What is a Stablecoin?

Hussnain Aslam
CTO
Aug 19, 2025

A stablecoin is a type of digital currency designed to keep its value steady. Unlike most cryptocurrencies, which can swing wildly in price, stablecoins are backed by specific assets such as national currencies or commodities.
Think of it like this, a dollar-based stablecoin aims to stay worth $1, while a gold-backed one tries to match the market price of gold. This backing, whether in fiat currency, crypto, or other assets, gives them stability.
In short, stablecoins are cryptocurrencies with a peg.
They maintain the same market value as the external asset they represent, making them ideal for people who want the benefits of crypto without extreme volatility.
How Do Stablecoins Work?
So, how do they stay stable?
A stablecoin’s life cycle involves several steps.
- First, a company issues the stablecoin. For each token created, it keeps the same value in a country’s currency or another reserve asset. This is what ties the coin’s worth to something else.
- Next, the stablecoin is recorded on a ledger, which is basically a system that logs ownership and transactions. This ledger ensures that the token’s value is distributed correctly among users. If you decide to cash out, you can redeem your stablecoin for its equivalent value in your bank account.
- Finally, a wallet provider lets you store, send, or receive your stablecoins through apps or devices.
Different models are used to keep the peg:
- Collateralization: holding reserves in fiat, crypto, or commodities.
- Algorithmic systems: adjusting supply and demand by minting or burning tokens.
Hence, whether it’s a USDC pegged to $1 or a gold-backed coin linked to bullion prices, the goal remains the same, which is, price stability.
Why Are Stablecoins Important?
Why do stablecoins matter in the fast-changing crypto market?
Firstly, they bring predictability to an otherwise volatile space. Traders can quickly move funds in and out of volatile coins without leaving the blockchain ecosystem.
Furthermore, they make digital payments more practical since you don’t have to worry about sudden drops in value.
They also act as a bridge between traditional finance and crypto. You can use stablecoins for everyday payments, cross-border transfers, and decentralized finance (DeFi) without the headaches of bank delays.
With global transactions becoming faster and more digital, stablecoins are shaping the future of payments.
Pros & Cons of Stablecoins
Stablecoins bring both advantages and concerns.
Benefits | Risks |
Fast, low-cost transactions. | Reserve mismanagement or lack of transparency. |
Global accessibility without bank barriers. | Centralization risks if one company controls supply. |
Flexibility across multiple blockchain platforms. | De-pegging during extreme market stress. |
Better price stability compared to regular cryptocurrencies. | Vulnerabilities in algorithmic designs, as seen with TerraUSD’s collapse. |
Safety is also a matter of perspective. It is because, even banks and mutual funds have failed before.
While stablecoins may be safer than volatile cryptos, they still require accurate, real-time pricing data and verifiable reserve audits to maintain trust.
How Are Stablecoins Used?
Stablecoins are not just for traders. Their uses go far beyond trading pairs on exchanges.
- Trading and hedging: moving to stablecoins during market drops to avoid losses.
- Cross-border payments: sending money globally without heavy bank fees.
- DeFi lending and borrowing: earning interest or accessing liquidity using platforms like MakerDAO.
- Everyday purchases: buying goods and services where stablecoin payments are accepted.
- Bridging blockchains: using a bridge stablecoin to move assets between different networks.
And here’s an interesting point, according to recent reports, Ripple reportedly offered to buy stablecoin issuer Circle. This shows how much traditional crypto companies are betting on stablecoin adoption.
Types of Stablecoins
Stablecoins come in four main categories, each with its own way of keeping value steady.
1. Fiat-backed stablecoins
The most popular stablecoins on the market are those backed by fiat currencies.
USD coin (USDC), for example, is fiat-backed and tied to the US dollar (USD) in a 1:1 ratio.
Other stablecoins are connected to the euro, British pound, Japanese yen, and Chinese renminbi.
USDC is a centralized stablecoin created by Circle. Each USDC is backed by a single dollar or an asset of similar fair value, which is stored in off-chain accounts with licensed financial institutions.
Customers with a US dollar deposit account can redeem 1 USDC for 1 USD. Other centralized stablecoins include USDT, BUSD, TUSD, USDP, and more.
2. Cryptocurrency-backed stablecoins
Crypto-backed stablecoins are cryptocurrencies linked to the value of a more established cryptocurrency.
MakerDAO is one of the most well-known examples. It uses a smart contract, a self-executing, code-based contract, along with the Ethereum blockchain to pool enough ether (ETH) as collateral for its stablecoin.
When the amount of collateral in the smart contract hits a certain threshold, users can mint DAI, the MakerDAO stablecoin.
MakerDAO maintains the peg for DAI by requiring users to lock up collateral via smart contracts. The smart contract generates DAI as overcollateralized debt with a configurable interest rate.
To preserve the 1:1 peg of 1 USD = 1 DAI, MakerDAO’s smart contracts adjust interest rates via on-chain governance by MKR token holders.
These changes encourage borrowers to repay or take more loans, affecting supply and therefore price stability.
3. Commodity-backed stablecoins
As the name suggests, commodity-backed stablecoins are tied to assets such as precious metals, industrial metals, oil, or real estate.
Commodity investors like them because they allow investment in assets like gold without needing physical storage. Tether Gold (XAUT) is one example backed by gold stored in a Swiss vault. One ounce of gold equals one XAUT.
