What Are Stablecoins? Types, Rankings, Risks & A Complete Guide (2025)

If you're new to the world of crypto, you've likely heard the term "stablecoin." But what exactly are stablecoins, and which ones should you know about?

Simply put, a stablecoin is a type of cryptocurrency whose value is pegged or tied to another currency, commodity, or financial instrument. Stablecoins were developed to avoid the high volatility common in the cryptocurrency market. Today, they are widely used as a medium for crypto investments, a safe-haven asset, and are increasingly accepted for payments due to their stable value.

This article will introduce you to what cryptocurrency stablecoins are, their different types, current rankings, and the risks involved. We hope you find it helpful.

Key Takeaways on Stablecoins

• A stablecoin is a cryptocurrency that attempts to peg its market value to an external reference.
• As a medium of exchange, stablecoins are more useful than more volatile cryptocurrencies.
• Stablecoins can be pegged to the price of a currency like the U.S. dollar or a commodity like gold.
• Stablecoins pursue price stability by maintaining reserve assets as collateral or through algorithmic formulas that control supply.
• Given the rapid growth of the $128 billion market and its potential to impact the broader financial system, stablecoins continue to face scrutiny from regulators.

Latest News and Developments in Stablecoins

According to Dune's "2025 Stablecoin Market Report: Supply, Adoption & Market Trends," although the market capitalization of stablecoins is still much smaller than traditional fiat liquidity, their trading volume has already surpassed major payment networks. This indicates that stablecoins are gradually becoming a key infrastructure for digital finance, bridging traditional finance (TradFi) and the crypto ecosystem.

The stablecoin market is experiencing explosive growth between 2024 and 2025. Data shows that as of February 2025, the stablecoin supply has grown by 63% year-over-year, from $138 billion to $225 billion. Meanwhile, compared to February of last year, the average monthly trading volume of stablecoins has jumped from $1.9 trillion to $4.1 trillion, a 115% increase, reaching an all-time high of $5.1 trillion in December 2024.

Furthermore, according to data from DefiLlama, the total market cap of stablecoins has now exceeded $230 billion. Among them, the fiat-backed stablecoin Tether (USDT) still dominates, with a market cap of $144 billion, accounting for about 62.45% of the market share, followed by USDC with $59 billion.

It's worth noting that with Donald Trump taking office as the US President, the legal status of stablecoins is gradually advancing. At a cryptocurrency summit, Trump stated that stablecoins are key to consolidating the US dollar's global dominance. "I have urged Congress to pass landmark legislation that sets simple, reasonable rules for stablecoins and market structure. As long as the regulations are in place, institutions large and small can invest, innovate, and participate in this modern fintech revolution with more confidence."

What is a Stablecoin?

A stablecoin is a digital currency pegged to a "stable" reserve asset like a fiat currency (e.g., the U.S. dollar) or gold. It aims to reduce the volatility seen in unpegged cryptocurrencies like Bitcoin. For example, a USD-backed stablecoin holds $1 of fiat currency in reserve for every digital coin issued, ensuring its price remains equivalent to $1.

Currently, converting between fiat and cryptocurrencies can be expensive and time-consuming. Therefore, crypto investors often use stablecoins as a trading medium and a store of value. For instance, if an investor believes the price of Bitcoin might fall, they can convert their Bitcoin into a stablecoin and hold it while waiting for the next opportunity to enter the market. The transaction time and cost between cryptocurrencies and stablecoins are significantly lower than those between fiat and crypto.

Initially, most stablecoins were built on a "fiat-pegged" foundation, maintaining their value through fiat collateral. However, as the crypto market evolved, other types of stablecoins have been developed, such as those collateralized by other cryptocurrencies or those that use algorithms to maintain price stability. These new types have injected more vitality into the crypto market.

Why Are Stablecoins So Important?

Compared to traditional investment products, virtual currencies are much more prone to significant price or exchange rate fluctuations. Even the top cryptocurrency, Bitcoin (BTC) , is subject to massive value swings.

For example, the price of Bitcoin rose from just under $5,000 in March 2020 to over $63,000 in April 2021, only to plummet by nearly 50% in the following two months.

Fiat currencies like the U.S. dollar do not experience this level of price volatility. Stablecoins aim to solve this problem by promising to keep a cryptocurrency's value stable in various ways.

Another way to understand stablecoins is to think of them as tokenized versions of fiat currencies. In theory, a U.S. dollar-based stablecoin is a token that resides on a blockchain and always trades at one dollar.

On August 7, 2023, payment giant PayPal announced it would issue its own U.S. dollar-pegged stablecoin, PayPal USD (PYUSD). This marked the first time a major financial company issued its own regulated stablecoin, drawing even more attention to the asset class.

What Are the Types of Stablecoins?

Now that you have a basic understanding of what stablecoins are, let's explore the different types. Based on their collateralization method, stablecoins can be broadly divided into three categories: Fiat-Collateralized, Crypto-Collateralized, and Algorithmic. Here is a comparison table to help you distinguish between them:

1. Fiat-Collateralized Stablecoins

The most popular and arguably safest stablecoins are fiat-collateralized. They are directly pegged to a fiat currency and issued by a centralized entity that must guarantee a 1:1 reserve of the fiat currency.

