Stablecoins are the backbone of liquidity in the crypto world, playing an increasingly crucial role in the crypto and global financial ecosystems. They bridge the gap between traditional and crypto finance, supporting payments, cross-border transfers, decentralized finance (DeFi), and improving overall market liquidity.

This article will provide an overview of stablecoins’ development, categories, and key characteristics. We’ll also review the current state of the market and take a quick look at the top 10 stablecoins by market capitalization in the crypto industry.

What are Stablecoins?

Stablecoins are cryptocurrencies designed to maintain a stable price. Unlike volatile cryptocurrencies like Bitcoin and Ethereum, stablecoins are typically pegged to a fiat currency (like the U.S. dollar), a basket of currencies, commodities (like gold), or other assets to ensure price stability.

As an innovative financial tool, stablecoins offer users a way to hedge against volatility in the crypto market while retaining the benefits of cryptocurrencies—fast transactions, transparency, and global access. They provide more stable and efficient payment, lending, savings, and other solutions.

Stablecoins can generally be divided into four types based on how they maintain price stability:

1. Fiat-backed Stablecoins

These stablecoins are issued by centralized institutions and are backed by fiat currency on a 1:1 basis. A reserve mechanism ensures that an equivalent amount of fiat currency is held for each stablecoin issued. Examples include Tether (USDT) and USD Coin (USDC).

1. Crypto-backed Stablecoins

These stablecoins are backed by other crypto assets (like Bitcoin or Ethereum). Due to crypto assets’ volatility, they often require over-collateralization to maintain price stability. MakerDAO’s Dai (DAI) is a well-known example of this type.

Unlike fiat-backed stablecoins, crypto-backed stablecoins are issued via smart contracts on the blockchain, rather than by a central institution.

1. Algorithmic Stablecoins

Algorithmic stablecoins rely on smart contracts and market mechanisms to adjust their supply and maintain price stability. They do not require direct backing by fiat or crypto assets; instead, they use algorithms to balance supply and demand. Examples include Frax (FRAX) and the now-defunct TerraUSD (USTC).

1. Commodity-backed Stablecoins

These stablecoins are backed by physical commodities like gold, oil, or real estate. Their value is tied to the market price of these assets. Paxos Gold (PAXG) and Tether Gold (XAUT) are examples of gold-backed stablecoins.

The Current State and Trends in Stablecoins

In 2014, Tether (USDT) pioneered the concept of stablecoins. Over the past decade, the market has grown significantly. According to DefiLlama, the total market capitalization of stablecoins peaked at $187 billion in May 2022. Though it has since dipped slightly, the total market cap is still around $170 billion.

Source: DefiLlama

Steady Growth in Market Cap, Led by USDT

USDT continues to dominate the market with a capitalization of $117.9 billion, representing 69.52% of the market. USDC follows with $34 billion and a 20.08% share. DAI, USDe, and FDUSD round out the top five, with market caps of $5.2 billion, $2.9 billion, and $2.8 billion, respectively.

Source: DefiLlama

USDT remains the top player, but other stablecoins are growing quickly. Compared to the start of the year, USDT’s market cap has grown by about 28.57%, while USDC has risen by 42.49%, FDUSD by 55.56%, and PYUSD by an astonishing 327.35%.

Growing Demand for Stablecoins Outside Ethereum

Source: DefiLlama

Ethereum remains the top blockchain for stablecoin use, with $82.9 billion in stablecoins representing 48.96% of the market. Tron follows with a 35.11% share and $59.6 billion in stablecoins. Binance Smart Chain (BSC), Arbitrum, and Solana take the next three spots with $4.9 billion, $4.5 billion, and $3.9 billion, respectively.

Looking at the trend across networks, the gap between Ethereum and Tron is shrinking. At the end of 2022, the gap was over $50 billion, but as Tron’s issuance of stablecoins has surged, the difference narrowed to about $20 billion by the second half of 2023.

