The Growth of Crypto-Backed and Algorithmic Stablecoins

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The stablecoin market has grown quickly, moving beyond traditional models like USDT and USDC, which are backed by fiat currencies such as the US dollar.

Today, two new types of stablecoins are gaining attention: crypto-backed stablecoins and algorithmic stablecoins.

These digital currencies aim to provide a stable value while avoiding dependence on banks or central authorities, making them suitable for decentralized finance (DeFi) applications.

Crypto-Backed Stablecoins

Crypto-backed stablecoins are supported by other cryptocurrencies, such as Ethereum (ETH) or staked ETH (stETH), which users lock into smart contracts. These contracts act as collateral, ensuring that the stablecoins retain their $1 value.

Typically, the amount of collateral exceeds the borrowed stablecoins by 30–70%, so even if crypto prices fall sharply, the system can sell the collateral to maintain the peg.

Popular examples include MakerDAO’s DAI and Spark Protocol. As of December 2025, DAI had a circulating supply of around $5.3–$5.4 billion.

Other crypto-backed stablecoins, such as Ethena’s USDe ($7.1–$7.6 billion), Prisma’s mkUSD, and Sky’s USDS, have pushed the total crypto-collateralized stablecoin supply past $25 billion.

These systems have proven resilient, with DAI never losing more than 4–5% of its value, even during major market crashes like Black Thursday in March 2020.

The main risks remain smart-contract bugs and rapid liquidations during extreme price swings, but improvements in technology have reduced these dangers.

Algorithmic Stablecoins

Algorithmic stablecoins take a different approach. They do not rely heavily on collateral but instead maintain a $1 value using automated rules, arbitrage, and incentives.

Early attempts, such as Terra’s UST, collapsed in 2022 after offering very high yields, which led to a “death spiral” when confidence fell.

Since 2024, newer designs have emerged with safer mechanisms. Ethena’s USDe, for example, combines staked ETH collateral with trading strategies to keep the coin backed while generating yield.

Frax Finance’s frxUSD, Curve’s CrvUSD, and other experiments like Reflexer’s RAI and Liquity’s LUSD have also appeared, though smaller algorithmic stablecoins typically remain below $500 million in market cap.

Currently, crypto-backed stablecoins account for about 12–14% of the overall stablecoin market, growing fastest, while purely algorithmic stablecoins remain under 2% but are gradually expanding.

These trends reflect a shift in DeFi toward decentralization and efficient use of capital, even if it means dealing with more complex systems.

Stablecoin Use in Kenya

In Kenya, stablecoins are becoming increasingly popular. By June 2024, total transactions reached Sh426 billion ($3.3 billion).

Businesses use them to simplify international payments and manage liquidity, while individuals, including Kenyans in the diaspora, use stablecoins to send money home faster and more cheaply than traditional remittance services.

The growth of mobile money in Kenya has also made stablecoins easier to adopt. Millions of Kenyans are already familiar with digital finance, creating a natural path toward using stablecoins for everyday transactions and cross-border trade.

Stablecoins offer protection against the volatility of the Kenyan shilling and provide a convenient digital store of value for both businesses and individuals.

Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.