4. Algorithmic stablecoins
These stablecoins are not backed by any “real-world” asset. Instead, they use algorithms to adjust supply according to market demand. The system mints new coins or burns existing ones to keep the peg.
Type | Backing Asset | Example | How It Works |
Fiat-backed | National currencies | USDC, USDT | 1:1 reserve held in bank accounts. |
Crypto-backed | Other cryptocurrencies | DAI | Overcollateralized with crypto like ETH. |
Commodity-backed | Gold, oil, real estate | Tether Gold (XAUT) | Backed by stored commodities. |
Algorithmic | None, supply adjusted by code | TerraUSD (UST – failed) | Mint/burn tokens to match demand. |
However, these designs carry high risk. The collapse of Terra’s UST stablecoin is a warning of what can happen if the algorithm fails to keep up with extreme market changes.
Stablecoin Regulations
Regulation plays a huge role in the future of stablecoins.
In the US, stablecoins are subject to both federal and state oversight. Recent proposals like the GENIUS Act stablecoin bill aim to set clearer rules for issuers and custodians, while the earlier STABLE Act focused on treating stablecoin issuers like banks.
Furthermore, each state may also have its own licensing requirements.
On the other hand, on global scale, several countries are moving fast in regulating stablecoins. Let us see how;
- Switzerland treats stablecoins under existing financial market laws.
- Japan requires issuers to be licensed banks or trust companies.
- In Singapore stablecoins fall under the Payment Services Act.
- UAE & Hong Kong are building specific frameworks for digital asset-backed tokens.
- UK & Brazil are exploring dedicated stablecoin legislation to protect consumers.
Are Stablecoins Actually Safe?
Safety is a highly subjective notion. Are fixed deposits in banks safe? Are mutual funds safe? Historically, several banks have defaulted on user deposits.
However, stablecoins are relatively safer than the rest of the cryptocurrency market. In theory, they are as secure as the fiat currency itself.
Regardless of the differences in stablecoin architecture, design, and risk, all stablecoins need precise pricing data for their underlying pegging process and when employed in decentralized applications. Because exchange rates fluctuate continually, stablecoins require real-time pricing data to maintain their peg.
Furthermore, tamper-proof means for obtaining information about the reserves backing stablecoins are required to guarantee the security of these systems.
Are Stablecoins a Crucial Part of Crypto Spcae?
Recently, Stablecoins have become the glue holding the crypto economy together.
They provide a stable medium of exchange for trading, power DeFi protocols, and act as a store of value when markets swing.
They also make interoperability possible, for example; you can move assets across chains or between fiat and crypto with minimal friction. In short, without them, the crypto market would be far less liquid and much harder to navigate.
Wrapping Up
Stablecoins are more than just “stable” cryptocurrencies. Rather, they are a key innovation that blends the best of traditional money with blockchain technology.
As regulation develops and technology matures, their role will likely expand from payments and DeFi to being a foundation for global digital economies.
In the end, no matter if you are a trader, investor, or everyday user, stablecoins could be the bridge that makes cryptocurrency truly practical.
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Frequently Asked Questions
What people commonly ask about ARMswap and its features.
Stablecoins are designed to provide a digital asset that maintains a stable value over time, typically by being pegged to a fiat currency like the US dollar. This makes them useful for payments, remittances, and a store of value in the volatile crypto environment.
Stablecoins maintain their value through collateralization (holding reserves of fiat, crypto, or commodities) or through algorithmic mechanisms that adjust supply and demand dynamically.
Yes, most centralized stablecoins like USDC or USDT can be redeemed for fiat currency through exchanges or directly through the issuer, provided you meet their KYC (Know Your Customer) requirements.
Risks include lack of transparency around reserves, regulatory issues, counterparty risk (for centralized issuers), and failure of algorithmic mechanisms in some decentralized models.
No. Some stablecoins, like DAI, are decentralized and governed by smart contracts, while others like USDC and USDT are centralized and managed by companies with off-chain reserves.
USDC is a fiat-backed stablecoin issued by a centralized entity (Circle), while DAI is a decentralized stablecoin backed by overcollateralized crypto assets managed through the MakerDAO protocol.
Yes. In many cases, stablecoins are used for cross-border payments, remittances, DeFi transactions, and even in online retail settings that accept crypto payments.
Regulation of stablecoins varies by jurisdiction. Some countries are drafting specific regulations for them, especially those issued by centralized firms, to ensure transparency and consumer protection.
Bitcoin is a decentralized, highly volatile cryptocurrency that is not pegged to any external asset. Stablecoins are designed to maintain a steady value and often represent a fiat currency or commodity.
If a stablecoin loses its peg, its value can fluctuate wildly, defeating its purpose. This can happen due to poor reserve management, market panic, or flaws in the algorithmic design, as seen with Terra’s UST collapse.
No, a stablecoin is not Bitcoin. Bitcoin is a cryptocurrency with a volatile price, while a stablecoin is designed to maintain a stable value by being pegged to a reserve asset like the US dollar or gold.
The “best” stablecoin depends on your needs. Popular options include Tether (USDT) for liquidity, USD Coin (USDC) for transparency, and DAI for decentralization. Always research the issuer’s reserves, reputation, and regulatory compliance before choosing.