#10: Behind the Peg: What Backing Really Means for Stablecoins

What Makes a Stablecoin “Stable”?

A stablecoin is supposed to maintain a 1:1 peg with a reference asset (mostly USD). To do that, stablecoins use backing: reserves, collateral, or algorithmic mechanisms, or hybrids. The credibility of backing determines how much trust people place in the peg holding under stress. I covered what actually makes a stablecoin “stable” and a more detailed view on the different concepts for the peg in this post.

Tether (USDT): The Giant With a Complex Balance Sheet

Intro:

Tether is one of the first and still largest stablecoins by market cap. It’s widely used across exchanges and blockchains as a “safe harbor” when users want to exit volatile crypto positions without converting to fiat.

What It’s Backed By:

Tether, the world’s largest stablecoin with a $171 billion market cap, holds an extensive and diversified mix of assets behind each USDT:

Tether’s strategy leans on short-term U.S. Treasuries as its core backing — a sensible choice for liquidity and stability. However, the inclusion of bitcoin, metals, and loans makes its reserves more complex and, arguably, riskier.

These assets can fluctuate in value and are harder to liquidate during periods of stress, but they may also generate higher returns.

Circle (USDC): The Cleaner, Simpler Counterpart

Intro:

Circle issues USD Coin (USDC). It positions itself as the more transparent, regulated counterpart to Tether’s USDT. Many institutions prefer USDC for that reason.

What It’s Backed By:

Circle’s USDC, with a $74 billion market cap, is often viewed as the more transparent, regulation-friendly stablecoin. Its reserves are heavily concentrated in U.S. government securities and cash equivalents — primarily managed by BlackRock through the Circle Reserve Fund.

Unlike Tether, Circle avoids any allocation to bitcoin, metals, or unspecified investments. It opts instead for a narrow but ultra-safe portfolio — maximizing liquidity and minimizing volatility.

Backing Comparison: USDT vs USDC

Tether’s model prioritizes returns and diversification, while Circle’s model emphasizes simplicity and safety.

One behaves more like a hedge fund’s treasury, the other like a regulated money market fund.

Different Structures, Different Strategies

A key factor shaping the difference between Tether and Circle lies in their corporate structure and regulatory environments. Tether, a privately held company based in the British Virgin Islands, operates largely outside traditional financial oversight. This gives it more flexibility — and perhaps incentive — to diversify reserves into assets like Bitcoin, gold, and secured loans, which can offer higher yields but also more volatility.

Circle, on the other hand, is a U.S.-regulated fintech that works closely with institutions like BlackRock and aims to align with frameworks such as MiCA and potential U.S. stablecoin legislation. Its strategy prioritizes transparency and conservatism, holding almost exclusively short-term Treasuries, repos, and cash. In short: Tether optimizes for independence and profit, Circle for compliance and trust.

Risks of the Backings

Even though both rely on U.S. government-backed assets, the nuances matter:

• Credit & Counterparty Risk: Repo agreements rely on trusted intermediaries — if markets freeze, liquidity could dry up.

• Market Volatility: Tether’s bitcoin and metals exposure can swing significantly.

• Transparency & Oversight: Circle offers more real-time insight; Tether still faces criticism for limited audits.

• Regulatory Exposure: As MiCA and the GENIUS Act tighten global rules, both issuers will face more stringent reporting and reserve standards.

Advantages & Disadvantages, Head-to-Head

Tether’s Edge:

• Broader diversification (and potentially higher returns).

• Deep liquidity across global exchanges.

Tether’s Downside:

• More complex reserves and higher volatility exposure.

• Limited regulatory clarity and transparency concerns.

Circle’s Edge:

• Clean, highly liquid, and regulator-friendly portfolio.

• Growing adoption by institutions and fintechs.

Circle’s Downside:

• Lower yield and reliance on a narrower asset base.

• Heavy U.S. exposure — meaning more sensitivity to U.S. banking and Treasury markets.

Food for Thought & Future Outlook

Both Tether and Circle are inching toward more institutional, Treasury-heavy models — effectively becoming private money-market funds on the blockchain.

But this raises new questions:

• If nearly all stablecoin backing depends on U.S. Treasuries, does that deepen global dollar dependency?

• Could euro- or multi-currency stablecoins offer a more balanced model?

• And as yields compress and regulations tighten, will issuers look for new, creative (and maybe riskier) sources of return?

In the end, stability isn’t just about what’s in the reserves — it’s about trust, transparency, and adaptability.

And as stablecoins continue to grow into trillion-dollar instruments, what’s behind them might become the most important story in modern finance.

Thanks for reading in 🤍

// Kai