDT would also be approximately 33.
Types of Stablecoins
Stablecoins can be categorized into four main types based on their backing mechanism and the assets they are pegged to:
- Fiat-Backed Stablecoins
- Crypto-Backed Stablecoins
- Algorithmic Stablecoins
- Commodity-Backed Stablecoins
1. Fiat-Backed Stablecoins
These are stablecoins pegged 1:1 to a national fiat currency. The issuer is required to hold an equivalent amount of the fiat currency in reserve to ensure stability and redeemability.
Popular examples of fiat-backed stablecoins include USDT, USDC, USD1, and FDUSD.
USDT vs. USDC: A Comparison
2. Crypto-Backed Stablecoins
These stablecoins are collateralized by other cryptocurrencies. Their value is maintained through over-collateralization and smart contract mechanisms that manage the reserve assets.
Notable examples include DAI and the now-defunct BUSD.
- The Delisting of BUSD
BUSD, often referred to as the Binance Stablecoin, was a cryptocurrency stablecoin issued through a partnership between Binance and Paxos.
The U.S. Securities and Exchange Commission (SEC) alleged that BUSD violated securities regulations and threatened legal action. Following this, Paxos terminated its collaboration with Binance.
Binance CEO Changpeng Zhao subsequently announced that the exchange would cease using BUSD as a primary trading pair, leading to its full delisting by 2024.
This event highlights the current stringent regulatory stance toward cryptocurrencies in the U.S., though it remains to be seen how political shifts might influence future policies.
3. Algorithmic Stablecoins
Algorithmic stablecoins maintain their peg through algorithms and smart contracts rather than direct collateral reserves, aiming for a more decentralized structure.
UST (TerraUSD) is the most famous example of an algorithmic stablecoin. It relied on a arbitrage mechanism with its sister token, Luna, to maintain its peg. However, a critical flaw led to a "death spiral," causing both UST and Luna to crash dramatically in value.
- The Luna Collapse
Luna and UST were once considered an innovative pairing, with UST marketed as maintaining a 1:1 peg with the US dollar. The ecosystem even offered the Anchor Protocol, which promised up to 20% annual returns for UST holders, attracting massive speculative investment.
The system was designed so that gains from Luna's appreciation would help sustain these high yields. However, a vulnerability in the contract led to an oversupply of UST, breaking the peg and triggering a catastrophic devaluation that wiped out both currencies.
More recently, the founder of Cardano has introduced DJED, a new algorithmic stablecoin. According to official sources, DJED is being integrated into over 40 dapps within the Cardano ecosystem, focusing on DeFi, payments, and lending.
DJED is pegged to the US dollar and is backed by reserves of ADA, Cardano's native token.
4. Commodity-Backed Stablecoins
These stablecoins are pegged to physical commodities like gold. The issuer holds the actual asset in reserve, which is often audited and held by third-party custodians.
The key advantage of commodity-backed stablecoins is the ability to tokenize real-world assets, opening up new avenues for investment.
Common examples include XAUT and PAXG, both of which are backed by physical gold.
Common Stablecoins in the Market
Based on data from DefiLlama, here are the top stablecoins by market share as of early May 2025:
- USDT: 61.65% (Fiat-Backed)
- USDC: 25.4% (Fiat-Backed)
- USDe: 1.93% (Fiat-Backed)
- USDs: 1.73% (Fiat-Backed)
- DAI: 1.69% (Crypto-Backed)
USDT
Tether (USDT) is one of the most widely used stablecoins in the cryptocurrency market. It was designed to combine the benefits of cryptocurrencies with the stability of fiat currency.
Its value is pegged to the US dollar, meaning 1 USDT should, in theory, always be worth 1 USD. This makes it a popular safe haven for investors during periods of high volatility in crypto markets.
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USDC
USD Coin (USDC) is managed and issued by Circle. For every USDC in circulation, the company claims to hold one US dollar in reserve. When a user buys USDC with dollars, those dollars are stored; when they redeem USDC, the tokens are burned.
Like USDT, USDC is pegged 1:1 with the US dollar. However, USDC is often viewed as more compliant and transparent in its operations, leading some to consider it a safer alternative to USDT.
USD1
The WLFL Foundation, supported by former President Donald Trump, announced the launch of USD1, a dollar-pegged stablecoin. It promotes a vision of political and financial integration, aiming to create a patriotic digital currency system free from government and traditional banking control.
