Stablecoins Explained: USDT, USDC, DAI and More
Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar. They bridge the gap between the volatile world of cryptocurrency and the stability needed for everyday transactions, savings, and commerce. By 2026, stablecoins have become one of the most important innovations in the cryptocurrency ecosystem, processing trillions of dollars in annual transaction volume and serving as the primary medium of exchange across decentralized finance (DeFi).
This guide explains how stablecoins work, compares the major stablecoins, explores the risks involved, and covers the evolving regulatory landscape.
What Are Stablecoins?
A stablecoin is a cryptocurrency whose value is pegged to an external reference — most commonly the US dollar at a 1:1 ratio. While Bitcoin and Ethereum can fluctuate significantly in value day-to-day, stablecoins are designed to always be worth approximately $1.00.
Why Stablecoins Matter
Stablecoins solve several problems simultaneously:
- Trading: Traders use stablecoins to park value during market downturns without converting to fiat
- DeFi: Stablecoins are the foundation of lending, borrowing, and yield farming in DeFi
- Payments: Merchants and individuals can transact in cryptocurrency without price risk
- Remittances: Send dollars across borders instantly and cheaply
- Savings: Access dollar-denominated savings from anywhere in the world
- Unit of account: Price goods and services in a stable denomination on-chain
Stablecoin Market Overview (2026)
| Stablecoin | Ticker | Type | Market Cap | Primary Chains |
|---|---|---|---|---|
| Tether | USDT | Fiat-backed | $130B+ | Ethereum, Tron, Solana |
| USD Coin | USDC | Fiat-backed | $50B+ | Ethereum, Solana, Base, Avalanche |
| DAI/USDS | DAI | Crypto-backed | $8B+ | Ethereum, L2s |
| First Digital USD | FDUSD | Fiat-backed | $3B+ | Ethereum, BNB Chain |
| Ethena USDe | USDe | Synthetic | $5B+ | Ethereum |
| Ripple USD | RLUSD | Fiat-backed | Growing | XRPL, Ethereum |
Types of Stablecoins
1. Fiat-Backed Stablecoins
Fiat-backed stablecoins are the simplest and most widely used type. A centralized issuer holds reserves of fiat currency (or equivalent assets) in a bank account, and issues one stablecoin token for each dollar held in reserve.
How they work:
- You send $1,000 to the issuer (e.g., Circle)
- The issuer deposits $1,000 in a bank account
- The issuer mints 1,000 USDC tokens to your wallet
- When you want to redeem, you send 1,000 USDC back, they burn the tokens and send you $1,000
Advantages:
- Simple to understand
- Backed by real-world assets
- High capital efficiency (1:1 backing is the minimum needed)
- Dominant in terms of market cap and usage
Disadvantages:
- Centralized: A single company controls issuance and can freeze tokens
- Counterparty risk: You must trust the issuer to maintain adequate reserves
- Regulatory risk: Subject to government oversight and potential restriction
- Bank risk: Reserve assets are held in banks, which can fail (as demonstrated during the Silicon Valley Bank crisis in 2023)
2. Crypto-Backed Stablecoins
Crypto-backed (or decentralized) stablecoins are created by locking cryptocurrency as collateral in a smart contract. Because crypto is volatile, these stablecoins are overcollateralized — you must lock more value in crypto than the stablecoins you receive.
How they work (DAI example):
- You deposit $150 worth of ETH into a MakerDAO vault
- The smart contract allows you to mint up to $100 DAI (150% collateral ratio)
- If your collateral value drops too close to the debt value, it is automatically liquidated
- To retrieve your ETH, you repay the DAI plus a stability fee
Advantages:
- Decentralized: No central issuer, governed by smart contracts and DAO governance
- Transparent: All collateral is visible on-chain
- Censorship-resistant: No single entity can freeze tokens
- Composable: Deeply integrated with DeFi protocols
Disadvantages:
- Capital inefficient: Requires over-collateralization (typically 150%+)
- Smart contract risk: Bugs in the smart contract could compromise the system
- Liquidation risk: Rapid price drops can trigger cascading liquidations
- Complexity: More complex to understand and use than fiat-backed stablecoins
3. Algorithmic Stablecoins
Algorithmic stablecoins attempt to maintain their peg through automated mechanisms that adjust supply based on demand, without full collateral backing.
