Stablecoins: What Backs Them

There is roughly $300 billion sitting in stablecoins right now, and most of the people holding them have never asked the obvious question: what, exactly, is a stablecoin worth a dollar because of?

The answer is more interesting, and more varied, than the marketing suggests. Some stablecoins are backed by Treasury bills sitting in a bank vault. Some are backed by other cryptocurrencies locked in smart contracts. One of the biggest is backed by a hedge fund strategy. And at least one that was worth $18 billion turned out to have no traditional reserves behind it at all. This article walks through the major stablecoins, how each one actually holds its peg, who checks the math, who’s making money, and what history says about how they fail.

What a Stablecoin Is Supposed to Do

A stablecoin is a cryptocurrency designed to hold a fixed value, almost always one US dollar. The idea is simple: give people a digital dollar that moves like crypto (on a blockchain, around the clock, across borders, without a bank in the middle) but doesn’t swing 10% in an afternoon. Traders use them to park money between trades. Businesses use them to settle invoices across borders. People in countries with collapsing currencies use them to hold dollars without needing a US bank account.

The market is growing beyond crypto trading, though most of the volume is still not payments. Total stablecoin transfer volume ran to roughly $27.6 trillion in 2024, according to a CEX.io report, but CEX.io estimated that about 70% of that was trading bots. Analysts who filter out the noise land far lower: McKinsey estimates that real payments, such as business settlement, payroll, and remittances, came to about $390 billion in 2025, more than double the year before, and BCG puts real economy payments at $350 billion to $550 billion. That is still a small slice of global payments, but it is growing fast, and this is no longer a niche product.

The Major Stablecoins and How They Work

As of early October 2026, the stablecoin market is roughly $300 billion, and it is extraordinarily top-heavy. Two coins account for roughly 85% of it.

Tether (USDT), about $183 billion. The oldest and by far the largest. Tether is a fiat-backed stablecoin: for every USDT in circulation, the company says it holds at least one dollar’s worth of reserves. Most of those reserves are now US Treasury bills. As of the end of 2025, Tether reported $141 billion in Treasury exposure, along with $17.4 billion in gold, $8.4 billion in bitcoin, and other assets. Tether is headquartered in El Salvador, operates outside US regulation, and is the dominant stablecoin everywhere outside the United States, especially on the TRON network, where it is the default dollar for much of Asia, Latin America, and Africa.

USD Coin (USDC), about $74 billion. Issued by Circle, a publicly traded US company. USDC is the regulated, institutional choice. Its reserves sit almost entirely in short-term Treasuries, overnight repurchase agreements, and cash at major US banks, much of it in a dedicated fund managed by BlackRock. USDC is the stablecoin most likely to be used by a US fintech or a Wall Street firm.

USDS and DAI, about $14 billion combined. These come from Sky (formerly MakerDAO) and are the leading crypto-collateralized stablecoins. Instead of dollars in a bank, they’re backed by cryptocurrency and, increasingly, tokenized real-world assets locked in smart contracts, with more collateral than the stablecoins issued against it. The system is governed by token holders rather than a company, which makes it more transparent (everything is on chain) and, in some ways, more exposed (a crash in the collateral can threaten the peg).

Ethena USDe, about $4.6 billion. The most novel of the big ones and the one that deserves the most scrutiny. USDe is a “synthetic dollar.” Ethena takes crypto collateral like ether and bitcoin and simultaneously opens an equal short position in perpetual futures on centralized exchanges. If the collateral falls, the short gains; if it rises, the short loses. The two cancel out, and the position is worth a constant dollar amount. This is a well-understood hedge-fund strategy called a basis trade, and it generates yield from futures funding rates, which Ethena passes on to holders. It works. It has also never been tested through a prolonged period of negative funding rates, and its hedges live on exchanges that could fail.

The rest. A second tier of fiat-backed coins has emerged in the past two years: PayPal’s PYUSD and the Paxos-issued USDG, Ripple’s RLUSD, and USD1 from World Liberty Financial, the Trump-family-affiliated venture. All follow the Circle model of Treasuries and cash with monthly attestations. First Digital’s FDUSD is a much smaller Asian-market alternative, and TRON’s USDD rounds out the top ten.

Are They Really Backed One-to-One?

This is the question that matters most, and the answer is: today, mostly yes, and that is a recent development.

The key distinction is between an attestation and an audit. An attestation is a snapshot: an accounting firm confirms that on a particular day, the issuer’s stated assets existed. An audit is a full examination of the issuer’s financial statements, controls, and processes over a period of time. Attestations are cheaper, faster, and far less rigorous. For most of stablecoin history, nobody had an audit.

Circle has been attested monthly by Deloitte for years and, as a public company, publishes audited financials. Paxos (PYUSD, USDG) is attested monthly by KPMG. Ripple’s RLUSD is attested by Deloitte. These are large firms with reputations to lose, and the reserves they’re checking are simple: Treasuries, repos, and cash.

