What Are Stablecoins? A Complete Guide for Beginners to Stable Cryptocurrencies

What Are Stablecoins?

A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging itself to reserve assets, such as fiat currencies (for example, the US dollar), commodities (such as gold), or other financial instruments. Unlike Bitcoin or Ethereum, which can experience sharp price fluctuations, stablecoins aim to provide the benefits of cryptocurrency technology—such as fast transactions, security, and borderless transfers—without volatility.

The stablecoin market has demonstrated remarkable growth, with total market capitalisation exceeding $235 billion, representing significant expansion over recent years.

Types of Stablecoins

Stablecoins employ various mechanisms to maintain their stable value.

Fiat-Backed Stablecoins

The most common type of stablecoin is one backed by fiat currencies, such as the US dollar. These stablecoins maintain fiat currency reserves in a 1:1 ratio, meaning one stablecoin can be exchanged for one unit of the currency.

Examples: Tether (USDT), USD Coin (USDC), Pax Dollar (USDP), and PayPal USD (PYUSD).

Commodity-Backed Stablecoins

These stablecoins are secured by physical assets, such as gold, silver, or oil. The stablecoin's value is pegged to the market value of these commodities.

Examples: Tether Gold (XAUt), Pax Gold (PAXG).

Crypto-Backed Stablecoins

These stablecoins use other cryptocurrencies as collateral. Due to cryptocurrency volatility, these stablecoins are typically over-collateralised, meaning the value of cryptocurrency held in reserve exceeds the value of issued stablecoins.

Examples: Dai (DAI), which is backed by cryptocurrencies such as Ethereum through the MakerDAO protocol.

Algorithmic Stablecoins

Algorithmic stablecoins do not rely on collateral. Instead, they use algorithms to control the cryptocurrency supply based on demand. When the price rises above the target value, the algorithm increases supply to lower the price.

Examples: Frax (FRAX), which combines collateral with algorithmic adjustments.

Most Popular Stablecoins

Tether (USDT)

Tether is the largest stablecoin by market capitalisation, with a value exceeding $143 billion. Launched in 2014, USDT is pegged to the US dollar and is available on several major blockchains, including Ethereum, Solana, and Tron.

However, Tether has faced scrutiny regarding its reserve practices. The company received a fine from the US Commodity Futures Trading Commission for making misleading statements about its reserves.

USD Coin (USDC)

USDC is the second-largest stablecoin, with a market capitalisation exceeding $58 billion. Issued by Circle, USDC emphasises transparency and regulatory compliance. Its reserves are held in cash and short-term US Treasury obligations, with weekly attestations.

Circle launched USDC in collaboration with Coinbase. It was created as a transparent alternative in the stablecoin market at a time when concerns about Tether's reserves were growing.

Paxos USD and Other Fiat-Backed Options

Several other fiat-backed stablecoins have emerged, each offering distinct features. These stablecoins are pegged to the US dollar and backed by dollar reserves and US Treasury bills, providing users with multiple options for stable value storage.

DAI

Unlike centralised stablecoins, DAI is a decentralised stablecoin created through the MakerDAO protocol. DAI maintains its parity with the US dollar through a system of smart contracts and over-collateralisation with other cryptocurrencies, primarily Ethereum.

PayPal USD (PYUSD)

Launched by PayPal in collaboration with Paxos, PYUSD represents the entry of traditional financial institutions into the stablecoin market. It is designed specifically for payments and is backed by reserves managed by Paxos.

Ripple USD (RLUSD)

RLUSD is a new stablecoin from Ripple, the company behind the XRP Ledger. Recently announced, RLUSD is pegged to the US dollar and uses Ripple's payment infrastructure for fast and inexpensive international transfers.

It is important to note that XRP itself is not a stablecoin. XRP is a separate digital asset used primarily for liquidity in cross-border transactions, whereas RLUSD is specifically designed as a stablecoin pegged to the dollar.

Euro Stablecoins

Notable examples of euro stablecoins include:

• EURT (Tether Euro): A euro-pegged stablecoin issued by Tether
• EURC (Euro Coin by Circle): A euro stablecoin from the issuer of USDC
• EURS (Stasis Euro): One of the earliest euro stablecoins, backed by euro reserves
• EUROC (Euro Coin): A regulated euro stablecoin gaining popularity in European markets

Euro stablecoins perform similar functions to their dollar counterparts but are particularly valuable for European businesses and individuals seeking to avoid currency conversion costs during transactions in their local currency.