How they work (conceptually):
- When the stablecoin trades above $1, the algorithm mints more tokens to increase supply and push the price down
- When the stablecoin trades below $1, the algorithm reduces supply (by incentivizing token burning) to push the price up
The UST/LUNA Collapse: The most notorious algorithmic stablecoin, TerraUSD (UST), collapsed spectacularly in May 2022, losing its peg entirely and wiping out approximately $40 billion in value. UST maintained its peg through an arbitrage mechanism with its companion token LUNA — when this mechanism failed under selling pressure, both tokens entered a "death spiral."
This collapse had a devastating impact on the entire crypto market and led to widespread skepticism of purely algorithmic stablecoin designs.
Current state in 2026: Purely algorithmic (uncollateralized) stablecoins are largely discredited. Most newer designs incorporate significant collateral backing alongside algorithmic mechanisms.
4. Synthetic/Yield-Bearing Stablecoins
A newer category that has emerged prominently by 2026 is synthetic stablecoins — tokens that maintain dollar parity through delta-neutral strategies or structured products:
Ethena USDe:
- Maintains peg through a delta-neutral position: holds staked ETH (long) and opens an equivalent short position on perpetual futures
- The funding rates from perpetual futures generate yield for holders (sUSDe)
- Not backed by fiat reserves — backed by a hedging strategy
- Risks include negative funding rates and exchange counterparty risk
Major Stablecoins in Detail
USDT (Tether)
Issuer: Tether Limited Launch: 2014 Market cap: $130B+ (2026) Chains: Ethereum, Tron (dominant), Solana, Avalanche, many others
Tether is the oldest and largest stablecoin. It is the most widely traded cryptocurrency by volume, often exceeding Bitcoin in daily trading volume. USDT is the dominant stablecoin for crypto trading, particularly in Asia.
Reserves: Tether's reserves have been a subject of debate for years. The company publishes quarterly attestation reports showing reserves that include US Treasury bills, money market funds, and other short-term investments. By 2026, Tether has generated billions in profit from the interest on its reserves.
Controversies: Tether has faced ongoing scrutiny regarding the transparency and composition of its reserves, its relationship with the Bitfinex exchange, and its regulatory status. Despite these controversies, USDT has maintained its peg consistently (with brief exceptions) and remains the dominant stablecoin by market cap.
Key feature: Tether can (and has) frozen USDT on specific addresses at law enforcement request.
USDC (USD Coin)
Issuer: Circle Launch: 2018 Market cap: $50B+ (2026) Chains: Ethereum, Solana, Base, Avalanche, Polygon, Arbitrum, many others
USDC is the second-largest stablecoin and is considered the most transparent and regulated fiat-backed option. Circle is a US-based company with regular auditing and regulatory compliance.
Reserves: USDC reserves are held in US Treasury securities and cash at regulated financial institutions. Monthly attestation reports are published by Deloitte.
SVB incident (March 2023): USDC briefly lost its peg (dropping to ~$0.87) when Silicon Valley Bank — where Circle held approximately $3.3 billion in reserves — collapsed. The peg was restored after the FDIC guaranteed all SVB deposits. This incident highlighted the bank counterparty risk inherent in fiat-backed stablecoins.
Key feature: USDC's Cross-Chain Transfer Protocol (CCTP) allows native USDC to be transferred across chains without traditional bridging, reducing costs and security risks.
DAI / USDS
Issuer: MakerDAO (now Sky, governed by MKR/SKY token holders) Launch: 2017 (DAI), 2024 (USDS rebrand) Market cap: $8B+ (2026) Primary chain: Ethereum
DAI is the largest decentralized stablecoin, created through MakerDAO's system of collateralized vaults. Users lock crypto assets (ETH, WBTC, USDC, and other approved collateral) to mint DAI.
Evolution: MakerDAO rebranded to Sky Protocol in 2024, introducing USDS (an upgraded version of DAI) and SKY (replacing MKR for governance). Both DAI and USDS continue to circulate.
Collateral: Originally backed only by ETH, DAI/USDS now accepts diverse collateral including:
- Crypto assets (ETH, WBTC, stETH)
- Real-world assets (tokenized treasuries, private credit)
- Other stablecoins (USDC — which has sparked debate about DAI's decentralization)
Key feature: DAI is the gold standard for decentralized stablecoins — no single entity can freeze or censor DAI tokens.
