In the world of cryptocurrencies, price volatility is a common hurdle.
Enter stablecoins, digital assets designed to bring much-needed stability to the crypto economy.
If you’re asking, “What is a stablecoin?” or “What is the purpose of stablecoins?”, this insider guide is your go-to resource.
We’ll break down how stablecoins work, explore their types and benefits and dive into how to buy and invest in them effectively.
Key Takeaways
- Stablecoins are digital assets pegged to fiat currencies, commodities or other cryptocurrencies to minimize price volatility.
- USDT and USDC dominate the market, with over $143 billion and $60 billion in circulation respectively.
- Stablecoins power real-world use cases like remittances, payroll and inflation hedging in emerging markets.
- Transaction volume reached over $30 trillion in 2024, outpacing even Visa’s global payment volume.
- Stablecoins face challenges including regulatory scrutiny, centralization risks and occasional de-pegging events.
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency that is pegged to the value of a stable asset, such as a fiat currency (like the U.S. dollar), commodities (like gold) or even other cryptocurrencies.
The goal is to combine the best of both worlds, the stability of traditional assets with the speed, transparency and decentralization of blockchain technology.
As a result, stablecoins have become essential infrastructure in the digital economy, offering a reliable unit of account and store of value.
Their growth has also fueled the rise of decentralized finance (DeFi) by enabling predictable pricing in lending, borrowing and yield-generating protocols.
What Is the Purpose of Stablecoins?
The primary purpose of stablecoins is to reduce the volatility that plagues most cryptocurrencies.
While Bitcoin and Ethereum can swing wildly in price within hours, stablecoins aim to maintain a steady value.
This makes them ideal for:
- Everyday Transactions: A stable medium of exchange for buying goods and services.
- Cross-border Payments: Faster and cheaper than traditional banking.
- Trading Pairs: A safe haven during crypto market turbulence.
- DeFi Applications: Collateral in lending protocols, liquidity pools and yield farming.
A 2022 study found that stablecoins used for cross-border payments could cut costs by up to 80% compared to traditional financial systems.
Additionally, their price predictability makes them increasingly popular in regions experiencing high inflation, acting as a digital alternative to stable foreign currencies.
So, if you’re wondering, “What is the point of stablecoins?”, the answer lies in utility, stability and broad financial accessibility.
How Do Stablecoins Work?
Stablecoins maintain their peg through one of several mechanisms:
1. Fiat-Collateralized: Backed 1:1 by reserves of fiat currency held in bank accounts.
Examples: USDC, USDT.
2. Crypto-Collateralized: Backed by other cryptocurrencies, often over-collateralized to absorb volatility for example – DAI.
3. Algorithmic: Not backed by reserves. Instead, they use algorithms and smart contracts to regulate supply and demand, like Frax.
4. Commodity-Collateralized: Pegged to real-world assets like gold (PAX Gold).
Each mechanism offers a different balance of decentralization and trust.
A 2023 report emphasized that stablecoins with transparent and verifiable collateral frameworks tend to maintain their pegs more reliably, particularly during market stress.
What Are the Two Types of Stablecoins?
While there are multiple classifications, stablecoins are often divided into two main categories:
- Collateralized Stablecoins: These include fiat, crypto, and commodity-backed stablecoins.
- Algorithmic Stablecoins: These rely on code and game theory to maintain price stability without direct collateral.
In addition to these, there are new types of stablecoins being developed everyday, such as, non-pegged, cross-chain stablecoins and many others.
Collateralized stablecoins currently dominate the market, with over 90% of the total stablecoin supply falling under this category according to data from The Block Research (2024).
In contrast, algorithmic stablecoins are considered riskier and have struggled to maintain consistent pegs during volatile periods, as highlighted by the collapse of TerraUSD in 2022.
This answers the question, “What are the two types of stablecoins?”, a fundamental concept for understanding how each variety manages its peg.
Top Stablecoins Compared
Here’s a snapshot comparison of major stablecoins:
| Stablecoin | Backing Type | Issuer | Use Case Focus |
|---|---|---|---|
| USDT | Fiat-backed | Tether Ltd. | Trading & settlements |
| USDC | Fiat-backed | Circle | Transparency & DeFi |
| DAI | Crypto-backed | MakerDAO | Decentralized finance |
| PAXG | Gold-backed | Paxos | Wealth preservation |
This comparison helps you choose the best stablecoin for your needs.
Who Are the Main Stablecoin Issuers?
Stablecoin issuers are typically fintech companies or decentralized protocols, often offering features like a digital wallet API to enhance user accessibility and integration.
Some key players include:
- Tether Ltd. – Issuer of USDT.
- Circle – Issuer of USDC (in partnership with Coinbase).
- MakerDAO – Maintains the DAI stablecoin.
- Paxos – Offers PAX Gold and formerly BUSD.
These issuers play a vital role in trust and transparency across the stablecoin ecosystem.
According to a 2023 report from Chainalysis, USDT and USDC combined were responsible for over 90% of all on-chain stablecoin transaction volume, emphasizing the dominance and responsibility carried by their issuers in maintaining user confidence and systemic stability.
How Many Stablecoins Are There?
According to CoinMarketCap, there are over 200 stablecoins in existence as of early 2025, but only a handful dominate trading volumes and user trust.
- USDT (Tether): The largest by market capitalization, with over $114 billion in circulation as of March 2025 (CoinMarketCap).
- USDC (USD Coin): Known for its transparency, USDC had over $41 billion in assets under management in late 2024 (Circle Transparency Report).