The most well-known fiat-collateralized stablecoins are USDT (Tether) and USDC (USD Coin). USDT is the stablecoin with the highest trading volume in the crypto market, pegged 1:1 to the U.S. dollar. USDC, the second-largest stablecoin by market cap, is issued by the Centre consortium, founded by Circle and Coinbase, and is also pegged 1:1 to the U.S. dollar.

These issuing institutions regularly publish account information, with monthly audits by accounting firms to assure users that there are sufficient U.S. dollar reserves.

Pros:

• The structure is simple and easy to understand.
• Backed by stable fiat currencies, ensuring low volatility.

Cons:

• The centralized structure is vulnerable to hacking and bankruptcy.
• Involves counterparty risk: you need to trust the issuer and the centralized organization holding the reserves.
• Requires regulation and regular audits.

2. Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins operate similarly to their fiat-backed counterparts, but their underlying collateral is another cryptocurrency.

Users lock their crypto assets into a smart contract that issues the stablecoin. To retrieve their collateral, they must pay back the stablecoin to the same contract, often with interest.

Because the collateralized crypto assets are themselves volatile, these stablecoins are over-collateralized. This means the value of the locked assets is greater than the value of the stablecoins issued, creating a buffer to absorb price fluctuations.

A well-known example is DAI, which uses Ether (ETH) as collateral. The issuer must maintain a collateralization ratio of 150%-200%. If the price of Ether drops and the ratio falls below 150%, a liquidation event is triggered to maintain the value of DAI.

Pros:

• Decentralized, as it is based on the blockchain.
• Does not require a custodian.
• Does not require traditional regulation or audits.

Cons:

• The structure is more complex.
• Over-reliant on the collateralized cryptocurrency.

3. Non-Collateralized (Algorithmic) Stablecoins

Algorithmic stablecoins like the original TerraUSD (UST) are a newer type that does not require collateral. Instead, they use computer algorithms and smart contracts to manage the coin's supply, similar to how a central bank manages a national currency.

If an algorithmic stablecoin pegged to $1 rises above that price, the algorithm automatically releases more tokens into the supply to bring the price down. If it falls below $1, the algorithm reduces the supply to push the price back up.

The main advantage is low maintenance cost. However, the drawback is that algorithmic adjustments are not foolproof, and the stablecoin can still experience periods of instability and price spikes.

The security of algorithmic stablecoins has been heavily questioned since the collapse of UST. TerraUSD (UST) was the largest algorithmic stablecoin, with a market cap peaking at over $18.7 billion on May 5, 2022, before it began to plummet after losing its peg.

TerraUSD's price was maintained at $1 through the minting (creating) and burning (destroying) of its sister coin, Luna. With no collateral, the entire model ran on an algorithm that minted and burned Luna tokens with every UST purchase or sale.

This proved to be a flawed model. TerraUSD suffered what became known as a "death spiral," where a wave of panic led to a run on the crypto in May, and massive selling "de-pegged" TerraUSD from its $1 price. Ultimately, the prices of both the "stable" token and its sister coin, Luna, fell to near zero.

Market fear spread, causing Tether (USDT) to briefly break its 1:1 peg on May 12, falling to 94 cents. Despite the different circumstances, investors were concerned about the reliability of Tether's reserves and whether it was fully collateralized.

After the Terra blockchain was officially halted on May 9 and de-pegged from the dollar, TerraUSD was rebranded and now trades as TerraClassicUSD (USTC). As of June 21, 2023, USTC was trading at about $0.01, 99% below its supposed $1 peg.

Pros:

• Decentralized, as no collateral is needed.
• Smart contracts create a trustless system.
• Offers interactive tools through coin shares and bonds.

Cons:

• More complex mechanism than any other type of stablecoin.
• Cannot always guarantee meeting high demand.
• History of failed peg mechanisms (e.g., Terra UST).

What Are the Risks of Stablecoins?

After understanding the types of stablecoins, it's crucial to be aware of the risks before investing.

1. Regulatory Scrutiny

With a market of around $130 billion and growing, stablecoins continue to face scrutiny from regulators due to their potential to impact the broader financial system. In October 2021, the International Organization of Securities Commissions (IOSCO) stated that stablecoins should be regulated as financial market infrastructure, alongside payment systems and clearinghouses. Proposed rules focus on stablecoins deemed systemically important, which could disrupt payment and settlement transactions.

Politicians are also increasingly calling for stricter regulation. For example, in November 2021, Senator Cynthia Lummis (R-WY) called for regular audits of stablecoin issuers, while others support bank-like regulation for the industry.

2. De-Pegging Risk

Any stablecoin can de-peg from its target value due to market volatility. Even the largest fiat-collateralized stablecoin, USDT, experienced a de-pegging event in 2018, with its price dropping to a low of $0.60.

3. Bank Run Risk

A bank run is one of the most feared events in finance, capable of bankrupting any project or institution. In simple terms, a stablecoin bank run occurs when holders panic and sell off their coins en masse. Even if the institution has sufficient reserves, this can cause the coin's price to collapse.

