This type of cryptocurrency is used for cross-border transfers, in DeFi, crypto trading, and on-chain payments. In short, they do everything most cryptocurrencies do without the volatile pricing. By the end of this guide, readers will learn more about the stablecoin concept, how they maintain the peg, and why they’re a better fit for new investors than Bitcoin.
What Are Stablecoins?
By definition, stablecoins are cryptocurrencies with a stable value – hence the name. Their value is pegged to another asset, with the US Dollar being the most common one. These digital tokens are worth the same amount as the tracking asset. For example, Tether is pegged to USD, and its value is $1 per coin most of the time.
Stablecoins aim to combine the stable price of traditional money with the speed, programmability, and global access of blockchain-based assets. Compared to Bitcoin or Ethereum, whose price moves freely, stablecoins are designed to track reference assets. This helps beginner investors warm up to the idea of blockchain and crypto, allowing them to experience their advantages without losing money.
How Do Stablecoins Keep Their Value?
One of the first questions everyone asks themselves is how stablecoins maintain their price. Why doesn’t their price fluctuate? How do they differ from Bitcoin or Ethereum? There’s a major reason for the lack of price dips. Stablecoins use reserves such as cash and other assets to support redemption. Users or institutions can redeem stablecoins for the underlying assets, depending on their terms.
When stablecoins drop below or go above the 1:1 peg, traders can push the price back toward the peg. Some stablecoins also use smart contracts to manage liquidation, burning, minting, or DeFi collateral. The goal of each stablecoin is to stick to the peg. They can still trade above or below the price, but in most cases, it takes a short time for them to go to the stable price. Regular audits of the reserves are important to maintain trust in fiat-backed stablecoin systems.
Main Types of Stablecoins
Stablecoins come in several different types. The most popular ones are fiat-backed, but they can also be backed by other reserves including commodities, cryptocurrencies, and more.
Fiat-backed stablecoins are pegged to fiat reserves. Most commonly, it’s either US Dollars, the Euro, or short-term government debt. The most common stablecoins in this space include Tether (USDT) and USD Coin (USDC).
Crypto-backed stablecoins work with collateral instead. Ethereum collateral, for example, can help absorb volatility and keep the price stable. DAI is a common example of a crypto-backed stablecoin.
Stablecoins can also be backed by commodities. Gold is the most common example, but it can be other real-world assets such as silver and oil. PAX Gold and Tether Gold are the two most common examples.
Hybrid models combine reserves, crypto collateral, and automated mechanisms. This helps them keep value while balancing capital efficiency with stability.
The most complex stablecoin concept is algorithmic stablecoins. They’re designed for a 1:1 peg with stable assets such as fiat reserves by using smart contracts to adjust supply. Algorithms burn tokens when the price drops below $1 or mint new coins when it’s above $1 to stabilize the price.
| Stablecoin Type | Backed by? | Example | Strengths | Risks |
|---|---|---|---|---|
| Fiat-backed | Fiat reserves (cash, bank deposits, treasuries) | USDT, USDC | Available at top exchanges; easy to use | Reserve risks |
| Crypto-backed | Crypto collateral | DAI | On-chain transparency | Volatility |
| Commodity-backed | Gold, silver, oil, etc. | XAUT | Real-world asset exposure | Price risks |
| Algorithmic | Code and incentive | USDe | Needs no full reserve | Peg failure risks |
| Hybrid | Hard assets, on-chain supply mechanisms | FRAX | Less locked capital required for new tokens, resulting in better scaling | Operational complexity; largely unproven |
Stablecoins vs Bitcoin, Bank Deposits and CBDCs
Stablecoins are often compared to other store-of-value instruments and digital currencies, which typically have different issuers, risk profiles, and use cases. The three most common comparisons are with Bitcoin, traditional bank deposits, and central bank digital currencies (CBDCs). Understanding where stablecoins stand relative to these elements helps clarify their intended purpose and where their limitations lie.
Stablecoins vs Bitcoin
While stablecoins are technically cryptocurrencies, like Tether for example, they’re often compared to other coins. Bitcoin is one such asset. The main difference between them is the price volatility, which is almost non-existent for stablecoins. Bitcoin as an asset has a market-driven price, which is often influenced by real-world assets and events. In contrast, stablecoins track another asset to keep the price stable.
