The 6 Largest Stablecoins in the World: How They Work and the Risks Involved

Stablecoins have become an essential part of the cryptocurrency ecosystem. Designed to maintain a fixed value, these tokens provide a reliable way for traders to manage risk, reduce transaction fees and even earn passive income.

Stablecoins have become an essential part of the cryptocurrency ecosystem, providing a stable way to trade digital assets and reduce the volatility associated with cryptocurrencies like Bitcoin and Ethereum. These tokens are typically pegged to a fiat currency, most commonly the U.S. dollar, and aim to maintain a 1:1 value.

While most stablecoins are backed by assets, a smaller category known as algorithmic stablecoins relies on technical mechanisms to keep the price stable. This approach is riskier because it’s more susceptible to market fluctuations and technical failures.

However, fiat-backed stablecoins, which are backed by real-world assets, currently dominate the market. Tether’s USDT and Circle’s USDC, the two largest stablecoins, collectively account for more than $167 billion in market cap.

Issuers of fiat-backed stablecoins often establish a reserve fund holding real-world assets. So if a stablecoin is backed by the U.S. dollar, the issuer might hold $100 million to support 100 million stablecoins. When a user wants to redeem their stablecoin, the issuer can draw from this reserve to provide the equivalent amount of fiat currency.

Here are the six largest stablecoins by market cap, as of Nov. 20, 2024, according to CoinMarketCap:

Tether (USDT)

With a market cap of $128.87 billion, Tether is the largest stablecoin in the world. It’s pegged to the U.S. dollar and operates on multiple blockchains, including Ethereum, Tron and Solana.

Tether is often credited with being the first successful stablecoin, and it has played a significant role in the growth of the cryptocurrency market. However, it has also faced controversy over its reserves and its close ties to a few large trading firms.

USDC (USDC)

USDC is a stablecoin pegged to the U.S. dollar, and it operates on multiple blockchains, including Ethereum. It’s managed by Circle, a financial technology company. USDC’s stability is ensured by a reserve of U.S. dollars, where each USDC token is backed by a corresponding dollar held with verified partners, often financial institutions.

To create new USDC, users deposit U.S. dollars with Circle, which then issues an equivalent amount of USDC tokens on the blockchain. This process ensures every USDC in the market is backed by a real U.S. dollar.

While initially managed by a consortium called Centre, co-founded by Coinbase and Circle, Circle has since assumed sole responsibility for the management of USDC. However, Coinbase still maintains a minority stake in Circle.

Dai (DAI)

Dai is a decentralized stablecoin operating on the Ethereum blockchain. It aims to maintain a stable value of one U.S. dollar through the use of smart contracts and a decentralized autonomous organization (DAO) known as MakerDAO.

Unlike centralized stablecoins like Tether, Dai’s issuance and management are decentralized, with no one entity controlling the process. Users can deposit different cryptocurrencies as collateral into smart contracts, which then mint DAI tokens. These collateralized assets help maintain DAI’s peg to the U.S. dollar.

First Digital USD (FDUSD)

First Digital USD is a stablecoin pegged to the U.S. dollar and operating on the Ethereum blockchain. It’s issued by FD121 Limited, a Hong Kong-based financial firm.

First Digital USD is designed to be backed by one U.S. dollar or equivalent assets, and its reserves are held in different accounts to ensure they remain separate from the firm’s other assets. These reserves are required to be held in cash or highly liquid assets.

A unique feature of FDUSD is its programmability, which allows the stablecoin to execute smart contracts. This capability can be used to facilitate escrow and insurance services without the need for intermediaries.

USDD (USDD)

USDD is a stablecoin pegged to the U.S. dollar and available on multiple blockchains, including Tron, Ethereum, BNB Chain and others. It was launched in May 2022 by Tron founder Justin Sun and the TRON DAO.

This token is designed to be a decentralized alternative to traditional fiat currencies and centralized stablecoins like Tether and USDC. It’s an algorithmic stablecoin that relies on market incentives and a hybrid backing model.

PayPal USD (PYUSD)

Launched in 2023, PayPal USD is a stablecoin pegged to the U.S. dollar and backed by the Paxos Trust Company, a U.S.-regulated custodian. It’s also the first stablecoin to be issued by a major U.S. financial services company.

This stablecoin is fully backed by a mix of U.S. dollar deposits, short-term U.S. Treasurys and cash equivalents, ensuring its peg to