Other Notable Stablecoins
FDUSD (First Digital USD): A Hong Kong-regulated stablecoin that gained prominence after Binance moved away from BUSD. Significant on BNB Chain and Binance exchange.
PYUSD (PayPal USD): Issued by Paxos for PayPal. Represents traditional finance's entry into the stablecoin market. Available on Ethereum and Solana.
RLUSD (Ripple USD): Ripple's stablecoin, designed for institutional cross-border payments. Available on XRPL and Ethereum.
GHO: Aave's decentralized stablecoin, minted against Aave collateral positions.
crvUSD: Curve Finance's stablecoin using LLAMMA (Lending-Liquidating AMM Algorithm) for soft liquidations.
Stablecoin Risks
De-pegging Risk
The primary risk of any stablecoin is losing its peg — trading significantly above or below $1.00:
| Incident | Stablecoin | Date | Cause | Outcome |
|---|---|---|---|---|
| UST collapse | UST | May 2022 | Algorithmic mechanism failure | Total collapse ($40B lost) |
| USDC de-peg | USDC | Mar 2023 | SVB bank failure | Temporary ($0.87), restored |
| DAI fluctuation | DAI | Various | Market volatility | Minor, always recovered |
Counterparty Risk
For fiat-backed stablecoins:
- Issuer risk: The company managing reserves could mismanage funds
- Banking risk: The banks holding reserves could fail
- Audit risk: Reserve attestations may not capture all risks
- Freezing risk: Issuers can freeze tokens on specific addresses
Smart Contract Risk
For decentralized stablecoins:
- Code vulnerabilities: Bugs in lending/minting contracts
- Oracle manipulation: Price feeds could be manipulated to trigger unfair liquidations
- Governance attacks: Malicious governance proposals could alter system parameters
- Cascading liquidations: Rapid price drops causing a chain reaction of liquidations
Regulatory Risk
Stablecoins are under increasing regulatory scrutiny worldwide:
- United States: Stablecoin legislation has been a focus of Congress, with debates over reserve requirements, issuer licensing, and Fed oversight
- European Union: MiCA (Markets in Crypto-Assets) regulation includes specific stablecoin provisions, requiring reserves to be held in EU banks
- Global: Various jurisdictions are developing stablecoin-specific regulations
Regulatory changes could impact:
- Which stablecoins are available in your jurisdiction
- Reserve requirements and transparency standards
- Whether non-bank entities can issue stablecoins
- Tax treatment of stablecoin transactions
How to Use Stablecoins Safely
Diversification
Do not hold all your stablecoin exposure in a single token:
- Spread across USDT, USDC, and DAI for different risk profiles
- Consider the chains your stablecoins are on (bridge risk)
- Understand the specific risks of each stablecoin type
Reserve Verification
Before holding significant amounts in a fiat-backed stablecoin:
- Review the issuer's attestation reports
- Understand what assets back the stablecoin
- Check whether the stablecoin has ever lost its peg
- Assess the regulatory status of the issuer
DeFi Yield Awareness
Stablecoins are commonly used to earn yield in DeFi. Be aware that:
- Higher yields typically mean higher risk
- "Risk-free" stablecoin yields of 3-5% exist (e.g., lending USDC on Aave, staked USDS)
- Yields above 10% usually involve significant smart contract or counterparty risk
- Always understand where the yield is coming from
Stablecoin Selection Guide
| Priority | Recommended | Why |
|---|---|---|
| Maximum trust/regulation | USDC | Most transparent reserves, US-regulated |
| Maximum liquidity/trading | USDT | Largest by cap, deepest markets |
| Maximum decentralization | DAI/USDS | No central issuer, smart-contract governed |
| DeFi composability | DAI, USDC | Widest DeFi integration |
| Yield generation | sUSDe, sDAI | Built-in yield mechanisms |
Stablecoins and Self-Custody
Like any cryptocurrency, the security of your stablecoins ultimately depends on the security of your private keys. Whether you hold USDT, USDC, or DAI, the same self-custody principles apply:
- Store your seed phrase securely and offline
- Use a hardware wallet for large holdings
- Understand that stablecoins on different chains require different wallet configurations
- Be aware of token approval risks when using DeFi (revoke unused approvals)
Protect your stablecoin holdings by securing your wallet's seed phrase. Use the SafeSeed Seed Phrase Generator to create a BIP-39 seed phrase that secures all your crypto assets — including stablecoins — across multiple chains. The same seed phrase protects your USDC on Ethereum, USDT on Tron, and DAI on Layer 2s.