Which is the Best Stablecoin?

The most popular and largest stablecoin by market capitalization is USDT (Tether). It is pegged 1:1 to the U.S. dollar and backed by reserves. It consistently ranks among the top five cryptocurrencies by market cap. You can find Tether on most major crypto exchanges, including Binance, BTCC, and others.

Originally, USDT was issued on the Bitcoin network via the Omni Layer protocol. To meet trading demand, Tether later issued USDT on the Ethereum and TRON networks. Therefore, there are three types of USDT: USDT-Omni (Bitcoin-based), USDT-ERC20 (Ethereum-based), and USDT-TRC20 (TRON-based). These types are not mutually transferable.

2025 Latest Stablecoin Rankings

According to data from CoinGecko, the top three stablecoins by market cap are currently USDT, USDC, and DAI. Here is a brief introduction to each.

1. Tether (USDT)

Tether (USDT) is one of the oldest stablecoins, launched in 2014, and remains the most popular. It is one of the most valuable cryptocurrencies overall by market cap. The primary use of USDT is to quickly move funds between exchanges to take advantage of arbitrage opportunities when crypto prices differ. However, it has found other applications: Chinese importers based in Russia have also used USDT to send millions of dollars worth of value across borders, bypassing China's strict capital controls.

Tether Ltd., the company that issues USDT, was involved in a 22-month legal battle with the New York Attorney General, who alleged that Bitfinex (Tether's sister company) tried to cover up an $850 million shortfall using funds from Tether. The case was settled on February 23, 2021, with Tether and Bitfinex forced to pay $18.5 million and submit quarterly reports showing Tether's stablecoin reserves for the next two years.

2. USD Coin (USDC)

USD Coin (USDC) is a stablecoin launched in 2018 by the Centre Consortium, a joint venture between crypto company Circle and Coinbase. Like Tether before it shifted to mixed collateral assets, USD Coin is pegged to the U.S. dollar. USDC is an open-source protocol, meaning any individual or company can use it to develop their own products.

On July 8, 2021, Circle announced plans to go public through a $4.5 billion SPAC merger with Concord Acquisition Corp. A month earlier, Circle completed a $440 million funding round involving industry giants like FTX, Digital Currency Group (the parent company of CoinDesk), and Fidelity Management & Research Company.

3. DAI

Dai runs on the MakerDAO protocol and is a stablecoin on the Ethereum blockchain. Created in 2015, Dai is pegged to the U.S. dollar and is backed by Ether (the token behind Ethereum).

Unlike other stablecoins, MakerDAO intends for Dai to be decentralized, meaning there is no central authority to trust with controlling the system. Instead, Ethereum smart contracts (which have unchangeable encoded rules) handle this job. However, this innovative model still has issues; for example, if the smart contracts supporting MakerDAO don't work exactly as intended. In fact, they were exploited in 2020, resulting in a loss of $8 million.

The Future of Stablecoins

The purpose of a stablecoin is not just to be a financial contract. It is an evolution of traditional payment systems and volatile cryptocurrencies.

It is a new form of digital currency, controlled by algorithms rather than a central authority, offering monetary benefits similar to fiat currency. As an inherently stable asset, stablecoins could open new doors for the mainstream adoption of digital assets in daily life.

However, due to the inherent dangers of stablecoins, governments are exploring new forms of regulation. The Biden administration announced in early 2022 that they want to regulate stablecoin issuers like banks.

To this end, issuers would need to insure their stablecoin reserves, much like traditional depository institutions. This would be like a crypto version of FDIC insurance. It would not only provide traders with some protection against price fluctuations but also against theft or issuer bankruptcy. Issuers would also be subject to federal oversight and audits. They would need to comply with restrictions on commercial entity affiliations and promote interoperability between stablecoins.

Although issues are still being worked out, stablecoins have immense potential to transform the global payments landscape. As stablecoins continue to "stabilize" and gain public trust, the way the financial sector uses digital assets will continue to evolve. Time will tell how they shape the future of finance.

Frequently Asked Questions about Stablecoins

Q: What is a stablecoin? 

A: A stablecoin is a type of cryptocurrency whose value is pegged or tied to another currency, commodity, or financial instrument.

Q: What is the purpose of a stablecoin? 

A: Stablecoins aim to provide an alternative to the high volatility of popular cryptocurrencies, including Bitcoin (BTC) .

Q: How do stablecoins work? 

A: Stablecoins attempt to peg their market value to an external reference, usually a fiat currency. As a medium of exchange, they are more useful than more volatile cryptocurrencies. They can be pegged to currencies like the U.S. dollar, commodities like gold, or use algorithms to control supply. They also maintain reserve assets as collateral or use algorithmic formulas designed to control supply.

Conclusion

In summary, stablecoins hold a vital position in the crypto market. Their low volatility and lower risk compared to mainstream digital currencies like Bitcoin make them a suitable investment, especially for beginners.

If you are just learning about cryptocurrency and want to start investing, stablecoins can be an excellent entry point. After thoroughly understanding the knowledge behind them, you can choose the right stablecoin for your investment journey.