Understanding the Stablecoin Landscape
Not all stablecoins are created equal. The mechanism used to maintain the peg — whether it’s fiat reserves, crypto collateral, algorithms, or commodities — has a huge impact on the coin’s safety, decentralisation, and use cases.
This guide breaks down every major stablecoin category and compares the leading tokens in each.
Fiat-Backed Stablecoins
Fiat-backed stablecoins are the simplest and most popular type. A centralised issuer holds fiat currency in a bank account and issues tokens on a 1:1 basis.
Tether (USDT)
| Detail | Info |
|---|---|
| Launched | 2014 |
| Issuer | Tether Limited |
| Market cap | $100B+ |
| Blockchains | Ethereum, Tron, BSC, Solana, Avalanche, and 20+ others |
| Reserves | Cash, US Treasury bills, money market funds, Bitcoin |
Pros:
- Highest liquidity and trading volume
- Available on virtually every exchange and blockchain
- The default trading pair for the entire crypto industry
Cons:
- Historical opacity around reserves
- Not fully decentralised
- Subject to US regulatory scrutiny -settled with NYAG and CFTC over reserve misrepresentation claims
USD Coin (USDC)
| Detail | Info |
|---|---|
| Launched | 2018 |
| Issuer | Circle |
| Market cap | $30B+ |
| Blockchains | Ethereum, Solana, Avalanche, Arbitrum, Optimism, and others |
| Reserves | Cash and short-term US Treasury securities |
Pros:
- Most transparent major stablecoin with monthly attestation reports
- Strong regulatory compliance
- Preferred by institutions and DeFi protocols
- Fast redemption for institutional clients
Cons:
- Depegged briefly in March 2023 during SVB collapse (recovered within days)
- Centralised — Circle can freeze addresses
- Less liquid than USDT on some exchanges
First Digital USD (FDUSD)
| Detail | Info |
|---|---|
| Launched | 2023 |
| Issuer | First Digital Labs (Hong Kong) |
| Market cap | $2B+ |
| Blockchains | Ethereum, BSC |
| Reserves | Cash and short-term US instruments |
Pros:
- Growing adoption, especially on Binance
- Zero-fee trading on certain pairs
- Newer with modern compliance framework
Cons:
- Shorter track record
- Hong Kong-based — different regulatory jurisdiction
- Lower adoption outside Binance
Crypto-Backed Stablecoins
Crypto-backed stablecoins use cryptocurrency as collateral, held in smart contracts. They’re typically over-collateralised to handle crypto price volatility.
Dai (DAI)
| Detail | Info |
|---|---|
| Launched | 2017 |
| Issuer | MakerDAO (decentralised governance) |
| Market cap | $5B+ |
| Blockchains | Ethereum, and others via bridges |
| Collateral | USDC, ETH, WBTC, and other approved assets |
How it works:
- Users lock collateral in a Maker Vault smart contract
- They can borrow DAI against it (up to a loan-to-value ratio)
- If collateral value drops too low, the position is liquidated
- Users pay a stability fee (interest) to retrieve their collateral
Pros:
- Fully decentralised — no central issuer to trust
- Transparent — all collateral is visible on-chain
- Integrated deeply with DeFi ecosystem
- Has maintained its $1 peg through multiple market crashes
Cons:
- Complex to understand for beginners
- Has relied partly on USDC as collateral (some centralisation creep)
- Slower to mint than simply buying from an exchange
Liquity (LUSD)
| Detail | Info |
|---|---|
| Launched | 2021 |
| Issuer | Liquity Protocol |
| Market cap | $200M+ |
| Collateral | ETH only |
Pros:
- Only backed by ETH (purest crypto-backed stablecoin)
- Non-redeemable but highly efficient
- Interest-free borrowing
Cons:
- Smaller market cap
- Less DeFi integration than DAI
- More volatile collateral base
Algorithmic Stablecoins
Algorithmic stablecoins use smart contracts to automatically adjust supply to maintain the peg. They’re the most controversial type.
Frax (FRAX)
| Detail | Info |
|---|---|
| Launched | 2021 |
| Issuer | Frax Protocol |
| Market cap | $600M+ |
| Mechanism | Fractional algorithmic (part collateralised, part algorithmic) |
Pros:
- Innovative hybrid model
- Capital efficient
- Growing ecosystem (Frax L2, frxETH)
Cons:
- Complex mechanism
- Still relatively small
- Algorithmic component adds risk
TerraUSD (UST) — Collapsed
The cautionary tale. UST was a $18B algorithmic stablecoin that collapsed in May 2022, wiping out $40B+ in value. Its death spiral — where the algorithm couldn’t maintain the peg and the associated Luna token went to zero — demonstrated the fundamental fragility of purely algorithmic approaches.
Lesson: Algorithmic stablecoins without robust collateral backing are inherently fragile under extreme stress.
Commodity-Backed Stablecoins
Paxos Gold (PAXG)
| Detail | Info |
|---|---|
| Launched | 2019 |
| Issuer | Paxos Trust Company |
| Market cap | $500M+ |
| Backing | One fine troy ounce of London Good Delivery gold |
Pros:
- Each token represents one ounce of physical gold
- Gold stored in Brink’s vaults in London
- Regulated by NYDFS
Cons:
- Niche use case
- Lower liquidity
- Gold price exposure (not USD-pegged)
Tether Gold (XAUT)
Similar to PAXG but issued by Tether. Each token represents one troy ounce of gold stored in Switzerland.
Comparison Table
| Stablecoin | Type | Backing | Market Cap | Decentralised | Risk Level |
|---|---|---|---|---|---|
| USDT | Fiat-backed | USD reserves | $100B+ | No | Low-Medium |
| USDC | Fiat-backed | USD reserves | $30B+ | No | Low |
| FDUSD | Fiat-backed | USD reserves | $2B+ | No | Low-Medium |
| DAI | Crypto-backed | Crypto collateral | $5B+ | Yes | Low-Medium |
| LUSD | Crypto-backed | ETH only | $200M+ | Yes | Medium |
| FRAX | Algorithmic | Fractional | $600M+ | Yes | Medium-High |
| PAXG | Commodity | Physical gold | $500M+ | No | Low (gold) |
Which Stablecoin Should You Use?
For trading: USDT or USDC — highest liquidity, available everywhere For DeFi: DAI or USDC — deepest integration with lending and borrowing protocols For maximum decentralisation: DAI or LUSD — no central issuer to trust For gold exposure: PAXG — regulated, London-vaulted gold
Conclusion
The stablecoin landscape is diverse and constantly evolving. Understanding the differences between types is crucial for managing risk and choosing the right tool for your trading strategy.
For most UK traders, a combination of USDT (for trading liquidity) and USDC (for DeFi and yield) makes a solid foundation. Always remember that even stablecoins carry risk — never put all your eggs in one basket.