Stablecoins Explained
Understanding the $280+ billion backbone of DeFi - how stablecoins maintain their value and enable global financial access
🎯 What You'll Learn
What Are Stablecoins?
Stablecoins are cryptocurrencies designed to maintain a stable value relative to a reference asset, typically the US Dollar. They solve crypto's volatility problem, making them essential for DeFi applications, payments, and as a temporary store of value during market turbulence.
Think of stablecoins as the bridge between traditional finance and crypto - they provide the relative stability of fiat currencies with the programmability and efficiency of blockchain technology. The stablecoin market has grown to over $280 billion in total market capitalization as of 2025, representing roughly 7% of the total crypto market.
Current Market Overview
Types of Stablecoins
Fiat-Collateralized
Backed by real USD and treasuries in regulated accounts. Most liquid and widely accepted.
Market Leaders: USDT (~$146B), USDC (~$60B)
Crypto-Collateralized
Over-collateralized with crypto assets (typically 150-200%). Decentralized but capital inefficient.
Examples: DAI, LUSD, crvUSD
Hybrid/RWA-Backed
Combines crypto collateral with real-world assets like treasuries. Growing rapidly in 2025.
Examples: FRAX, USDS (Sky/MakerDAO)
How Fiat-Backed Stablecoins Work
User Deposits USD
Send dollars to the issuer (e.g., Circle for USDC, Tether for USDT) through their platform
Stablecoins Minted
Issuer creates equivalent stablecoins and sends them to your wallet (1:1 ratio)
Reserves Held
Your dollars are held in bank accounts and short-term US treasuries (check attestation reports)
Redemption Available
Institutional users can redeem directly; retail users typically trade on exchanges
How Crypto-Backed Stablecoins Work
Deposit Collateral
Lock crypto worth 150-200% of desired loan (e.g., $1,500 ETH for $1,000 DAI)
Smart Contract Mints Stablecoins
Protocol creates new stablecoins backed by your collateral
Monitor Collateral Ratio
If collateral value drops, add more or risk liquidation (typically at 110-130% ratio)
Repay to Unlock
Return borrowed stablecoins plus stability fees to retrieve your collateral
How Hybrid/RWA Stablecoins Work
Mixed Collateral
Backed by combination of crypto assets and tokenized real-world assets
Yield Generation
RWA portion (like T-bills) generates yield, often passed to holders
Dynamic Allocation
Protocol adjusts mix based on market conditions and governance
Enhanced Stability
RWA backing provides stability during crypto volatility
Where to Find Current Data
📊 Real-Time Stablecoin Analytics
Risk Assessment Framework
| Type | Example | Typical Market Share | Main Risk | Risk Level |
|---|---|---|---|---|
| Fiat-Backed | USDT, USDC | 85-90% | Regulatory/Custodial | Low-Medium |
| Crypto-Backed | DAI | 3-5% | Liquidation Cascades | Medium |
| Hybrid/RWA | FRAX, USDS | 5-10% | Complexity/Governance | Medium |
| Algorithmic | Historical Only | < 1% | Death Spiral | Very High |
Regulatory Changes: Increasing government oversight may affect availability and redemption processes
Smart Contract Risk: DeFi protocols holding stablecoins face ongoing exploit risks ($2.3B+ lost in 2025)
Counterparty Risk: Fiat-backed stablecoins depend on traditional banking infrastructure and custodians
Historical Lesson: UST's $60B collapse in 2022 remains the largest stablecoin failure - avoid experimental designs
🔑 Key Takeaways
Knowledge Check
1. What percentage of the stablecoin market do USDT and USDC typically control together?
2. Why do crypto-backed stablecoins require over-collateralization?
3. Where should you check to verify USDC's reserves?
Practical Exercises
Live Market Research
Visit DeFiLlama's stablecoin page and identify: 1) Current total market cap, 2) Top 5 stablecoins by size, 3) Which chain has the most stablecoin activity. Compare these to the figures in this module.
Reserve Verification
Find the latest attestation reports for both USDC and USDT. Compare their reserve compositions. What percentage is in cash vs treasuries? Which appears more transparent?
Risk Assessment
Research a smaller stablecoin (not USDT/USDC). Check its mechanism, audit status, daily volume, and number of holders. Would you trust it with significant funds? Why or why not?