The Ecosystem of Stablecoins
The volatility of most cryptocurrencies makes them unsuitable as a stable medium of exchange. The need for a stable intermediary digital asset was met by the emergence of stablecoins. These types of cryptocurrencies are designed to maintain a stable value by being pegged to fiat currencies, combining the advantages of blockchain technology with the financial stability necessary for real-world applications. Operating on blockchain networks, stablecoins leverage key advantages such as decentralization, security, transparency, speed, and programmability. Initially, stablecoins served primarily as a bridge between traditional currencies and cryptocurrencies on exchange platforms. Now they are expanding beyond function in trading, targeting their potential as a widely accepted medium of payment for global transactions. According to Stripe’s annual letter published in February 2025, stablecoins possess four advantageous properties for global transactions: “They make money movement cheaper, they make money movement faster, they are decentralized and open-access, and they are programmable.” (1) With the total market cap of stablecoins approaching $250B, there is potential by tapping into the $194T volume of the cross-border payment market (2), among which a particularly relevant segment is the $905B global remittances market. (3) As cross-border payments and remittances often come with high fees and slow transaction speeds, stablecoins could have the most transformative impact by cutting costs and thus, benefiting millions worldwide. Compared to the fees for traditional international bank transfers of ~7%, blockchain transaction costs are almost negligible, with fees as low as $0.002 on the Solana network. (Image 1) Given these advantages for individuals and businesses, combined with increasing fintech adoption and imminent regulatory clarity, stablecoins are set to revolutionize the financial world. This article introduces the types of stablecoins and highlights the major stablecoins ranking within the top 100 cryptocurrencies by market cap.
Image 1: Fees, cost percentage, and times for a remittance of 1000 Euro from Germany to the United States at different payment service providers and blockchains. Updated on 31.03.2025 to the article.
Types of Stablecoins
Depending on the mechanism a stablecoin uses to maintain stability, stablecoins can be grouped into four categories including “Fiat backed”, “Asset-backed”, “Synthetic” and “Algorithmic”. Each type prioritizes different aspects of the stablecoin trilemma, balancing decentralization, peg stability, and capital efficiency, resulting in various trade-offs. (4)
Fiat-backed Stablecoins
Fiat backed stablecoins to hold reserves, which are required to match or exceed the circulating supply of the stablecoin, in form of cash or cash equivalents such as U.S. treasuries. These stablecoins are inherently centralized, as a centralized organization manages the reserves and issues the stablecoins.
Tether (USDT), backed by the U.S. dollar, is the largest stablecoin by market cap with ~$150B accounting for a ~65% share of the stablecoin market. (Image 2 a)) Tether Holdings Ltd., the issuer of USDT, is largely privately held with executives owning the majority of the company’s stakes. Giancarlo Devasini, who recently transitioned from CFO to Chairman of the company, owns 47% of the company, while former CTO and current CEO Paolo Ardoino owns 20%. (5,6) The company generates revenue through the fiat deposit process, charging around 0.1 % for new fiat deposits, (9) and by earning interest on its reserves, which include U.S. treasury securities. According to data from TokenTerminal, Tether stands at the top for revenue earned from fees (Image 3)(10) and a reported total profit of $13B in 2024. (11) Since 2021, Cantor Fitzgerald, a financial services firm, has served as a custodian for Tether’s assets. (12) At the end of last year, Cantor Fitzgerald acquired a convertible bond, securing 5% ownership in Tether Holdings Ltd. (13) Notably, the former CEO of Cantor Fitzgerald, Howard Lutnick, was appointed as Secretary of Commerce in the Trump administration just days before the acquisition. Despite Tether’s dominant position in the market and its connection to high-profile individuals, it faces regulatory challenges. Under the European Union’s Markets in Crypto-Assets (MiCA) framework, Tether would be required to deposit 60% of its reserves in banks. As a result of non-compliance, major exchanges, including Binance and Kraken, are preparing to delist USDT for trading in the European Economic Area (EEA) by 31st March 2025. Facing this loss in regional stablecoin market share, Tether appointed a new CFO on 3rd March 2025 and announced to conduct a full audit in collaboration with one of the Big Four accounting firms, emphasizing its commitment to regulatory compliance and transparency.
