Stablecoins: Benefits and risks of USDT, USDC, USDe & Co.

Forget the hype—stablecoins are where crypto gets practical.

USDT, USDC, and USDe aren’t here to get rich quick; they’re here to keep value steady, remittances cheap, and inflation in check, especially where fiat is flailing.

But how exactly do stablecoins maintain their stability, and what risks do they face in the ever-evolving regulatory landscape?Dive into this guide and explore the world of stablecoins to uncover their transformative potential and the challenges that lie ahead.

What are stablecoins?

Stablecoins are a class of cryptocurrencies designed to maintain a stable value by pegging their worth to a reserve of assets, such as fiat currencies, commodities, or other cryptocurrencies. As such, the primary purpose of stablecoins is to combine the benefits of cryptocurrencies—such as decentralization, security, and ease of transfer—with the stability of traditional financial assets.

Which are the most popular stablecoins?

USDT (Tether), USDC (USD Coin), and USDe (Ethena USD) are among the most widely adopted stablecoins.

• USDT (Tether): Tether is one of the earliest and most popular stablecoins. It is pegged to the US dollar, with each Tether token (USDT) backed by an equivalent amount of USD in reserve. Tether is widely used in the crypto market for trading and arbitrage.
• USDC (USD Coin): Launched by Circle, USDC is a fully-backed US-dollar stablecoin. It is governed by the Centre Consortium and is known for its transparency and regulatory compliance. USDC is used extensively in the decentralized finance (DeFi) ecosystem and for cross-border transactions.
• USDe (Ethena USD): Ethena’s USDe is a USD-pegged stablecoin that uses a crypto-native, fully onchain design. Unlike traditional stablecoins such as USDT or USDC, it doesn’t rely on bank reserves and instead maintains its peg using crypto collateral and hedging strategies. USDe is positioned as a decentralized stable currency in DeFi, providing a stable medium for trading, lending, and value transfer, and diversifying the stablecoin ecosystem with an alternative independent of traditional banking.
• USDS (Sky Dollar): USDS is the rebranded successor to MakerDAO’s DAI and serves as the core stablecoin of the Sky Protocol (formerly MakerDAO). It maintains a soft USD peg through surplus collateral in a decentralized, non-custodial system, meaning it’s backed by more assets than issued tokens to ensure stability. In the broader stablecoin landscape, USDS continues DAI’s role as a leading crypto-backed stablecoin, providing a major decentralized alternative to fiat-backed coins.
• FDUSD (First Digital USD): FDUSD is a USD stablecoin issued by Hong Kong’s First Digital Limited, maintaining a 1:1 peg to the US dollar with fully backed cash and short-term U.S. Treasury reserves. Within the stablecoin ecosystem, FDUSD expands the landscape as an Asia-based alternative to U.S.-issued stablecoins, offering users another option for stability and value transfer beyond the dominant US-backed coins.
• PYUSD (PayPal USD): PYUSD is a USD-pegged stablecoin from PayPal, fully backed 1:1 by U.S. dollar deposits and highly liquid reserves like short-term treasuries. Designed for seamless digital payments on PayPal, it enables users to buy, sell, and hold value in-app and send money to others with no fees, while also being transferable to compatible external crypto wallets.

Benefits of stablecoins

Stablecoins have found a wide range of applications in the real world:

• Hedging: Within crypto, stablecoins serve as a hedge against volatility. Traders and investors can quickly move their funds into stablecoins during periods of high volatility to preserve value, providing a safe harbor during market turbulence.
• Inflation: Currently, however, stablecoins are having a larger impact in developing countries. Here, they mainly provide a hedge against local currency volatility and inflation. For instance, in countries such as Venezuela and Zimbabwe, where hyperinflation has severely devalued local currencies, individuals can preserve their wealth and protect their purchasing power by converting their money into stablecoins pegged to more stable currencies such as the US dollar.
• Remittances: Another use case is remittances. Traditional money transfer services often charge high fees and can take several days to process transactions. Stablecoins offer a faster and cheaper alternative, allowing migrant workers to send money back to their families fast and cheap.
• Inclusion: Also, stablecoins enhance financial inclusion by providing access to global financial services via DeFi. In regions where banking services are limited or non-existent, stablecoins and DeFi protocols enable people to participate in savings, loans, and investments, offering previously inaccessible financial opportunities.

Risks of stablecoins

Despite their benefits, stablecoins are not without risks:

• Reserve transparency: One of the primary issues is reserve transparency. For fiat-backed stablecoins such as USDT and USDC, it is essential to ensure that the issuing companies hold the appropriate USD reserves. Lack of transparency or false claims about reserves can undermine trust and lead to instability or depegging.
• Smart contract security: Smart contract security is another critical issue. Vulnerabilities in smart contracts can be exploited, leading to potential loss of funds. For example, hackers could exploit bugs in the smart contract code of USDS, which might enable them to drain the collateral reserve—in which case USDS would lose its 1:1 USD peg.
• Regulation: Regulatory risks also loom. As stablecoins grow in popularity, regulators are increasingly scrutinizing their operations to ensure compliance with financial laws and regulations.