How Stablecoins Maintain Their Value

The ability of stablecoins to maintain stable value depends on various mechanisms, depending on the stablecoin type.

Reserve Assets

Stablecoins backed by fiat currencies maintain their value through reserves of the underlying asset. For each stablecoin in circulation, the issuing company must hold an equivalent amount of reserve asset. These reserves are typically held in bank accounts, Treasury bonds, or other low-risk investments.

Peg Mechanisms

The most common peg mechanism is a 1:1 ratio to fiat currency, typically the US dollar. This means one stablecoin always costs one dollar. Other stablecoins may be pegged to different currencies, such as the euro, or to commodities, such as gold.

Maintaining Stability

To ensure stablecoins remain at their peg, issuers employ various methods:

1. Minting and Redemption: Users can create new stablecoins by depositing equivalent value in the reserve asset, or redeem their stablecoins for the underlying asset.
2. Arbitrage: If the market price of a stablecoin deviates from its peg, arbitrageurs can profit by buying the stablecoin when it trades below parity and redeeming it for the reserve asset, or selling when it trades above parity.
3. Over-Collateralisation: For crypto-backed stablecoins, the system requires users to deposit more value in cryptocurrency than the value of stablecoins they receive.
4. Algorithmic Supply Adjustments: Algorithmic stablecoins use smart contracts to automatically adjust supply based on demand.

Transparency and Audits

Many stablecoin issuers publish regular attestations or "proof of reserves" to verify they hold sufficient reserve assets. These reports, often conducted by third-party accounting firms, help strengthen confidence in the stablecoin ecosystem.

Advantages of Stablecoins

Stablecoins offer several advantages over both traditional financial systems and volatile cryptocurrencies.

Price Stability in Volatile Markets

The primary advantage of stablecoins is their price stability relative to volatile cryptocurrencies. During market downturns, cryptocurrency traders can quickly convert their assets to stablecoins to preserve value without completely exiting the crypto ecosystem.

International Transactions and Remittances

Stablecoins enable faster and cheaper international transfers compared to traditional banking systems. For example, a $200 remittance from sub-Saharan Africa costs approximately 60% less when using stablecoins compared to traditional fiat-based remittance methods.

Financial Inclusion

In regions with limited access to banking services or unstable local currencies, stablecoins provide a way for individuals to participate in the global economy. By offering a stable store of value accessible via smartphone, stablecoins can serve unbanked and underbanked populations worldwide.

DeFi Applications

Stablecoins form the foundation of many decentralised finance (DeFi) protocols. They facilitate lending, borrowing, and yield generation without the volatility risks associated with other cryptocurrencies.

Bridge Applications

Bridge stablecoins represent an innovative category created specifically to facilitate transfers between different blockchains. Platforms specialising in interoperable stablecoin infrastructure allow seamless movement of stablecoins across different blockchain networks.

Protection Against Inflation

In countries with high inflation, stablecoins pegged to more stable currencies, such as the US dollar, provide residents with a way to protect their savings from local currency devaluation. This has contributed to high stablecoin adoption in countries such as Argentina, Turkey, and Venezuela.

Risks and Challenges

Despite their advantages, stablecoins face several risks and challenges.

Regulatory Concerns

Stablecoins continue to attract regulatory attention. Various jurisdictions are developing regulatory frameworks to address potential risks to financial stability, monetary policy, and consumer protection.

In the United States, both chambers of Congress have advanced stablecoin legislation. In Europe, the Markets in Crypto-Assets Regulation (MiCA) effectively banned algorithmic stablecoins and introduced strict reserve requirements for all others.

Reserve Transparency Issues

Reserve transparency supporting stablecoins has been an ongoing concern. While some issuers, such as Circle (USDC), publish regular attestations, others have faced criticism for lack of transparency. Several issuers have faced regulatory action for making misleading statements about their reserves.

De-Peg Risks

Stablecoin history includes several instances where coins lost their peg to the underlying asset. The most notable example was the collapse of TerraUSD (UST) in May 2022, which destroyed approximately $45 billion in market value within a week.