In contrast to USDT, USD Coin (USDC), the second-largest stablecoin with ~$60B USDC in circulation on 19 blockchain networks, is MiCA-compliant. Surprisingly, among the top ten stablecoins by market cap, USDC is the only one that is approved after the MiCA regulations came into effect. This compliance was likely facilitated by its close ties to traditional financial institutions, which have expertise to adapt to regulatory requirements. USDC is issued by Circle Internet Financial, whose reserves are held in Circle Reserve Fund, managed by BlackRock and custodied by Bank of New York Mellon. Additionally, its cash reserves are distributed across multiple regulated financial institutions and are independently audited monthly by Deloitte. Unusual for a crypto project, Circle’s history is marked by direct investments from legacy financial players. Circle received a $50M strategic investment led by Goldman Sachs in 2015, followed by a $110M round, which included Chinese crypto-mining giant Bitmain Technologies. USC was subsequently launched in September 2018 by Centre consortium, a collaboration between Circle and Coinbase. (14) In 2022, Circle expanded its financial backing with a $400M private equity round, involving Blackrock and Fidelity. (15) In 2023, Coinbase further strengthened its partnership by acquiring a 3.5% equity stake in Circle. (16) While still a private company, Circle has the initiated the process for an IPO. (17)
Image 2: a) Marketshare of the major stablecoin projects. b) Evolution of the Total Stablecoin Marketcap.
A substantially smaller fiat-backed stablecoin compared to USDT and USDC is First Digital USD (FDUSD), with a circulating supply of ~$3B. FDUSD is issued by FD132 Limited, a subsidiary of Hong Kong-based financial firm First Digital Limited. Launched in 2023, FDUSD is currently available on Ethereum, BNB Chain, Sui, and Solana. (18) Although its reserves, consisting of cash and cash equivalents, are held in segregated accounts, seperate from its issuer’s operational accounts, and independently audited on a monthly basis, FDUSD failed to meet MiCA compliance standards.
PayPal entered the stablecoin market in 2023 with the introduction of PayPal USD (PYUSD), issued by Paxos Trust Company. PYUSD is available on Ethereum and Solana. (19) Its reserves backing at the time ~ $800M PYUSD consist of U.S. Dollar deposits, U.S. Treasuries, and cash equivalents. Similar to other fiat-backed stablecoins, PYUSD undergoes monthly audits by WithumSmith+Brown, PC with reports publicly accessible. Despite its transparency in audits, PYUSD also failed to meet MiCA’s regulatory requirements. (20) PYUSD is highly centralized, as evident in its smart contract functionalities on Ethereum. These include features such as freezing, blocking and deactivating accounts, and restricting usage to pre-approved wallets, resembling centralized fiat systems.
Asset-backed Overcollateralized stablecoins
Unlike fiat-backed stablecoins, which are managed by private companies, the concept of a decentralized central bank emerged to enable a more autonomous and transparent approach to issuing and managing stable digital assets. This vision led to the creation of MakerDAO, a decentralized autonomous organization (DAO), governed by holders of the Maker (MKR) governance token. MKR token holders can vote on key parameters of the Maker lending protocol such as the interest rates and debt ceilings. Users can mint the decentralized stablecoin DAI, which is pegged to the U.S. Dollar, by depositing crypto-assets as collateral into Maker Vaults on the Maker Protocol. To ensure stability, borrowing DAI requires overcollateralization, with collateralization ratios in the ranging from 101% to 175%, depending on the deposited asset’s risk level. If a borrower’s collateral falls below the required threshold, their position becomes subject to liquidation. In 2024, MakerDAO rebranded as “Sky” with new tokens issued, which can be obtained by swapping MKR for SKY and DAI for USDs since 18th September 2024. This upgrade also contained a freeze function and restricted access via VPNs to improve regulatory compliance. Currently, USDs and DAI have a combined circulating supply of ~$8B, backed by ~ $10B in collateral. (21,22) A considerable fraction of ~45% consists of fiat-backed stablecoins. Apart from its rebranding, the Sky protocol has expanded from operating solely on Ethereum to a multichain ecosystem, now including Solana, Base and Arbitrum. (23)
Synthetic stablecoins
While over-collateralized stablecoins such as USDs require excess reserves and suffer from low capital efficiency, Ethena Labs’ synthetic stablecoin USDe adopts a more capital-efficient approach. To mint USDe, users deposit backing assets at a 1:1 collateralization ratio into Ethena. This collateralization ratio is possible, as the underlying strategy, known as delta hedging, pairs the spot holdings of the backing assets, BTC and ETH, with a perpetual futures short position of equivalent notional value. If BTC rises by $1k, the spot position gains $1k, while the short futures position loses $1k. Conversely, if BTC falls by $1k, the spot position loses $1k, while the short future position gains $1k.At the same time, Ethena generates protocol-level revenue from future funding rates, as traders going long pay a fee to incentivize short traders. Additionally, the collateral itself generates yields through staked Ethereum rewards. (24) The assets backing the USDe are custodied on-chain in auditable accounts by “off-exchange settlement” providers, eliminating reliance on traditional banking infrastructure. (25) Starting out in 2024, Ethena has quickly gained traction with USDe’s circulating supply currently amounting to ~ $5B.