Tether is the complicated case, because Tether’s history is complicated. In 2021, the New York Attorney General fined Tether and its sister exchange Bitfinex $18.5 million after finding that the company had, for periods of time, not been fully backed and had covered an $850 million shortfall with undisclosed intercompany loans. The CFTC fined Tether another $41 million the same year for misrepresenting its reserves. From 2022 onward, Tether published quarterly attestations from BDO Italia, a mid-tier firm, and steadily moved its reserves into Treasuries. In March 2026, Tether finally engaged KPMG for its first full financial audit, and on August 13, 2026 it announced the audit was complete, with an unqualified opinion on its 2025 financials. Whether Tether will publish the full report is still unclear. But it is a genuine step, and it is fair to say Tether’s reserves today are far more transparent and far higher quality than they were five years ago. It reported $6.3 billion in excess reserves in its year-end 2025 attestation, and the audit put the figure at $6.8 billion, meaning it holds more than a dollar of assets per USDT.

The crypto-backed coins are a different story. USDS and DAI are verifiable in real time by anyone with a block explorer; you don’t need to trust an accountant because the collateral is on chain. USDe’s backing is partly on chain and partly in exchange accounts, which Ethena reports through custodian attestations. That’s more transparent than Tether circa 2019, but it’s harder to verify than a Treasury bill.

The other big change is the law. In July 2025, the United States passed the GENIUS Act, the first federal stablecoin statute. It requires US issuers to hold one-to-one reserves in cash, short-term Treasuries, and similarly safe assets; publish monthly reserve reports examined by public accountants; have their CEO and CFO personally certify the numbers; and, for issuers over $50 billion, submit to annual audits. Holders get priority over all other creditors if an issuer goes bankrupt. Enforcement begins by January 2027. Foreign issuers like Tether need a Treasury reciprocity determination to serve US businesses, which had not been granted as of this writing; Tether has responded by launching a separate US-compliant coin called USAT. For the first time, “backed one-to-one” is a legal requirement rather than a promise.

Who Benefits, and How the Money Is Made

Stablecoins do not pay interest to holders. Under the GENIUS Act, US issuers are now explicitly prohibited from doing so. That means every dollar you hold in USDT or USDC is a dollar the issuer gets to invest, and the issuer keeps the return.

At current Treasury yields, that is an astonishingly good business. Tether earned more than $10 billion in profit in 2025 with a few hundred employees, which makes it one of the most profitable companies per employee in the world. Circle earns billions the same way. Neither has to do much beyond hold Treasuries and manage a blockchain contract. It is essentially a bank that pays 0% on deposits, invests them in government debt, and has no branches.

Holders benefit in other ways. For a trader, a stablecoin is the fastest way to exit a position without leaving the crypto ecosystem. For a business, it settles a cross-border payment in seconds instead of days. For a family in Argentina, Nigeria, or Turkey, it is the difference between watching savings evaporate in the local currency and holding something that tracks the dollar. In Latin America, Chainalysis found that stablecoins accounted for 32.1% of cross-border value transfers by June 2026, and Tether reports over 500 million users worldwide. Whatever one thinks of Tether the company, the demand for a digital dollar in places where the local currency is failing is real and enormous.

The US government benefits too, which is why the GENIUS Act passed with bipartisan support. Stablecoin issuers are now among the largest buyers of short-term Treasuries on earth, and they extend dollar dominance into countries and markets the traditional banking system doesn’t reach. A Nigerian merchant holding USDT is, in effect, financing US government debt.

What the Fees Actually Are

Stablecoins are cheap to use, but they are not free, and the costs hide in a few places.

Network fees. Sending a stablecoin costs whatever the underlying blockchain charges. On Ethereum, that can be anywhere from a few cents to several dollars depending on congestion. On TRON, Solana, or a Layer 2, it is typically a fraction of a cent. The stablecoin itself doesn’t charge; the road it travels on does.

Issuance and redemption. Converting real dollars into USDC and back is free for Circle’s institutional customers. Tether charges a 0.1% fee on redemptions and requires a minimum of $100,000, which means ordinary users can’t redeem directly at all; they sell on an exchange instead.

Exchange spreads. Most people acquire stablecoins on an exchange, and the exchange takes a spread and a trading fee. This is usually the largest real cost, typically 0.1% to 1%.

The hidden fee. The interest you don’t earn. If you hold $10,000 in USDC for a year at 4% Treasury yields, the issuer pockets roughly $400 that a money market fund would have paid you. This is the true price of a stablecoin, and it’s invisible because it never shows up as a line item.

How Centralized Are They?

More than most users realize. The fiat-backed coins that dominate the market are, for all practical purposes, run by a single company that can freeze your money.

Both Tether and Circle build a blacklist function into their tokens. When an address is blacklisted, the coins in it cannot be moved, ever, unless the issuer reverses the decision. As of July 2026, Tether had frozen about $5.7 billion across nearly 9,600 addresses. Most of those freezes respond to law enforcement requests, sanctions designations, or Tether’s own fraud monitoring, and a meaningful share involve stolen funds being returned to victims. But the power is total and the recourse is thin: only about 3.6% of addresses frozen in 2025 were ever unfrozen. Circle freezes far less often and generally only under a court order, but it has the same switch.

