Stablecoins: Balancing Convenience and Risk Exposure

Stablecoins have emerged as one of the most widely used elements of the cryptocurrency industry. The niche’s success may earn it the place of “killer app” for broader crypto adoption.

As of February 2025, the aggregate market capitalization for stablecoins has soared to over $215 billion. Furthermore, monthly transaction volumes now reach approximately $950 billion, reflecting the growing appeal of stablecoins as a reliable medium of exchange and store of value in a volatile market. Nonetheless, not all stablecoins are created equal, and in this article, we’ll dive into different methods, their benefits and risks.

Total Stablecoin Market Capitalization

Different Models, Different Trade-Offs

Stablecoins currently come in four main varieties: fiat-backed, crypto-backed, algorithmic, and synthetic. Each category presents its own advantages, disadvantages, and risk considerations:

Fiat-Backed Stablecoins

Fiat-backed stablecoins are stablecoins that are fully collateralized by traditional fiat currencies (e.g., USD, EUR) and/or U.S. Treasury notes, commercial paper, and other cash-equivalent assets, held in reserves by a central entity.

Examples: Tether (USDT), USD Coin (USDC).

Advantages:

• Typically more straightforward to understand for newcomers.
• Backed by reserves held in traditional financial institutions, which can inspire market confidence.
• Currently enjoy the highest adoption across exchanges, merchants and Dapps

Disadvantages/Risks:

• Dependence on centralized entities that hold collateral.
• Vulnerable to regulatory pressures
• Limited transparency as to whether reserves are audited and fully backed.

Crypto-Backed Stablecoins

Crypto-Backed Stablecoins are stablecoins that are collateralized by other cryptocurrencies, often overcollateralized to account for volatility.

Examples: Aave GHO

Advantages:

• Decentralized collateral model, limiting reliance on traditional banking.
• Automated over-collateralization can mitigate some forms of default risk.
• Some crypto-backed stablecoins provide interest to holders.

Disadvantages/Risks:

• Vulnerable to extreme crypto market volatility, which can lead to under-collateralization and forced liquidations, putting stress on the system.
• The decentralized governance mechanisms can introduce systemic risk, for example by failing to react quickly to market conditions
• Difficult to scale

Algorithmic Stablecoins

Algorithmic Stablecoins maintain their peg through algorithmic mechanisms, adjusting supply and demand without direct collateral backing.

Examples: The most famous historical example of an algorithmic stablecoin was Terra’s UST stablecoin, which resulted in the biggest loss of cryptocurrency to date.

Advantages:

• Attempts to eliminate the need for traditional or crypto collateral
• Potential for efficient capital usage if the algorithm remains stable.

Disadvantages/Risks:

• Peg can collapse quickly in a crisis of confidence (e.g., a “death spiral”).
• High technical and governance risks; success often depends on maintaining market trust.

Synthetic Stablecoins

These stablecoins are created using derivative-like structures, often backed by a combination of assets or smart contract mechanisms rather than direct fiat or crypto reserves.

Examples: Ethena’s USDe is a leading example in this segment, with its delta-neutral hedging strategy as the backing for the stablecoin.

Advantages:

• Novel backing model that can capture yield from derivatives positions.
• Potentially less reliant on a single collateral asset, which may reduce concentration risk.

Disadvantages/Risks:

• Complexity in the derivatives infrastructure may lead to misunderstandings or liquidity shortages.
• Relies on a certain level of trust due to a partly centralized execution.
• Regulatory uncertainties if the synthetic assets are deemed securities or derivatives.

Spotlight on the Major Players

While there are close to 30 noteworthy stablecoins, a handful of key names have dominated headlines. Each of these stablecoin projects has established its own identity and approach to achieving price stability. Below is a closer look at the four largest contenders in this space.

Tether (USDT)

USDT remains the largest stablecoin by market capitalization and is widely accepted throughout the cryptocurrency industry. It is commonly used for payments and DeFi applications and is available on all major blockchains. A significant portion of USDT’s transaction volume (68%) now occurs on the TRON blockchain, which currently settles over 14 million unique USDT transactions per week.

While USDT’s high volume on TRON has long raised concerns about illicit activity, recent measures have reportedly reduced such incidents. Nevertheless, Tether’s centralized governance structure and historically opaque reserve disclosures continue to spark controversy, prompting some prominent exchanges to delist USDT over potential compliance issues.

Yet despite these headwinds, Tether’s overall market usage continues to rise, illustrating a sustained demand for its liquidity and accessibility.

USD Coin (USDC)

USD Coin (USDC), issued and maintained by Circle, has gained traction as a more transparent and regulation-friendly alternative. Its approach to publishing reserve attestations and complying with global regulations has led to favorable views from both U.S. legislators and policymakers governing Europe’s Markets in Crypto-Assets (MiCA) framework. Though its market capitalization remains smaller than Tether’s, USDC has seen a 30% growth in value this year, largely driven by institutional investors and businesses seeking clarity on compliance and oversight.

Stablecoin Market Analysis dashboard

DAI/USDS

MakerDAO’s DAI stablecoin has long been one of the largest stablecoins. With the protocol’s rebranding to Sky, it has introduced a new stablecoin called USDS. Building on DAI’s original decentralized foundation, both DAI and USDS are now backed by diversified collateral sources — including crypto, real-world assets (RWAs), and delta-hedged strategies. Sky’s model resonates with crypto-native communities who value decentralized governance and trustless collateral management. While the rebranding brings a fresh narrative, the protocol’s core ethos and mechanics remain the driving force behind its enduring appeal.

USDe

Ethena’s USDe has emerged as a major newcomer, quickly climbing to become the fourth-largest stablecoin by market cap. Its delta-neutral hedging model stands out by offering holders a share of the yield generated from underlying derivatives positions, making USDe particularly attractive to yield-seeking investors.

Despite its relative youth, the token has weathered recent market downturns with notable stability, indicating that its innovative model may offer a resilient alternative to traditional fiat-backed or crypto-backed stablecoins. As with any cutting-edge design, however, its long-term viability will likely hinge on how it performs under extreme market stress and evolving regulatory landscapes.

Finding the Right Fit

Despite having different collateral structures and design philosophies, stablecoins share a common goal: providing users with on-chain liquidity and a relatively stable asset in an otherwise volatile landscape. Institutional and retail users alike should weigh factors such as collateral transparency, regulatory compliance, yield opportunities, and technological resilience when choosing among these digital dollar alternatives.

Are you working on a stablecoin project and looking for support with adoption, liquidity, or usage? Reach out to us here.