Even fiat-backed stablecoins can temporarily lose their peg during periods of market stress or if concerns arise regarding the issuer's solvency.

Security and Centralisation Risks

Most major stablecoins are issued by centralised entities, introducing counterparty risk and single points of failure. Users must trust that the issuer properly manages reserves and honours redemptions. Additionally, centralised stablecoins may be subject to address freezing or blacklisting.

Uses of Stablecoins

Stablecoins have a broad range of applications in both retail and institutional contexts.

Trading and Investment

Stablecoins serve as an important trading pair on cryptocurrency exchanges, allowing traders to enter and exit positions without converting to fiat currencies.

For investors, stablecoins offer a way to "park" funds during market volatility without completely exiting the crypto ecosystem.

Payments and Commerce

The stability of stablecoins makes them suitable for everyday commerce. Unlike Bitcoin or Ethereum, where price fluctuations can significantly alter transaction value, stablecoins maintain stable purchasing power.

Businesses can confidently accept stablecoin payments, knowing the received value will not depreciate.

Remittances and International Transfers

Traditional cross-border payments through banks can be expensive and slow, often taking several days to complete and charging fees of 5-7% or more. Stablecoins enable nearly instantaneous international transfers at a fraction of the cost.

This application is particularly valuable in corridors serving migrant workers sending money home.

Store of Value in High-Inflation Regions

In countries with high inflation or currency controls, stablecoins offer a way for residents to preserve their purchasing power. By converting local currency to stablecoins pegged to the US dollar, individuals can protect their savings from devaluation.

DeFi Applications

Stablecoins form the foundation of decentralised finance ecosystems, enabling:

• Lending and Borrowing: Platforms allow users to lend stablecoins and earn interest or borrow against cryptocurrency collateral
• Liquidity Provision: Stablecoins comprise half of many popular trading pairs on decentralised exchanges
• Yield Farming: Users can earn returns by providing liquidity of stablecoins to various protocols
• Synthetic Assets: Stablecoins serve as collateral for creating synthetic versions of stocks, commodities, and other assets

Regulation of Stablecoins

The regulatory landscape for stablecoins continues to evolve as governments and financial authorities recognise their growing importance in the financial system.

Current Regulatory Landscape

Stablecoin regulation varies significantly depending on jurisdiction. Primary regulatory concerns include:

• Financial stability risks
• Consumer and investor protection
• Anti-money laundering and counter-terrorism financing (AML/CFT)
• Impact on monetary policy
• Disruption to the banking system

Regional Regulatory Approaches

United States

In the United States, both the House and Senate have advanced stablecoin legislation in recent years. Proposed acts aim to establish frameworks for stablecoin issuers, including reserve requirements, transparency standards, and oversight mechanisms.

The Securities and Exchange Commission has issued statements noting that certain stablecoins maintaining adequate reserves and redemption rights may not be considered securities under certain conditions.

European Union

The European Union has implemented the Markets in Crypto-Assets Regulation (MiCA), which came into effect in 2023. MiCA effectively bans algorithmic stablecoins and requires all others to have assets held by third parties.

Singapore

The Monetary Authority of Singapore (MAS) has completed development of a regulatory framework for single-currency stablecoins pegged to the Singapore dollar or any G10 currency.

Hong Kong

Hong Kong has developed a regulatory framework for stablecoin issuers and launched a sandbox allowing industry participants to develop and test their business models.

Regulatory Outlook

The trend in stablecoin regulation appears to be moving towards:

1. Bank-Like Regulation for stablecoin issuers, which may include capital requirements, reserve standards, and regular audits
2. Higher Transparency Requirements regarding reserve composition and management
3. Consumer Protection Measures, including redemption rights and disclosure requirements
4. Integration with Existing Financial Systems through licensing and oversight frameworks

How to Buy and Use Stablecoins

Where to Buy Stablecoins

Stablecoins are available on leading cryptocurrency exchanges offering popular stablecoins such as USDT and USDC across multiple blockchain networks.

