What is a Stablecoin?

A stablecoin is a cryptocurrency that maintains a fixed value (peg) against a traditional asset, such as the US dollar or gold. It reduces volatility and provides reliable transactions, making it a secure store of value compared to other tokens.

Stablecoins face the challenge of balancing decentralization, price stability, and capital efficiency. As a result to that, they can be divided into four types, ranked from safest to riskiest: fiat-collateralized, commodity-backed, crypto-backed, and algorithmic.

Together, all stablecoins have a market capitalization of $175 billion, which represents 6.89% of the global value of all cryptocurrencies. While Tether's USDT accounts for 69% of the stablecoins sector, Circle's USDC has scored more regulatory wins in 2024.

How to Evaluate Stablecoin Safety

Evaluating the safety of stablecoins involves examining critical factors that ensure the reliability and stability of the protocol including:

• Collateralization: Assess the assets backing the stablecoin, such as fiat, crypto, or algorithms, and their transparency.
• Regulatory Compliance: Verify adherence to regulatory standards like EU's Markets in Crypto-Assets (MiCA), which can help improve trust and legal stability.
• Transparency and Audits: Look for regular audits and transparent disclosures to confirm asset backing and financial health.
• Liquidity: Ensure that the stablecoin has sufficient liquidity for users to redeem assets without delay.
• Decentralization: Consider the level of decentralization, as this impacts security and resistance to censorship.
• Market Adoption: A widely adopted stablecoin generally has stronger market confidence and resilience.

What are the Safest Stablecoins?

After examining over 25 stablecoins, we identified the safest options for 2024. These fiat-pegged stablecoins have proven reliable and resilient, making them ideal for investors seeking stability.

1. USD Coin (USDC)

USDC, issued by Circle in partnership with Coinbase, stands out due to its high regulatory compliance in both the US and Europe.

Circle holds a broker-dealer license from the SEC and is licensed as an Electronic Money Institution (EMI) in Europe, ensuring USDC’s full backing by cash and short-term US Treasury bonds, verified by regular audits.

2. Tether (USDT)

Tether's USDT with a market cap of $122 billion, is the most widely adopted stablecoin and offers high liquidity and quick conversions, making it accessible for global transactions.

However, Tether has faced regulatory scrutiny due to concerns about its reserve transparency and compliance with emerging regulations. Notably, the European Union's MiCA regulation has led some exchanges to delist USDT in Europe.

3. Euro Coin (EURC)

Euro Coin, or EURC is also issued by Circle, is a euro-backed stablecoin fully compliant with the EU’s MiCA regulatory framework.

Circle’s EMI licensing in Europe reinforces EURC’s reliability, with reserves held in reputable financial institutions to ensure stability. As of late 2024, there are €81.59 million EURC in circulation, with €83.01 million in reserves.

Why is USDC the Safest Stablecoin?

USD Coin (USDC) is ranked as the safest stablecoin due to its rigorous regulatory compliance in both the US and Europe. Issued by Circle, in partnership with Coinbase, it was the first stablecoin to meet the EU’s MiCA regulatory standards, acquiring an EMI license in Europe.

In the US, USDC operates under financial oversight to ensure high legal standards. The stablecoin’s reserves are fully backed by cash and short-term US Treasury bonds. A portion of these reserves is managed through the Circle Reserve Fund.

With $37 billion in circulation and 10 million holders across 80 blockchain networks, USDC's stability and transparency are reinforced by financial institutions like BlackRock and BNY Mellon, ensuring 1:1 USD redeemability.

Furthermore, USDC's integrity is evidenced by annual audits following American Institute of Certified Public Accountants (AICPA) standards.

What is The Safest Decentralized Stablecoin?

The safest decentralized stablecoins are designed to maintain stability while minimizing reliance on centralized assets and custodians. These are the few that do it best:

• DAI (USDS): Fully decentralized and crypto-collateralized stablecoin by MakerDAO (Now Sky) that has been live since 2017, making it the most preferred DeFi option on the list.
• Frax (FRAX): As a partially algorithmic, partially collateralized stablecoin, FRAX achieves stability through a unique mechanism that combines decentralized governance and Ethereum-based collateral.
• Liquity USD (LUSD): Fully decentralized and backed by Ethereum, LUSD is designed to maintain stability without relying on centralized assets or third-party custodians.

Is DAI a Safe Decentralized Stablecoin?

DAI is a safe decentralized stablecoin due to its diversified, crypto-based collateral system. Historically, DAI was very dependent on USDC, however, it has since minimized its share from 50% to 4.9% in its reserves.

Interestingly, in 2024 MakerDAO rebranded to Sky Protocol, introducing USDS as an upgraded version of DAI; however, the community is currently debating a potential return to the MakerDAO and DAI branding and this might cause a little confusion.

As of now, DAI primarily utilizes Ethereum derivatives, including wrapped ether (WETH) and wrapped staked ether (wstETH), which make up 68% of its collateral. With an over-collateralization ratio of 213%, DAI maintains a good buffer to safeguard its stability.

Who Else in Launching a Stablecoin in 2024?

In 2024, numerous organizations launched stablecoins to meet the demand for stable digital assets. PayPal introduced PayPal USD (PYUSD) for payments, and Revolut is planning to launch its own stablecoin to compete with Tether and Circle.

In September, Ethena Labs started developing UStb, backed by BlackRock’s tokenized U.S. Treasuries fund, while in October Ripple announced a USD-backed stablecoin (RLUSD) for liquidity on its platform.

Most recently, Paxos, Robinhood, Kraken, and Galaxy Digital created the Global Dollar Network, a consortium aiming to accelerate stablecoin adoption worldwide.

Bottom Line

Stablecoins play a crucial role in the digital economy by providing a stable, reliable medium of exchange and store of value in the volatile crypto market.

Despite the wave of new stablecoin launches in 2024, the safest options remain USD Coin (USDC), Tether (USDT), and decentralized choices like DAI.

These stablecoins are backed by strong regulatory compliance, transparent reserves, and proven stability, making them secure picks for investors, traders and businesses.