Stablecoin Beginner's Guide: The Two Mainstream Stablecoin Types You Must Know in 2025

As Bitcoin breaks through the $100,000 mark, the stablecoin market is also experiencing an explosion. To date, the circulating stablecoins in the market have approached 200 types, with a total market capitalization exceeding $212 billion, making it the fastest-growing sector in the digital asset field. Beyond Bitcoin and Ethereum, stablecoins have become the “hidden protagonists” of the crypto market.

Why are stablecoins so popular?

The core appeal of stablecoins lies in a simple yet powerful promise—stability of value. In the volatile crypto market, stablecoins serve as a safe harbor for investors, like a port of refuge. They retain the high efficiency, transparency, and security of blockchain technology while avoiding the risks associated with sharp price fluctuations typical of traditional cryptocurrencies.

The working principle of stablecoins is straightforward: by pegging to external assets (fiat currency, commodities, or other financial instruments), each stablecoin is backed by a reserve asset. This mechanism ensures the credibility foundation of stablecoins, making them ideal tools for trading, transferring, and storing value.

What are stablecoins used for?

From daily transactions to cross-border remittances, the application scenarios of stablecoins are continuously expanding:

Trading Settlement: In crypto trading, stablecoins act as intermediaries, allowing you to switch between different currencies flexibly without converting to fiat, thus avoiding market volatility risks.

International Remittances: Traditional cross-border transfers are cumbersome and expensive. Stablecoins can complete transfers in just a few minutes at low cost, which is especially significant for remittance workers.

DeFi Ecosystem: In decentralized finance platforms, stablecoins serve as collateral, liquidity pools, and yield farming foundations, fueling DeFi’s prosperity.

Financial Inclusion: For regions with limited access to traditional banking services, stablecoins can provide savings, payments, and transfer functions via smartphones, breaking down financial barriers.

A deep comparison of the two main types of stablecoins

Among many stablecoins, fiat-collateralized stablecoins and crypto-collateralized stablecoins constitute the mainstream market forms, representing two fundamentally different design philosophies of stablecoins.

Fiat-collateralized stablecoins: Digitizing traditional trust

This type of stablecoin maintains a 1:1 peg with fiat currency (usually USD). When you purchase such stablecoins, the issuer deposits an equivalent amount of fiat currency in a bank account as reserves. The advantage of this model is its simplicity and intuitiveness—stability backed by fiat credit, with relatively manageable risks.

Typical representatives:

Tether (USDT): Launched in 2014, a pioneer in stablecoins. By the end of 2024, USDT’s market cap exceeded $140 billion, circulating in over 109 million on-chain wallets, making it the most widely used stablecoin globally. Tether’s profits in the first three quarters of 2024 reached $7.7 billion, demonstrating strong financial performance. USDT is deployed across multiple blockchains, offering unparalleled liquidity.

USD Coin (USDC): Launched jointly by Circle and Coinbase in 2018. According to the latest data, USDC’s circulating supply exceeds 75.3 billion coins, with a market cap of $75.34 billion, ranking as the second-largest stablecoin. USDC is favored by institutional investors for its high regulatory compliance and transparency.

Ripple USD (RLUSD): A newcomer launched on December 17, 2024. RLUSD operates on both the XRP ledger and Ethereum, leveraging the advantages of both ecosystems. Within just a few days of launch, its market cap surpassed $53 million, indicating strong market recognition of Ripple’s backing.

The main risk faced by this type of stablecoin is dependence on the issuer—if reserves are insufficient or management is opaque, the stablecoin may lose its value support. Additionally, regulatory changes can directly impact their usability.

Crypto-collateralized stablecoins: Decentralized exploration

Unlike fiat-collateralized stablecoins, this type is backed by other cryptocurrencies, requiring “over-collateralization” to cope with the volatility of crypto assets. For example, to issue $100 worth of stablecoins, you might need to lock in $150 of crypto assets as collateral.

Typical representatives:

Dai (DAI): Launched in 2017 by MakerDAO, a decentralized star project. DAI allows users to generate DAI by staking various crypto assets in smart contracts, with each DAI requiring over-collateralization of the underlying assets. As of the latest data, DAI’s market cap is $4.24 billion. DAI’s innovation lies in full on-chain transparency and decentralized governance, making it a foundational infrastructure in DeFi.

Ethena USDe (USDe): A rising star launched in February 2024, employing an innovative “triangular arbitrage” mechanism—combining staking Ethereum, hedging short positions, and yield optimization strategies to maintain stability and generate returns for holders. Within just 10 months, its market cap surged to $6.3 billion, with impressive growth. USDe also launched an upgraded version, USDtb, supported by BlackRock and Securitize’s tokenized money market fund BUIDL, further strengthening its stability.

Frax (FRAX): An experimental stablecoin launched in 2020, pioneering a “partial algorithm + partial collateral” hybrid model. As market demand for stability increased, Frax voted in 2023 to upgrade to a fully collateralized model. Its current market cap is $6.156 million, reflecting a pragmatic approach.

Risks of crypto-collateralized stablecoins include: over-collateralization leading to low capital efficiency; smart contract vulnerabilities risking fund loss; and price crashes of collateral assets triggering liquidation cascades, potentially losing the peg. The collapse of UST in history serves as a cautionary tale.

Other innovative stablecoins worth noting

Commodity-backed: Projects like Tether Gold (XAUT) directly back with physical gold, allowing investors to hold gold exposure on-chain, but face liquidity and storage cost challenges.

Yield-generating stablecoins: Ondo Finance’s USDY is backed by U.S. Treasuries and bank deposits, offering about 4-5% annual yield, representing an innovative direction for stablecoins.

Emerging fiat stablecoins: First Digital USD (FDUSD) has a market cap of $1.45 billion, and PayPal USD (PYUSD) has a market cap of $3.63 billion. New players keep entering, intensifying market competition.

Risk warnings before investing in stablecoins

Stablecoins are not entirely risk-free:

Regulatory uncertainty: Different countries’ attitudes toward stablecoins are still evolving, and stricter requirements or restrictions may emerge in the future.

Technical risks: Complex smart contracts are prone to vulnerabilities, and hacking threats are ever-present.

Systemic risks: The rapid growth of the stablecoin market could lead to large-scale failures, potentially affecting the entire financial system.

Summary

Stablecoins have become a key bridge connecting traditional finance and digital assets. The two main types—fiat-collateralized and crypto-collateralized—each have their advantages. Fiat-collateralized stablecoins are more stable but depend on the issuer; crypto-collateralized ones are more decentralized but carry more complex risks. Understanding these differences is essential to making smarter choices in the stablecoin world. Investors should fully understand the risks involved and select suitable stablecoin tools based on their needs.