Step-by-Step Process for Purchasing Stablecoins

1. Create an Account: Register on a reputable cryptocurrency exchange platform or download its mobile application
2. Complete Verification: Finish the Know Your Customer (KYC) process as required by regulations
3. Navigate to Assets: On the website, click "Assets," then "Deposit" or in the app, tap "Assets" > "Spot" > "Deposit"
4. Select Your Stablecoin: Search for the stablecoin you wish to purchase (for example, USDT) and select it
5. Choose the Correct Network: Select the blockchain network (for example, ERC20, SOL, or TRC20) – importantly, ensure you select the same network for deposits and withdrawals to avoid losing funds
6. Generate an Address: If you haven't previously received a deposit address, click "Generate Address"
7. Deposit Funds: Copy the address or scan the QR code to transfer funds from another platform or wallet
8. Await Confirmation: Your deposit will be credited after blockchain confirmation

Stablecoin Storage Options

For enhanced security, consider transferring your stablecoins from the exchange to a self-custody wallet. Options include hardware wallets, software wallets, and mobile wallets.

Important Considerations

• Verify Network Compatibility: Always ensure that sending and receiving platforms use the same network
• Check Minimum Deposit Requirements: Some stablecoins have minimum deposit amounts
• Be Aware of MEMO Requirements: Certain tokens require both an address and a MEMO
• Confirm Contract Addresses: Verify that the asset's contract address matches the one supported by your platform
• Consider Network Fees: Different blockchains have varying transaction fees
• Maintain Records: Keep documentation of all transactions for tax and personal accounting purposes

Conclusion

Stablecoins bridge blockchain technology and traditional finance, offering blockchain benefits with price stability. Their $235 billion market reflects growing importance in both crypto and traditional financial systems. Major institutions, such as PayPal, Bank of America, and Stripe, are entering this space, whilst governments develop regulatory frameworks.

In the future, stablecoins will likely experience greater regulation, increased integration with traditional financial systems, innovation in decentralised options, expanded use cases, and regional variants to meet specific economic needs.

Although challenges remain—including regulatory uncertainty, transparency issues, and de-peg risks—stablecoins have become an integral part of the digital economy. By staying informed about the various types, advantages, risks, and regulations, users can maximise the benefits of these versatile digital assets.

FAQ

Що таке стейблкойни？ Чим вони відрізняються від інших криптовалют, таких як Біткойн та Етеріум？

Стейблкойни — це криптовалюти, прив'язані до традиційних валют (як доларі США) або активів. На відміну від Біткойну та Етеріуму, які коливаються у ціні, стейблкойни мають стабільну вартість близько 1 дол. США. Вони призначені для платежів, накопичення та переводів, а не для інвестицій. За стейблкойнами стоять резерви реальних активів.

稳定币如何保持价格稳定？主要有哪些稳定机制？

稳定币通过三种主要机制保持价格稳定：法币担保型由现金储备1:1支持；加密担保型以其他加密资产超额抵押；算法型通过智能合约调节供应。这些机制确保价格维持在1美元附近的固定值。

稳定币有哪些常见类型？USDT、USDC、DAI分别是什么？

稳定币主要包括三类：USDT是Tether发行的美元锚定币，交易额最大；USDC由Coinbase和Circle发行，受美国监管，透明度更高；DAI是MakerDAO的算法稳定币，通过智能合约维持价格稳定。

Як я можу купити та використовувати стейблкойни？

Виберіть криптовалютну платформу，введіть бажану суму, підтвердіть операцію. Стейблкойни надійдуть на ваш рахунок. Використовуйте їх для торгівлі，переводів або збереження вартості без коливань цін.

Стійбійні монети мають які основні сценарії застосування та переваги？

Стійбійні монети використовуються для торговлі цифровими активами, міжнародних платежів та обмінів між криптовалютами. Їх основна перевага—стабільність вартості, що дозволяє уникнути коливань цін та надійно зберігати вартість без ризиків волатильності.

持有稳定币有什么风险需要注意？

持有稳定币主要面临币值下滑风险，尤其在极端市场事件发生时。法币抵押稳定币的短债收益归发行方，投资者收益有限。此外，还需关注发行方信用风险和市场波动影响。

Стейблкойни та фіатні валюти（наприклад, долар США）мають які переваги порівняно один з одним?

Стейблкойни пропонують швидші переводи, вищу прозорість та глобальну доступність порівняно з традиційними фіатними валютами. Вони працюють цілодобово без посередників.