What Makes a “Good” Stablecoin?
Toluwase Ajayi
In case you’re not aware, the Stablecoin GENIUS Act recently passed in the U.S. Senate1. The GENIUS Act is a landmark legislation that establishes a federal regulatory framework for payment stablecoins and their issuers.
According to CNBC, the GENIUS Act passing marks the first major legislative win for the crypto industry and already Web2 giants like Amazon and Walmart are reportedly already moving toward stablecoin-style offerings2. They won’t be the only ones. I predict that we are about to see a flood of stablecoin issuance as everybody from TradFi businesses and payment networks to Web3 stablecoin projects acts to secure their footing in this fast-growing sector.
And that brings us to the core question: If every player starts issuing their own stablecoin, how do you know which ones are solid and which are just liquidity traps?
To answer that, we need to unpack what makes a “good” stablecoin and that’s what this post is about.
Why This Conversation? Why Now?
The general consensus of the wider crypto community seems to indicate that crypto mass adoption is coming from sectors like Artificial Intelligence (AI) or Real World Assets (RWA). Yet in the past 5 years, the stablecoin sector has been one of the most quietly dominant sectors in all of crypto.
According to data from RWA.XYZ, the total on-chain market cap of stablecoins has grown from $4 billion in 2019 to $230Bn+ (as of 2025). That’s an astounding 5,650% increase in less than 6 years3. Data also shows that stablecoins have a monthly transfer volume of over $2.8Tn with more than 30 million addresses actively trading monthly.
Meanwhile, Stablecoin projects are also enjoying a great deal of capital inflow on the fundraising scene. Circle recently raised a staggering $1.1Bn from its IPO4. Ubyx –a global clearing and settlement network for Stablecoins backed by top venture capitalists like Galaxy and Coinbase Ventures just raised $10 million in a seed funding round. Plasma raised $1 billion in just 30 minutes.
All of the above signal one important thing: There is a huge demand for quality stablecoin products and from all indications, this demand is only going to continue growing. With the pace of growth and the expected surge in stablecoin issuance and adoption, it is a no-brainer that there will be both good and bad stablecoin products. More specifically, there will be bad actors seeking to capitalize on the space’s increased visibility and liquidity inflow.
If you plan to stay safe amidst the incoming chaos, there is one question you should be asking, “What makes a good stablecoin?”
But first, what are stablecoins?
A stablecoin is a type of cryptocurrency that has its value pegged to another asset (usually one with relative stability), in order to maintain a stable price or valuation. Examples of assets stablecoins can be pegged to include fiat currencies like the U.S. dollar, commodities like gold, and even other cryptocurrencies like Ethereum (although these are far less common due to increased susceptibility to volatility)5.
A typical example of a stablecoin is the USDc by Circle which is pegged 1:1 to the U.S. dollar. This means that every USDc can be redeemed for approximately $1 or its equivalent value in other cryptocurrency tokens or fiat6.
From the above explanation, three things are immediately clear. For a token to be considered a stablecoin, it has to:
Be pegged to a stable asset (or less volatile asset) like the U.S. Dollar
It has to be built on a decentralized network –that is, it operates on a blockchain, allowing for transparency, programmability, and trustless transactions.
It must have redemption capability –meaning holders should be able to “redeem” stablecoins for the equivalent of the underlying asset.
Types of stablecoins
Stablecoins are categorized based on the type of asset they’ve been pegged to for stability and value. On that note, here’s an overview of the types of stablecoins currently available:
Fiat-pegged stablecoins: This type of stablecoin is by far the most popular one on the market. These stablecoins are typically pegged 1:1 to an underlying fiat currency like the Euro and USD. Examples include USDt, USDc, and EURc.
Commodity-pegged stablecoins: As the name implies, these stablecoins are pegged to physical assets like gold and silver. They are designed to mimic and represent the valuation of the underlying commodity, thereby offering users exposure to these commodities without them actually having to own the assets. A popular example is PAX Gold (PAXG) a stablecoin where each token unit represents one troy ounce of gold secured in a professional vault7.
U.S. Treasury-backed stablecoins: These stablecoins have their asset value tied to U.S. treasuries and repurchase agreements. Because of this, they can offer one unique feature that other types of stablecoins don’t offer: yields. Common examples include USDY by Ondo and USYC originally by Hashnote (it is worth mentioning that Circle acquired Hashnote in January 2025)8.
Crypto-backed stablecoins: These are stablecoins backed by reserves of specific cryptocurrency assets. I know what you’re thinking, “But crypto is volatile, right?” You’re correct, and that’s why the issuers of crypto-backed stablecoins use a mechanism called “over-collateralization” to maintain asset value. What this simply means is that instead of pegging the stablecoin in the common 1:1 ratio, you have something like 1:1.5(and above). This helps the stablecoin maintain its value during periods of market fluctuation. An example is DAI which is backed by ETH reserves.
Algorithmic stablecoins: Unlike other types of stablecoins, these ones are not directly pegged to a collateral. Instead, they rely on dynamic supply and demand adjustment using a smart contract for value stability. While this is an innovative approach to stablecoin issuing, it has been historically proven to be quite unsafe. The TerraUSD $UST collapse of 2022 which wiped out millions of dollars from the market comes to mind9. Stablecoins like Ethena’s USDe and FRAX which employ algorithmic mechanisms for stability actually only do so partially, combining it with collateralization.