Stablecoins vs Bank Deposits
Bank deposits are made and claimed on regulated bank accounts. Stablecoins are tokens issued by private companies and protocols. The key differences lie in safety and regulation. While bank deposits are covered by different kinds of insurance (such as FDIC in the USA), stablecoins rely on the issuer’s transparency as well as the quality of the reserve.
Stablecoins vs CBDCs
Central bank digital currencies or CBDCs are a digital form of fiat currency issued by central authorities such as governments and banks. They primarily work as digital legal tender.
On the other hand, stablecoins are privately issued and backed by assets. They operate mainly on blockchains depending on the model, and may be risky depending on the transparency and audits.
Stablecoins are often mistakenly thought of as digital dollars. That’s not the case. A CBDC may be a digital dollar. Stablecoins do not always legally or operationally match the equivalent of fiat money reserves in a bank account.
Here’s the breakdown for the differences between stablecoins and other digital assets:
| Feature | Stablecoin | Bitcoin | Bank Deposit | CBDC |
|---|---|---|---|---|
| Issuer | Companies or protocols | Decentralized network | Banks | Central bank |
| Target | Pegged to fiat assets | Independent digital assets | Fiat balance | Central bank money |
| Access | Crypto exchanges, wallets, apps | Crypto exchanges, wallets, apps | Bank account | Government-approved wallets and apps |
| Blockchain-based | Typically | Yes | No | Depends on the design |
| Risks | Peg and smart contract risks | Price volatility | Counterparty risk | Privacy concerns |
What Are Stablecoins Used For?
Stablecoins are most often used for trading on crypto exchanges. If you take a look at a reputable crypto exchange, USDC and USDT are used as quote. This is because of their stable price, making other pairs easier to trade and track in terms of pricing.
That’s not the only use case. As a stable-priced digital asset, they can also be used for DeFi lending and borrowing. Lending markets often use Tether, which can also be found in collateral systems and liquidity pools. Once again, the lack of volatility compared to Bitcoin is the reason why they’re suitable in this case.
Naturally, they can move across borders without intermediaries. The decentralized nature of stablecoins makes them an excellent pick for transfers abroad, with no banks to meddle in the mix and take fees. They allow frictionless payments with fast settlements and almost no fees.
Stablecoins can also help users send dollar-linked value internationally. Users can get paid for different projects in USDT or USDC (most common examples), without worrying about losing value, as would be the case with Ethereum or Bitcoin.
Finally, stablecoins can also act as the cash leg of tokenized assets. In this use case, they provide instant on-chain settlement for bonds, funds, or real estate. This allows for simultaneous exchange of payments and assets, which cuts back on time and reduces counterparty risk.
Why Stablecoins Are Important to DeFi and Crypto Markets
Stablecoins are a key foundation for DeFi protocols and are also used as settlement or quote asset for crypto markets. Their liquidity layer allows them to move easily between volatile crypto asset, without ever leaving the blockchain.
In lending and borrowing markets, they can be used as collateral. Traders rotate into stablecoins during volatile market periods (or bear markets) as a market stability tool. Due to their stable prices, they’re often discussed as a non-volatile payment infrastructure, or as tokenized cash equivalents and treasury tools.
This makes perfect sense. When Bitcoin or Ethereum’s price is down, traders can move stablecoins quickly to prevent further losses. With stablecoins, you get instant, 24/7 global transactions in the digital assets market without worrying if the price will go up or down.
Stablecoin on-chain transaction volumes even outplace Venmo in research, offering foundational liquidity for trading pairs.
Benefits of Stablecoins
Stablecoins offer a range of practical benefits that make them useful beyond simple price speculation. Here is a summary of the main advantages.
Lower Volatility
Crypto markets are defined by volatility. Bitcoin is notorious for its variable price, so it’s not exactly the best entry point in our opinion. Stablecoins have lower volatility. Their prices are backed by real-world assets, allowing for smoother sails and eliminating volatility concerns.
Fast Settlement
Stablecoins can move on blockchain networks 24/7. Unlike fiat money, which is tied to banks, bank holidays, and other things that can delay payments, with stablecoins you have fast settlements without issues or intermediaries.
Very Useful for Trading
Moving between crypto positions in a bear market? Stablecoins are the way to go. Their price allows traders to move between positions without worrying of drops or price hikes.
Global Access
Users can receive and send stablecoins from reputable exchanges and wallets easily. It’s global, 24/7 access for everyone. They eliminate geo-restrictions, and allow users to receive payments with ease.