The Future of Stablecoins
Regulation
By 2026, stablecoin regulation is rapidly maturing:
- The US is advancing comprehensive stablecoin legislation
- The EU's MiCA framework is fully implemented
- Asian jurisdictions (Singapore, Hong Kong, Japan) have established regulatory frameworks
- Bank-issued stablecoins and CBDCs are competing with existing stablecoins
Competition and Innovation
The stablecoin market is becoming more competitive:
- Bank stablecoins: Traditional banks are issuing their own stablecoins
- CBDCs: Central Bank Digital Currencies may complement or compete with stablecoins
- Yield-bearing: More stablecoins are offering native yield (from treasury bills, staking, etc.)
- Privacy: Privacy-preserving stablecoin transfers (using zero-knowledge proofs) are emerging
- Cross-chain: Native cross-chain transfers (CCTP for USDC) are reducing bridge risks
Dollar Dominance
Stablecoins have become a significant channel for US dollar hegemony in the digital realm. Most stablecoins are dollar-denominated, and the demand for dollar stablecoins from users worldwide effectively increases global demand for US dollars and US Treasury securities. This dynamic has made stablecoins a topic of geopolitical interest.
FAQ
What is a stablecoin?
A stablecoin is a cryptocurrency designed to maintain a stable value, usually pegged to the US dollar at 1:1. Unlike Bitcoin or Ethereum, whose prices fluctuate significantly, stablecoins aim to always be worth approximately $1.00.
How do stablecoins maintain their peg?
Different stablecoins use different mechanisms. Fiat-backed stablecoins (USDT, USDC) maintain their peg by holding actual dollar reserves — for every token in circulation, there is $1 in the bank. Crypto-backed stablecoins (DAI) use overcollateralized crypto positions. Algorithmic stablecoins use supply/demand mechanics (largely discredited after UST's collapse).
Are stablecoins safe?
Stablecoins carry various risks depending on their type: counterparty risk (fiat-backed), smart contract risk (crypto-backed), de-pegging risk (all types), and regulatory risk (all types). No stablecoin is "risk-free," but well-managed, transparent stablecoins like USDC and DAI have maintained their pegs through multiple market crises.
What is the difference between USDT and USDC?
Both are fiat-backed dollar stablecoins, but they differ in transparency and regulation. USDC (by Circle) is considered more transparent with regular Deloitte attestations and is US-regulated. USDT (by Tether) is larger and more liquid but has faced criticism over reserve transparency. USDT dominates in Asia and trading; USDC is preferred for institutional and DeFi use.
Can I earn interest on stablecoins?
Yes. You can earn yield on stablecoins through: (1) DeFi lending protocols like Aave or Compound (3-8% APR typically), (2) yield-bearing stablecoins like sDAI or sUSDe, (3) centralized platforms and exchanges. Always understand the risks — higher yields mean higher risk.
Are stablecoins subject to tax?
In most jurisdictions, yes. Converting between stablecoins (e.g., USDT to USDC) may trigger a taxable event. Earning yield on stablecoins is typically taxed as income. Regulations vary by country — consult a tax professional familiar with cryptocurrency. See our Regulation Guide for more details.
What happened to UST/LUNA?
In May 2022, the algorithmic stablecoin TerraUSD (UST) collapsed catastrophically. UST maintained its $1 peg through an arbitrage mechanism with its companion token LUNA. When massive selling pressure broke the arbitrage loop, both tokens entered a "death spiral" — UST lost its peg entirely and LUNA's price went to near zero, destroying approximately $40 billion in value.
Can stablecoin issuers freeze my tokens?
Yes, centralized issuers (Tether, Circle) have the technical ability to freeze or blacklist specific addresses. This has been done in response to law enforcement requests, hacks, and sanctions compliance. Decentralized stablecoins like DAI cannot be frozen by any single entity.