USD1 uses a 1:1 dollar reserve mechanism backed by U.S. Treasuries, cash, and other equivalent assets. It is deployed on Ethereum and BNB Chain, with a focus on transparency through cross-chain technology and periodic audits.
Compared to USDT and USDC, USD1 emphasizes political freedom and financial sovereignty. Potential use cases include political fundraising and conservative e-commerce, though its acceptance faces regulatory and legal hurdles.
FDUSD
First Digital USD (FDUSD) is a dollar-pegged stablecoin launched in June 2023 by FD121 Limited, a subsidiary of the Hong Kong-based FinTech company First Digital Limited. Each FDUSD is backed 1:1 by US dollars or equivalent assets, with regular audits provided by independent firms to ensure transparency.
FDUSD was initially deployed on Ethereum and BNB Chain, with a later launch on the Sui blockchain. Its primary uses include cross-border payments, DeFi applications, and digital asset transfers.
- The FDUSD Depegging Event
In early April 2025, FDUSD briefly lost its peg, with its value dropping to as low as $0.76. This triggered market panic, with accusations from Justin Sun that the issuer, First Digital Trust, was insolvent and涉嫌 involved in a $456 million fraud.
Binance later issued a statement assuring users that FDUSD was fully backed 1:1, though questions about the timing and transparency of the announcement remained. This incident underscores the critical importance of trust and transparency in the stablecoin ecosystem.
DAI
DAI is a crypto-backed stablecoin issued by MakerDAO. Its supply and price are automatically adjusted based on market conditions, making it one of the most popular stablecoins on the Ethereum network.
In the world of decentralized finance (DeFi), users often lock up Ethereum as collateral to generate DAI through loans. Because DAI is widely available and integrated into many protocols, it is a common choice for those seeking to leverage their crypto assets without selling them.
Four Key Uses of Stablecoins
Stablecoins act as a bridge between traditional finance and the crypto economy. They offer not only lower risk but also serve as a unit of account for valuing other digital assets.
1. Risk Mitigation
The high volatility of typical cryptocurrencies makes them less suitable for short-term storage of value. Stablecoins, with their steady prices, provide a reliable way to preserve capital between trades or during market downturns.
Furthermore, many exchanges offer attractive interest rates—often around 6% or higher—for simply holding stablecoins in savings accounts or through promotional activities.
2. Asset Digitization
Stablecoins pegged to real-world assets allow for easy transfer and storage without the physical limitations. This eliminates issues like the need for third-party custodians or the risk of loss due to physical damage or theft.
3. Unit of Account in Crypto Trading
Cryptocurrencies like BTC and ETH are commonly measured against stablecoins. For instance, the price of Bitcoin is often quoted as BTC/USDT, using USDT as the base currency for valuation and trading pairs.
4. Bypassing Fiat Restrictions
Converting between fiat currency and cryptocurrencies often involves regulatory hurdles and banking limitations. Stablecoins offer a faster, more efficient alternative for moving value across borders and between platforms.
Some stablecoins are even accepted for everyday purchases. For example, McDonald's in Lugano, Switzerland, announced it would accept Bitcoin and USDT as payment methods.
While stablecoins are generally less volatile than other cryptocurrencies, it is still essential for investors to understand the underlying mechanisms and risks associated with each type.
Frequently Asked Questions
What gives stablecoins their value?
Stablecoins derive their value from being pegged to reserve assets like fiat currencies, commodities, or other cryptocurrencies. The issuer holds reserves to back each token, ensuring stability and redeemability.
Are stablecoins completely risk-free?
No. While designed for stability, they carry risks such as regulatory changes, reserve insolvency, or algorithmic failures. It's crucial to research the issuer's transparency and auditing practices.
How can I use stablecoins for earning interest?
Many cryptocurrency exchanges and DeFi platforms offer savings accounts or lending protocols where you can deposit stablecoins to earn annual percentage yield (APY). Always use reputable platforms and understand the terms.
What is the difference between USDT and USDC?
Both are fiat-backed stablecoins pegged to the US dollar. USDT (Tether) is the largest by volume but has faced scrutiny over its reserves. USDC (USD Coin) is known for greater regulatory compliance and transparency.
Can stablecoins be used for international transfers?
Yes. Stablecoins enable fast, low-cost cross-border transactions compared to traditional banking systems. They are especially useful in regions with limited access to stable foreign currencies.
What happened to algorithmic stablecoins like UST?
UST collapsed due to a flaw in its design that could not maintain the peg under extreme market conditions. This event highlighted the risks associated with non-collateralized or under-collateralized stablecoins.