Do stablecoins have an impact on traditional finance?

Stablecoins are disrupting traditional financial systems in several ways.

Most importantly, stablecoins offer a new way to store and transfer value. In this context, faster and cheaper transactions in particular are challenging traditional banks and payment systems.

Additionally, stablecoins also provide a gateway to the DeFi ecosystem, where users can access financial services such as lending, borrowing, and earning interest without the need for traditional financial institutions.

Stablecoins are also being used to facilitate tokenized assets and securities, enabling fractional ownership and easier transfer of assets—making investment opportunities more accessible than traditional banks and financial service providers.

Tokenization involves creating a digital token on a blockchain that represents ownership of a real-world asset, such as real estate, stocks, bonds, or commodities. Stablecoins play a crucial role in this process by offering a stable medium of exchange that can be used to price these tokens. For example, a piece of real estate can be tokenized, and each token might represent a fractional ownership interest, priced in a stablecoin such as USDC or USDT.

How to buy stablecoins with Phantom?

If you don't have a crypto wallet, here's how to get started in less than five minutes.

• First, download Phantom. Then, create a new wallet.
• As soon as your wallet is set up, and you access it for the first time, you'll be welcomed by a screen with two options:
  • Buy crypto
  • Transfer crypto
• Select "Buy Crypto" and then your preferred cryptocurrency
• Insert the amount you want to buy
• Select "Next"
• Choose your funding option: MoonPay, Coinbase Pay, etc.
• Finalize your order

Once you've completed your purchase, your crypto will appear in your wallet.

From there, you can swap into other tokens within the ecosystem. But before you do, take a moment to read our Solana tokens guide to learn all about them.

How to share stablecoins with friends and family

Know someone who might be interested in stablecoins? You can share a simple token page with them so they can get involved.

Here's how:

• Open Phantom
• Search for e.g. “USDC” and select the token
• Click the “Share” button
• Copy the link
• Send the link through your preferred app, such as iMessage, Telegram, Instagram, or others

When you share this link, the recipient will receive the official USDC token page from Phantom.

How to set up a Phantom wallet?

How to set up Phantom on mobile

• Follow the installation steps of the Phantom app on your device
• Open the app—you’ll be greeted by the Phantom onboarding screen
• Select “Create New Wallet”
• Enable biometric security and click “Next”. This secures your wallet using fingerprint or facial recognition to ensure you are the only one that can access it. We strongly recommend turning this feature on!
• You will be presented with your “Secret Recovery Phrase” (seed phrase)
• Be sure to store your Secret Recovery Phrase in a safe and secure location!
• Your Secret Recovery Phrase is the MOST important part of your new wallet:
  • Whoever has access to your Secret Recovery Phrase will have access to the wallet’s funds
  • If you lose your Secret Recovery Phrase, you will lose access to your wallet and its funds
  • We at Phantom never have access to your Secret Recovery Phrase
  • Phantom team members will never ask you for your Secret Recovery Phrase
  • The Secret Recovery Phrase is the only way to recover your wallet
• After saving your wallet password and securing your Secret Recovery Phrase, select “Continue” to proceed
• You can enable notifications to get instant updates about your wallet activity. These can also be customized in the Phantom app via Settings > Notifications
• To fund your wallet, make sure to check out our Apple Pay and Google Pay guide

How to set up Phantom on desktop

• Follow the steps in your respective extension store to add Phantom to your browser
• Open the Phantom browser extension and select “Create New Wallet”
• Key in a secure password and select “Continue”
• You will be presented with your “Secret Recovery Phrase” (seed phrase)
• Be sure to store your Secret Recovery Phrase in a safe and secure location!
• Your Secret Recovery Phrase is the MOST important part of your new wallet:
  • Whoever has access to your Secret Recovery Phrase will have access to the wallet’s funds
  • If you lose your Secret Recovery Phrase, you will lose access to your wallet and its funds
  • We at Phantom never have access to your Secret Recovery Phrase
  • Phantom team members will never ask you for your Secret Recovery Phrase
  • The Secret Recovery Phrase is the only way to recover your wallet
• After saving your wallet password and securing your Secret Recovery Phrase, select “Continue” to proceed
• After successfully setting up your Phantom wallet, you can access it on the top right-hand side of your browser's toolbar
• Don’t see Phantom? Click the icon that looks like a puzzle piece to access a list of your browser’s extensions, where you will find Phantom
• Click on the pin icon next to Phantom to make the wallet visible in your browser's toolbar and easier to find in the future
• To fund your wallet, make sure to check out our Apple Pay and Google Pay guide

How to bridge tokens to Solana with Phantom?

If you’d like to bridge funds to Solana, use our very own Crosschain Swapper! With our Crosschain Swapper, you can bridge tokens across Solana, Ethereum, Base, and Sui right in your Phantom wallet.

FAQs

Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.