This is the fundamental trade. A stablecoin can be censorship-resistant or it can be dollar-backed and regulated, but it cannot fully be both, because the dollar-backed version has a company in the middle that governments can compel. USDS, DAI, and USDe are more decentralized in governance, though DAI’s collateral increasingly includes USDC itself, which means the freeze risk propagates downstream.

When Stablecoins Break

The history is short, but it is instructive, because every major failure has followed the same pattern: the backing was not what people assumed.

Terra/UST, May 2022. The largest collapse in crypto history outside of exchange fraud. UST was an algorithmic stablecoin, backed not by assets but by a mechanism that let holders swap it for a sister token, LUNA, at a dollar’s worth. When confidence broke, holders rushed to exit, the mechanism minted trillions of LUNA to absorb the redemptions, LUNA’s price collapsed to zero, and $18 billion of UST followed it. Roughly $40 billion of value evaporated in a week. The lesson was unambiguous: a stablecoin backed by nothing but faith in its own token is not stable.

USDC, March 2023. The regulated, fully-backed, Deloitte-attested coin depegged to $0.87 over a weekend. Circle had $3.3 billion of its cash reserves at Silicon Valley Bank when the bank failed. USDC was fully backed; the problem was that some of the backing was temporarily inaccessible. The peg recovered within days when the government guaranteed SVB’s deposits, but the episode proved that “backed by dollars in a bank” carries bank risk.

Tether, October 2018. USDT fell to around $0.92 amid rumors about its banking relationships, which the later NYAG investigation showed were not baseless. It recovered, but it was the moment the “is Tether really backed” question went mainstream.

Iron Finance, June 2021. A partially algorithmic stablecoin that suffered what its own team called “the world’s first large-scale crypto bank run,” wiping out its TITAN token entirely.

USDe, October 2025. During the largest liquidation event in crypto history, USDe briefly traded at $0.65 on Binance. This was a pricing anomaly on one exchange rather than a failure of the underlying hedge; on other venues it barely moved. But it caused a cascade of liquidations for anyone using USDe as collateral on Binance, and it illustrated a real vulnerability: a synthetic dollar is only as stable as the venues that price it.

The Risks Going Forward

Taking all of this together, the risks fall into a few clear categories.

Reserve risk is the classic one: are the assets really there, and are they really worth what the issuer says? For the Treasury-backed coins this has become a much smaller concern than it was, though how much of Tether’s completed KPMG audit becomes public is the thing to watch.

Bank and custody risk is what bit USDC in 2023. Even perfect backing can be locked in a failed institution.

Mechanism risk applies to the crypto-backed and synthetic coins. USDS and DAI depend on liquidations working during a crash. USDe depends on funding rates and exchange solvency. These have held up so far, and Terra proved what happens when they don’t.

Centralization and censorship risk is inherent to fiat-backed coins and is not going away; the GENIUS Act arguably strengthens it by making freeze compliance a legal obligation.

Concentration risk is the one nobody talks about. Two companies control roughly 85% of a $300 billion market that has become critical infrastructure for global crypto trading and a growing share of real-world payments. Tether alone holds more Treasuries than most countries. A serious problem at either issuer would not be a crypto story; it would be a financial-stability story.

The Balanced View

Stablecoins are, on the whole, a success. They have given hundreds of millions of people access to dollars, made cross-border payments faster and cheaper than the banking system, and become the settlement layer for an entire industry. The backing has improved dramatically, the law has finally caught up, and the biggest issuers now hold reserves that would satisfy a conservative money market fund.

But a stablecoin is a claim on someone, and it is only as good as that someone’s assets, honesty, and freedom from interference. Read the attestations. Know which kind of stablecoin you’re holding and what’s behind it. Understand that the issuer can freeze it, that the yield on your dollars is going to them, and that history’s worst failures came from coins whose holders never asked what they were actually backed by. The technology is sound. The trust is still, in the end, in people.

A Note on This Article

This article is provided for general informational and educational purposes only. It is not financial, investment, legal, or tax advice, and nothing in it should be read as a recommendation to buy, sell, hold, or use any stablecoin, cryptocurrency, or other asset. The figures, dates, and descriptions above were drawn from publicly available sources believed to be reliable at the time of writing, but the stablecoin market changes quickly and the author makes no representation or warranty as to the accuracy, completeness, or timeliness of any of it. References to specific companies, products, or issuers are for illustration and commentary only and do not constitute an endorsement or a criticism of any of them; every opinion expressed here is the author’s alone. Readers should not rely on this article in making any financial decision. Cryptocurrency and stablecoins carry real risk, including the risk of total loss, and anyone considering them should conduct their own independent research, review the issuers’ current disclosures directly, and consult a qualified professional before acting. Crypto Highlander and its author accept no liability for any loss or damage arising from the use of, or reliance on, the information contained here.