Smart Contracts and Programmability
Stablecoins are often used with smart contracts, automated payment flows, and DeFi protocols. This kind of flexibility beats any other coin in the crypto space.
Dollar Access
Stablecoins provide dollar value in many markets where local currencies are limited. This is one of their strongest suits, allowing for easier access to USD or commodities all the time.
Risks and Limitations of Stablecoins
Stablecoins carry a range of unique risks that differ from those of other cryptocurrencies. Therefore, it is important to understand these risks before using or holding any stablecoin.
Reserve, Depeg, Issuer, and Regulatory Risks
With stablecoins, certain depeg risks can push the price below the intended value. This occurs when reserves, market liquidity, or confidence drops down. If pegged to a reserve of lower quality, the price can drop as well. There are also issued risks involved, especially if the issuer’s operations or banking relations are shattered. Finally, as regulatory rules evolve, any changes can cause stablecoin access and redemption.
Smart Contracts, Custody, and Bridge Risks
Smart contracts are useful, but sometimes, code vulnerabilities can pose a risk to stablecoins. So can custody risks, as some platforms may not be able to safeguard balances. Additionally, stablecoins moving across chains can be exposed to bridge hacks, pushing prices down. Blockchain activity, Bitcoin block trends, and liquidity conditions can all affect how the market works and transfers as well.
How to Choose a Stablecoin
When choosing a stablecoin, there are several ways to help you make the right pick. These include redemption rights, reserve transparency, liquidity, and more that we explained below.
- Reserve Transparency: Check whether the publisher has reserve reports or public attestations. This can help you choose a stablecoin if the other factors tick the boxes.
- Redemption Rights: Always check who can redeem the stablecoins and under which conditions.
- Liquidity: Is the stablecoin widely traded? If so, on which platforms? Are these reputable exchanges and DeFi protocols? If the answer is yes, it’s a good pick.
- Issuer Credibility: Not all stablecoin issuers are regulated and reputable. Check each issuer’s credibility before choosing a stablecoin, no matter how good it looks.
- Network Support: Which blockchains support the stablecoin? If it’s only one, and it has a history of concerns, it’s best to look in another direction.
- Transfer Speed & Fees: How fast are transfers with your selected stablecoin? Are there any fees? The best ones trade for either no or low fees.
- Regulatory Availability: Not all stablecoins are available in every region. Check for availability before choosing one.
- Use Case Fit: Make sure the stablecoin fits your use cases. Some are meant for trading, others for payments, while some are focused on DeFi.
How to Buy, Store and Use Stablecoins Safely
Buying, storing, and using stablecoins safely requires a bit of research. Follow these tips to stay safe while trading or using stablecoins in any other way.
Only Buy Stablecoins Through Reputable Exchanges and Platforms
Beginners should always buy stablecoins via secure and reputable exchanges and platforms. Telegram groups aren’t that. Use Binance, Coinbase, or other platforms for the most secure experience.
Choose the Right Network
Stablecoins exist on different networks. Make sure you use the right one when sending or receiving. A misstep such as missing a character will result in a voided transaction. Sending to the wrong address can cause irrecoverable losses.
Use Secure Wallets
There are all kinds of crypto wallets out there for storing your stablecoins. These can be hot (online) and cold (offline). Make sure you use one with strong reputation for the best experience.
Send a Small Amount First to Test the Waters
To test the network and receiver when sending stablecoins, send a small amount first. If it passes, you can transfer a larger amount.
Check the Fees
Always check the fees on the network you’re sending or receiving stablecoins. They can differ greatly, so pick one with the lowest fees.
Avoid Fake Tokens
Unfortunately, there are plenty of crypto and stablecoin scammers out there. To stay safe, choose reputable coins and networks.
Learn About Redemption Limits
Sometimes, users can’t redeem stablecoins directly with the issuer. Ask for redemption limits and read the terms before you start trading.
Stablecoin Regulation and the Future of Digital Dollars
Stablecoins are designed to sit between crypto markets, payment systems, reserves, banking, and monetary policy. They aren’t the same as volatile crypto assets, which requires a bit of different regulation.
In the past years, regulators have focused on whether stablecoins are backed by high-quality liquid assets such as gold or the US Dollar. For Tether, this means high regulatory compliance, and it is the most traded stablecoin on the market. All stablecoins pegged to such assets pass AML checks and sanctions requirements.
