Better Stablecoin Buy: Tether (USDT) vs. Ripple USD (RLUSD)

Stablecoins are often considered safer alternatives to volatile cryptocurrencies like Bitcoin (CRYPTO: BTC). They're usually pegged to a fiat currency like the U.S. dollar. They can be held without a bank account, be used for faster and cheaper cross-border transfers, and help people preserve their capital in countries plagued by hyperinflation.

They're not designed to beat the market over the long term, but they can earn higher yields than traditional savings accounts across centralized and decentralized finance (DeFi) platforms. They can also fund payments on decentralized apps (dApps) across various blockchains.

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The world's largest stablecoins are all pegged to the U.S. dollar. At first glance, they might look identical because they're all trading at $1 a token. But if we dig deeper, we'll see that they're backed by different assets and integrated into different ecosystems. Let's review two of those popular stablecoins -- Tether (CRYPTO: USDT) and Ripple USD (CRYPTO: RLUSD) -- and see how their differences might make them more or less appealing to certain investors.

The differences between Tether and Ripple USD

Tether, with a market cap of $183.5 billion, is the world's most valuable stablecoin. It was launched by Tether Limited, a subsidiary of Hong Kong-based iFinex (which also owns the Bitfinex cryptocurrency exchange), in 2014. It was initially minted on Bitcoin's blockchain, subsequently minted as an ERC-20 token on Ethereum's (CRYPTO: ETH) blockchain, and minted across other smaller blockchains as it was more widely accepted.

Ripple USD, with a market cap of $1 billion, ranks a distant ninth in the stablecoin race. It was launched by fintech company Ripple Labs, whose founders also created the XRP (CRYPTO: XRP) cryptocurrency, in 2024. It was pre-mined natively on the XRP Ledger.

Tether is more broadly used on DeFi platforms and dApps than Ripple USD. Ripple's XRP Ledger isn't natively compatible with Ethereum and other popular blockchains, so Ripple USD is still primarily used for money transfers within Ripple's own payment platform.

Ripple USD is also often used as a "bridge currency" for fiat currency transfers. Instead of directly converting fiat currencies into each other -- which can be slow, expensive, and inefficient -- both fiat currencies are simply converted to Ripple USD (as a bridge) and converted back to their original currencies.

Unlike other stablecoins, which are only backed by cash and U.S. Treasuries, Tether uses a mix of cash, commercial paper, and other assets to stay pegged to the U.S dollar. It submits its summaries of those reserves to a third-party accounting firm, but it hasn't opened up its books to full audits yet. That lack of total financial transparency -- along with its controversial ties to China -- makes Tether a more opaque investment than many other USD-backed stablecoins.

Ripple USD isn't a centralized token like Tether, which is directly minted by Tether Limited. Instead, each token is an "IOU" issued by individual gateways (like Bitstamp and GateHub) on the XRP Ledger. Those IOUs stay pegged to the U.S. dollar because they're backed by the cash in the issuers' own bank accounts.

When you buy Ripple USD, you need to check the reputation of the issuing gateway. If that gateway fails because it didn't have enough cash to back up its IOUs, you could forfeit that money -- just like how you could lose your savings if a non-FDIC-insured bank fails. So even though Ripple USD is diversified across a wide range of gateways, it's still a trust-based system.

The better buy: Tether USD

Ripple USD might be a better stablecoin if you regularly use the XRP Ledger for payments or bridge currency transactions. But if you're simply looking for a safe stablecoin to buy, hold, and lend out for interest or use in dApps, then Tether is a better buy. It's more widely used, compatible with the top blockchains, and doesn't run on individual gateways.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.