What makes a “good” stablecoin?
With the GENIUS Act passing in Congress and the stablecoin market growing at a ridiculous pace, it is expected that more stablecoins will be issued into the market. Do we really need so many stablecoin solutions? Maybe not, but that doesn’t change market sentiments about what’s likely to happen.
According to a Forbes article, Traditional giants like Amazon and Walmart are considering developing their own stablecoins10. They won’t be the only ones. Add this to the currently present severe need for secure, seamless, and fast cross-border payment solutions, especially in LATAM and Africa and the implication is clear: payments are evolving and there is a ready market for stablecoins to service.
For the general crypto space, this is good news since it signals better adoption metrics. However, it is also important to point out that increased adoption also means increased proliferation of sub-standard (or outrightly fake) stablecoin products. So the question is how do you sift through the noise to identify the good ones?
This question is harder to answer than it appears at first glance. The reason is because people have different values and aims for holding stablecoins. For those looking for a low-risk avenue to earn profits, a “good” stablecoin must include yield-bearing mechanisms. For people interested in stablecoins for cross border payments, the priority will be stablecoins that a widely accepted and easily accessible with deeper liquidity and very low fees. I could go on and on, but you probably get the point by now.
That said, regardless of personal biases, there appears to be a general consensus on what features a good stablecoin should possess. These features more or less serve as the foundational building blocks and any additional preferences build on them. They include the following:
Reserves and liquidity
A good stablecoin should be backed by transparent and verifiable reserves. Ideally, you should be able to see what’s backing your stablecoin and track how it’s doing per time. In addition to this, the stablecoin should also have enough liquidity depth. This is to ensure that it can easily handle significant transfer demand that could be placed on it without significant slippage or delays, even under pressure.
Collateralization mechanics
A good stablecoin must have a solid collateralization mechanism that perfectly secures the value of the stablecoin. The stablecoin may be backed by fiat, crypto, treasury bills, algorithmic rebalancing, or any combination of all of the above. The main point is that its value must be secured. Now here’s where subjectiveness may come in.
Depending on your view of blockchain technology, decentralization and aims for holding a stablecoin, your definition of “good collateralization mechanism” may be different. However, all that is moot if the stablecoin does not have strong collateralization. A balanced 1:1 collateralization is popular for stablecoins backed by fiat currencies. But for other types of stablecoins, an over-collateralization approach appears better because it offers more stability.
Infrastructure
Again this is another point of division. Some people prefer fully decentralized stablecoins, in keeping with Satoshi’s vision of breaking away from TradFi completely. However, in situations where this isn’t available, my recommendation will be to settle for stablecoins issued by high-trust corporations or business entities. But all of this is on the trust scene.
Beyond this, infrastructure should also be evaluated for technical flexibility and accessibility. A good stablecoin should also have multi-chain availability for enhanced utility. Bonus points if it’s chain-agnostic and interoperable across ecosystems. The rationale is that the more ecosystems a stablecoin can operate in seamlessly, the more utility and adoption it can achieve.
Regulatory compliance
For far too long, the crypto space has been left with too few regulations. However, things are changing on the stablecoin front. In light of recent developments, the U.S. GENIUS Act will likely become the go-to reference document for stablecoin issuance. Already, the Act details guidelines to promote stablecoin trust and sustainability like:
Detailing who can issue stablecoins
Clearly stating reserve backing requirements and disclosures for optimal transparency
Customer protection and token redemption rights
Risk management requirements
Compliance obligations, and many more.
I believe that this is just the start. While many governments globally may not “copy pasta” the GENIUS Act, it will likely serve as a great starting reference point for other countries to draw up stalecoin regulations of their own. It is necessary to mention that countries like Switzerland and Japan already have operational guidelines for stablecoin issuance, risk control, and redemption11.
Since these regulations are designed to promote transparency, trust, and user safety, it should go without saying that compliance of a stablecoin to one of these is non-negotiable. That said, remember that there will be some differences between these regulations. So it is important to identify what legislation a stablecoin is subject to so you can accurately determine how best to keep yourself safe.
This could also be used as a trust index since stablecoins that are operational in multiple countries will have been required to meet the regulatory standards of those countries. So the more countries a stablecoin is legally used as a medium of exchange, the higher its trust “coefficient” and vice versa (PS. this is a personal take so no need to agree or disagree. yunno).
Smart contract safety
The operations of a stablecoin are literally governed (either partially or completely) by smart contracts. In fact, the very safety of your liquidity depends on the quality of the stablecoin’s smart contract. I said all of that to say this: If a stablecoin hasn’t been audited by a reputable firm like OpenZeppelin, Consensys, or CertiK, I strongly recommend you stay away. Alchemy has compiled a list of top blockchain auditing companies so I’ll just plug that here.
Be aware that smart contract auditing by itself is not a statement of trust in a stablecoin’s overall quality. It just means that as far as the “current” smart contract is concerned, you’re not likely to get blindsided. I highlight “current” because tokens switch smart contracts all the time (it’s not a new thing) so you definitely want to consider that.
Final thoughts
As I mentioned earlier, I do believe that there are far more components to consider when trying to define what a good stablecoin is. However, since a lot of these components are subjective, it will be challenging to accurately represent them all. That said, the 5 factors highlighted above should provide a solid starting point you can use to determine what a good stablecoin is to you. I know what I look out for in a good stablecoin; how about you?
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