Soure: DefiLlama

Furthermore, among the top 10 blockchains by stablecoin market cap, except Solana and Base, where USDC is the primary stablecoin (making up over 62.9% and 94.2% of the stablecoin market, respectively), USDT leads on all the other 8 networks.

More Players Joining the Stablecoin Market

As of August 2024, DefiLlama has recorded over 190 stablecoin projects. With the potential to unlock a trillion-dollar market and drive financial innovation, stablecoins are attracting more major corporations and financial institutions.

In July, the Hong Kong Monetary Authority (HKMA) released the list of participants for its stablecoin regulatory sandbox, with JD.com, RD InnoTech Limited, and Standard Chartered among the first to join. Hokuriku Bank in Japan launched Tochika, the country’s first stablecoin backed by bank deposits. Meanwhile, Colombia’s largest bank, Bancolombia, rolled out COPW, a stablecoin pegged 1:1 to the Colombian peso. In Europe, Societe Generale, France’s third-largest bank, introduced its euro stablecoin last December.

A Quick Look at the Top 10 Crypto Stablecoins

Here’s a quick introduction to the top 10 stablecoins, ranked by market capitalization.

1. Tether (USDT)

USDT holds the top spot among stablecoins, with a market cap of around $117.9 billion. Issued by Tether Limited, USDT is claimed to be backed 1:1 by corresponding fiat currencies, with 100% reserves to match.

Tether provides transparency by publishing asset data for its reserves in USD, EUR, CNH, gold (XAU), and MXN on its website.

Source: Tether

USDT circulates on multiple blockchains, with Tron (49.5%) and Ethereum (39.28%) accounting for 88.78% combined. The rest is mainly spread across BNBChain (3.37%), Arbitrum (2.37%), Avalanche (1.16%), and Optimism (0.97%).

1. USD Coin (USDC)

USDC is a fully regulated stablecoin pegged to the U.S. dollar, co-issued by Circle and Coinbase, with a market cap of approximately $34 billion. Affected by U.S. OFAC sanctions and an SEC investigation in 2022, USDC’s market cap has fallen by 38% from its $55 billion peak.

USDC is regularly audited for transparency, making it a favourite among institutional traders. It’s widely used in DeFi, payments, and cross-border transactions.

1. Dai (DAI)

DAI, launched by MakerDAO in December 2017, is a decentralized stablecoin pegged to the U.S. dollar. It maintains its price stability through the over-collateralization of crypto assets, managed through Collateralized Debt Positions (CDPs). DAI exists entirely on the blockchain, with all processes controlled by smart contracts.

MakerDAO holds reserves in crypto assets like ETH and WBTC. As of September 4, 2024, DAI’s market cap is around $5.26 billion. Ethereum dominates its use with 91.06%, followed by Polygon (3.52%), Gnosis (1.58%), and Arbitrum (0.83%).

On August 27, MakerDAO rebranded as Sky, and DAI became USDS. The rebranding addresses regulatory pressures and technical upgrades while maintaining a 1:1 exchange ratio between DAI and USDS.

1. Ethena USDe (USDe)

USDe is a decentralized stablecoin launched by the Ethena project on Ethereum. It achieves price stability through derivatives-backed collateral and delta-neutral hedging strategies. Users can create USDe using USD, ETH, or liquid staking tokens as collateral.

Since its launch late last year, USDe’s market cap has surged to a peak of $3.6 billion in July but has since dropped to about $2.9 billion.

Supplement: A delta-neutral strategy is a common risk management and arbitrage strategy in financial markets. It aims to create a portfolio that is insensitive to price fluctuations, keeping the total value of the portfolio relatively stable, even as the price of the underlying asset changes. Traders typically hold both long and short positions to neutralize the total delta of these positions.

1. First Digital USD (FDUSD)

FDUSD, issued by FD121 Limited (a subsidiary of First Digital Limited) in June 2023, is backed 1:1 by U.S. dollars or equivalent assets.