Algorithmic stablecoins
The fourth category, algorithmic stablecoins, relies on an algorithmic arbitrage mechanism to regulate the stablecoin’s supply and maintain its peg to the underlying currency. However, past projects have shown that during periods of market stress such as large-scale sell-offs, these mechanisms are susceptible to fail in maintaining the peg stable and in the worst case lead to a death spiral. The most prominent algorithmic stablecoin failure was TerraUSD (UST) from the Terra ecosystem, which collapsed in May 2022. TerraUSD’s stability mechanism was based on an algorithmic expansion and contraction of the UST supply through a burn-and-mint process, adjusting to fluctuating demand to maintain its peg. This mechanism functioned through the interplay between native coin, LUNA, and stablecoin UST. When UST traded above $1.01, arbitrage traders were incentivized to burn LUNA in exchange for newly minted UST and then sell the stablecoin for a $0.01 profit, and thus increasing the UST supply and restoring its peg. Conversely, if the UST fell below $1.00, arbitrageurs were incentivized to burn UST in exchange for one dollar worth of LUNA, shrinking the stablecoin’s supply and pushing its price back up. The collapse of the algorithmic stablecoin system was largely triggered by the concentration of UST on the lending platform Anchor, where $14B of the total of $18B UST supply was deposited due to its high 20% yield. When Anchor protocol attempted to address the unsustainable nature of the high yield and reduced yield to 18% at the beginning of May 2022 with plans for further reductions, massive withdrawals and liquidations begun, causing UST to lose its peg. As UST holders rushed to exit, an excessive amount of UST was burned to mint LUNA, inflating LUNA’s supply from 343M to 6.53T within one week. (26) This hyperinflation led to a 99% drop in LUNA’s price, ultimately causing the entire system to collapse. The failure of UST has led to widespread scepticism about this type of stablecoins.
Image 3: Annual revenue earned from fees.
Outlook
Dollar-backed stablecoins, with USDT and USDC, continue to strengthen their position as the go-to option for users due to widespread adoption and liquidity. While the issuing companies of these centralized stablecoins are in the hands of private ownership, Circle’s announced IPO plans could offer outside investors a chance to gain exposure to the foundation of the future on-chain financial system. Meanwhile, more decentralized alternatives such as the overcollateralized USDs and the capital-efficient synthetic USDe are gaining traction as newer projects in the stablecoin ecosystem. Their rise highlights the growing demand for alternatives that prioritize decentralization while maintaining stability and capital efficiency. At a time when the U.S. dollar’s status as world reserve currency is challenged, U.S. dollar-backed stablecoins play a strategic role in maintaining its global dominance by capturing transaction volume in international currency markets, ensuring cross-border transactions are conducted in digital U.S. dollars. The strategic importance of stablecoins has been also recognized by Donald Trump, whose affiliated entities have acquired a majority stake in World Liberty Financial (WLFI). DT Marks DEFI LLC, an entity affiliated with Trump and some family members, holds a 60% in WLF Holdco LLC, which, in turn, owns sole member interest in World Liberty Finance. This decentralized finance protocol has the governance token WLFI and plans to launch USD1, a stablecoin pegged to U.S. dollar and backed by short-term U.S. government treasuries, and U.S. deposits, on the Ethereum and BSC networks. (27,28) On the other hand, governments worldwide including China with its e-CNY are developing central bank digital currencies (CBDCs). While these initiatives aim to modernize the financial system, they also raise concerns about state control over money and individual financial privacy. Overall, none of the currently existing stablecoins has fully resolved the stablecoin trilemma, the challenge of balancing decentralization, peg stability and capital efficiency. However, as regulatory frameworks mature and blockchain technology has long moved beyond its experimental phase, stablecoins are set to disrupt traditional financial services on a global scale. By reducing transaction costs, increasing speed and enhancing transparency, they are expected to shape the future of cross-border payments and digital finance.