What does the future look like? It’s certainly bright. Stablecoins will continue to coexist with digital bank currencies, giving users the flexibility to pick either decentralized or centralized platforms for transactions. Since most stablecoins are dollar-pegged, they can strengthen the role of digital dollars in global finance. We’re currently in a shifting financial era, but stablecoins show the way forward. Frictionless and low-fee payments with global access and a stable value.
Regulations will follow for sure, and some stablecoins may be strongly integrated into payment systems. They will play a major role in tokenized finance in the near future and in the long run.
Quick Stablecoin Glossary for Beginners
The terms below cover the core concepts used throughout this guide. For a broader breakdown of crypto terminology, the Tradeblock glossary covers the wider ecosystem in full.
- Peg: A target value asset that the stablecoins aims to match 1:1 in price.
- Reserve: Various assets (fiat money, commodities, crypto) that back up a stablecoin.
- Attestation: Third-party reports about reserve holdings that show how credible a stablecoin is.
- Redemption: Exchanging stablecoins for an underlying value asset.
- Depeg: A term that describes when a stablecoin trades above or below the target value (under or over $1, for example)
- Minting: The creation of new stablecoin tokens.
- Burning: Destroying tokens during a redemption stage.
- Collateral: A term for assets that support the value of a stablecoin.
- Overcollateralization: Holding more collateral than the value of all tokens issued.
- Wrapped stablecoin: A special version of a stablecoin moved or represented by another blockchain.
Conclusion: The Role of Stablecoins in Digital Finance
Designed as a bridge between traditional money and blockchain-based finance, stablecoins have a major role to play in the future of digital assets. They’re a great crypto start for beginners, eliminating volatility, while having numerous use cases. They can be used for trading, payments, settlement, and in decentralized finance, but only if users understand the risks of depegs, reserve quality, and regulation.
The easy learning curve and price stability makes them a perfect fit for anyone looking to start with crypto. Their safety depends on numerous factors. But if you stick to the commonly traded stablecoins such as Tether or USD Coin, they are an ideal gateway into the world of cryptocurrencies and the broader crypto market context.
Frequently Asked Questions About Stablecoins
Are stablecoins the same as Bitcoin?
No, they aren’t. While nearly all stablecoins exist on the blockchain, it might not be Bitcoin’s blockchain at all. Their value is pegged to a real-world asset, eliminating the volatility of Bitcoin.
How do stablecoins stay at $1?
Stablecoins stay at a 1:1 price thanks to their peg to real-world assets. These can include fiat money assets, most commonly the US Dollar, commodities, or other value assets.
Are stablecoins safe?
Yes, reputable stablecoins are safe. Asset-backed stablecoins such as USDT and USDC seem to be the most stable of them all.
What are the main types of stablecoins?
The main types of stablecoins are primarily categorized by their backing mechanism. There are fiat-backed stablecoins such as USDT and USDC, crypto-collateral stablecoins (DAI), commodity-backed stablecoins (Tether Gold), and algorithmic stablecoins (such as Ethena USDe).
What is the difference between USDT and USDC?
USDT and USDC’s differences lie in transparency, reserves, market usage, and regulatory compliance. Both are pegged to the US Dollar, so they maintain a stable value of $1.
Can stablecoins lose their peg?
Yes, and they often do so. The good news is that depegs, or going under or over value, are short, and most stablecoins retrieve a 1:1 peg value quickly.
Are stablecoins backed by real money?
Some are, others aren’t. Stablecoins such as Tether (USDT) and USD Coin (USDC) are backed by the US Dollar, and often stay within the 1:1 value range.
How are stablecoins used in DeFi?
Stablecoins are the foundational low-volatile block of decentralized finance. They’re used for DeFi lending, borrowing, and yield generation, all without intermediaries.
Can you use stablecoins for payments?
Yes, stablecoins such as USDT and USDC are already used for payments. They offer fast, cheap, and global transactions and are ideal for cross-border payments and freelancer payouts.
Are stablecoins regulated?
Regulation on stablecoins is increasing. The market has moved from a largely unregulated space toward strict framework, ensuring reserve transparency, fiat backing, and user redemption rights.
What is the best stablecoin for beginners?
Tether is widely considered the best stablecoin for beginners. It’s available at the world’s top crypto exchanges, keeps a stable price, and is a gateway to crypto payments for most new users.