First Digital Trust Limited, registered in Hong Kong, holds the reserves in segregated accounts at regulated financial institutions in Asia to ensure the FDUSD reserves aren’t mixed with other assets.

FDUSD is primarily on Ethereum (98%) and BNBChain. The issuer plans to expand to other blockchains.

1. PayPal USD (PYUSD)

PYUSD, PayPal’s stablecoin, is pegged to the U.S. dollar and aims to simplify global digital payments.

Primarily issued on Solana and Ethereum, PYUSD has a market cap of $1 billion. Thanks to Solana’s rapid adoption, PYUSD’s supply has grown 260% since June. Its trading volume also soared, reaching $8.88 billion in August, compared to $320 million earlier this year—a 26.75-fold increase.

Source: Allium

1. USDD (USDD)

USDD is a stablecoin on the Tron blockchain, issued and managed by TRON DAO Reserve since May 2022. It maintains price stability through over-collateralization within Tron’s ecosystem.

USDD’s market cap is $752 million, with 99.5% circulating on Tron. Its total collateral is valued at $1.752 billion, including 10.929 billion TRX and $25.6 million USDT.

Source: usdd.io

1. BlackRock USD (BUIDL)

BUIDL is a tokenized asset fund issued by global asset management giant BlackRock in collaboration with U.S. tokenization platform Securitize. Launched in March this year, BUIDL primarily targets institutional investors. As an ERC-20 token on Ethereum, BUIDL supports real-time on-chain transfers within a whitelist. It interacts with smart contracts and offers real-time USDC redemption through Circle.

BUIDL primarily invests in cash, U.S. Treasury bills, and repurchase agreements. Investors must meet certain qualifications to receive BUIDL tokens, with each token valued at $1. Transfers must be approved by Securitize, and recipients must meet screening requirements.

BUIDL’s current market capitalization is around $500 million, with 17 addresses holding the tokens, including institutions like Ondo Finance.

Source: Dune

1. TrueUSD (TUSD)

TUSD, launched in March 2018, is a stablecoin pegged to the U.S. dollar. It was initially issued by TrueCoin (a subsidiary of Archblock), but ownership was transferred to Techteryx on December 15, 2020.

TUSD is primarily issued on Ethereum, followed by Tron, with both networks accounting for about 99%. In October 2023, TUSD’s market cap briefly exceeded $3.78 billion, but a subsequent de-pegging crisis led to a liquidity and trust crisis, causing its circulating supply to drop to $489 million.

Source: DefiLlama

1. Frax (FRAX)

Launched by Frax Finance in December 2020, FRAX is the first stablecoin partially backed by collateral and partially algorithmic. Some FRAX stablecoins are backed by crypto assets (like USDC or other stablecoins), with the collateralization ratio dynamically adjusted based on market conditions. The rest of FRAX’s price stability is maintained through algorithms that regulate supply and demand to keep the price close to $1.

In the Frax V3 version, FRAX will transition from an algorithmic stablecoin to a decentralized stablecoin backed by multiple assets, including frxETH, sFRAX, and FXB, making its reserves more diversified. sFRAX and FXB are backed by real-world assets, such as government bonds.

FRAX’s issuance on Ethereum accounts for 66.51%, followed by Fraxtal with 15.98% and Arbitrum with 6.96%. After reaching a market cap peak of nearly $2 billion in May 2022, FRAX’s market cap has been steadily declining and is currently around $370 million.

Conclusion

Over the past decade, the stablecoin market has seen rapid, explosive growth, and the competition within it has intensified. Serving as a key bridge between traditional finance and the blockchain world, stablecoins offer not only a stable way to store and exchange value but also new opportunities for global payments, cross-border transactions, and the development of decentralized economies.

As more institutions get involved and new innovative applications emerge, stablecoins are poised to play an even more significant role in the global financial system. Alongside the anticipation of more innovative stablecoin projects, there’s also a hope for major advancements in areas such as security, transparency, compliance, and cross-chain interoperability.