Stablecoins: Not All Created Equal..

While stablecoins are often grouped together under a single label, not all stablecoins are built the same. They differ meaningfully in how they maintain their peg, the assets that back them, and the regulatory standards they operate under. Some are fully backed by cash and short-term government securities, while others rely on on-chain collateral or algorithmic mechanisms that introduce additional layers of complexity.

These design choices matter. The engineering behind a stablecoin directly impacts its resilience, transparency, and risk profile, particularly during periods of market stress. For participants in OTC markets, understanding these differences is essential, as the structure of a stablecoin can influence liquidity, counterparty risk, and settlement reliability.

Fiat Backed Stablecoins

At the highest tier are fiat-backed stablecoins, which are typically supported by cash, cash equivalents, and short-term government securities held with regulated custodians. These stablecoins are designed to closely mirror traditional dollars while benefiting from blockchain based settlement, and they are generally favored by institutions and OTC desks due to their transparency and liquidity. 

• USD Coin (USDC) is offered by Circle

  • Regulatory gold standard.

  • Market cap is ~75B

• Tether (USDT) is offered by iFinex

  • Lacks regulatory support, as per lack of auditing.

  • Market cap is ~186B, most liquid/adopted.

Data from Coinglass visualizes the comparative growth of USDC vs USDT.

Crypto Collateralized Stablecoins

Instead of being backed by cash held in a bank, these assets are backed by on-chain crypto assets such as ETH and other approved collateral that users lock into smart contracts. To account for crypto price volatility, the system requires these positions to be overcollateralized, meaning more value is deposited than the amount of stablecoins issued. If collateral values fall below required thresholds, positions are automatically liquidated to protect the peg.

• Dai (DAI) is a crypto collateralized stablecoin with a current market cap of 4.2B

• Terra USD (UST) was a crypto collateralized stablecoin that collapsed to a value near $0 because of insufficient value backing the stablecoin. It collapsed alongside Luna in 2022.

  

  While worth almost 20B USD at peak, UST met an unfortunate end curing intense downward market movement, making the back assets (BTC/LUNA) worth less than the total market cap of UST. Data from CoinGecko.

Algorithmic Stablecoins

Another tier consists of algorithmic or partially algorithmic stablecoins, which rely on supply and demand mechanisms, incentives, or secondary tokens to maintain their peg. Rather than being fully backed by reserve assets, these stablecoins depend on market behavior and protocol design to remain stable. While innovative, they carry higher structural risk and have historically been more fragile during rapid market drawdowns.

• Ethena USDe (USDe) is an intriguing example of financial engineering where the collateral backing the stablecoin is an aggregated pool of capital which maintains a “Delta Neutral” exposure to Ethereum (ETH).

USDe maintains a market capitalization ~6B at the time of writing. This stablecoin is an interest financial engineering experiment, where the vulnerabilities are well understood.

Closing Thoughts

Stablecoins are not a monolithic asset class. They span a wide range of designs, from fully fiat-backed models to crypto-collateralized, algorithmic, and hybrid structures, each with its own tradeoffs around transparency, resilience, and risk. The engineering choices behind a stablecoin matter, particularly in high-volume or high-stakes environments, where liquidity, redemption certainty, and operational reliability are non-negotiable. Understanding these differences is essential for anyone using stablecoins beyond casual transfers.

For institutions and OTC desks like EraTree, these considerations naturally lead to USDC as the preferred settlement asset. Its regulated reserve structure, deep liquidity, and broad acceptance across exchanges, custodians, and banking partners make it uniquely suited for large-scale transactions and liquidity management. While innovation across stablecoin design continues, USDC remains the clear standard for institutional-grade stability, providing the confidence and infrastructure required to move capital efficiently and securely in modern digital markets.