- DAI: A decentralized option backed by crypto collateral, with a market cap exceeding $5 billion.
- BUSD: Binance’s stablecoin, whose usage is declining following regulatory pressures.
New stablecoins
New stablecoins continue to enter the market with unique features, including region-specific pegs and niche use cases.
- RLUSD: Ripple labs is a pioneer in blockchain-based cross-border payments, has introduced Ripple USD
- PYUSD: The official stablecoin of PayPal.
- USDTb: USDtb is a synthetic stablecoin pegged to the US dollar using a delta-neutral strategy.
- LavaUSD: LUSD is backed by crypto collateral held in smart contracts.
- WYST Wyoming Stablecoin: WYST is a dollar-backed stablecoin fully issued and managed by the Wyoming government.
- GBPA Stablecoin: GBPA is a British Pound-pegged stablecoin developed by Agant Finance with a strong emphasis on UK regulatory compliance.emption guaranteed.
- Staked USDe Stablecoin: sUSDe offers yield through staking, appealing to DeFi users seeking stable income.
- sUSDS High Yield: sUSDS is a yield-bearing stablecoin issued by Sky, built on top of USDS.
- YBX Stablecoin: Is being launched by Marginfi on the Solana blockchain.
- GYEN: Is a stablecoin linked to the Japanese yen, issued by GMO Trust.
- FDUSD: Is a fiat-backed stablecoin fully collateralized by U.S. dollars and equivalent assets.
- EUROe: Is a fully-backed stablecoin pegged to the euro, ensuring stability.
New stablecoins are emerging regularly, each with a unique twist or specialized use case.
Benefits of Stablecoins
Stablecoins offer a unique fusion of traditional financial reliability, embedded finance and blockchain innovation.
Their adoption has grown rapidly: in 2023, stablecoin transaction volume reached over $7 trillion, more than Visa’s total payment volume the same year (The Block Research).
- Price Stability: Essential for commercial adoption, especially in volatile economies.
- Speed & Cost: Transactions are often completed in seconds with fees as low as a few cents.
- Global Access: Roughly 1.4 billion adults globally remain unbanked (World Bank) and stablecoins offer them access to digital finance.
- Transparency: Leading stablecoins like USDC publish monthly reserve audits.
- Interoperability: Stablecoins function across DeFi apps, wallets and exchanges.
This combination makes stablecoins indispensable tools in crypto and beyond.
- Price Stability: Crucial for merchants and consumers alike.
- Speed & Cost: Faster, cheaper transactions compared to traditional systems.
- Global Access: Financial inclusion for the unbanked.
- Transparency: On-chain verification of transactions and reserves (in some cases).
- Interoperability: Usable across different platforms and blockchains.
If you’re curious about the “benefits of stablecoins”, consider them the digital glue holding the crypto ecosystem together.
Use Cases for Stablecoins in the Real World
Stablecoins aren’t just for trading, they’re reshaping finance globally:
- Remittances: Sending money across borders faster and cheaper.
- Payroll: Companies paying remote workers in USDC or USDT.
- Hedging Against Inflation: Individuals in unstable economies preserve value in USD-pegged coins.
- NFT & Gaming Economies: Stablecoins are used as in-game or marketplace currencies.
According to the World Economic Forum, stablecoins have the potential to reduce global remittance costs significantly, which currently average around 6.2% per transaction.
In regions like Latin America and Sub-Saharan Africa, adoption is already rising as users look for faster, cheaper and more stable alternatives to local currencies.
These real-world applications showcase stablecoins transformative power.
Risks and Challenges of Stablecoins
Despite their benefits, stablecoins come with notable risks:
- Regulatory Pressure: Governments are increasingly scrutinizing stablecoins and may impose strict compliancerules.
- Centralization: Many popular stablecoins rely on centralized entities, creating single points of failure.
- Transparency Issues: Not all issuers provide real-time audits of their reserves.
- De-pegging Events: Algorithmic stablecoins like TerraUSD (UST) have suffered catastrophic failures.
A 2023 IMF report emphasized that poor risk management and lack of regulatory oversight were key contributors to past stablecoin collapses, urging the need for global standards.
These risks underline why users must thoroughly research stablecoin structures and issuers before engaging.
Understanding these challenges helps investors and users navigate stablecoins more responsibly.
Stablecoins and Regulation: What’s Coming?
Global regulators are paying close attention to stablecoins due to their rapid adoption:
- United States: Proposed bills like the Stablecoin TRUST Act aim to bring clarity.
- European Union: The MiCA framework will govern stablecoin issuance and usage across member states.
- Asia: Countries like Japan and Singapore are establishing licenses for stablecoin providers.
According to a 2023 report by the Financial Stability Board (FSB), effective regulation of stablecoins is critical to preventing systemic risk and ensuring financial stability.
As regulatory frameworks continue to adapt and improve, market participants will need to adapt quickly to remain compliant and competitive.
Regulation may add trust but also limit innovation, depending on its scope and execution.
How to Buy Stablecoins
Buying stablecoins is easy and can be done in a few steps:
- Choose an Exchange: Binance, Coinbase, Kraken or decentralized platforms like Uniswap.
- Create an Account: Complete KYC (Know Your Customer) if required.
- Deposit Funds: Use fiat or crypto to fund your account.
- Buy the Stablecoin: Choose from popular options like USDC, USDT or DAI.
- Store Securely: Use a crypto wallet, preferably hardware for long-term storage.
How to Invest in Stablecoins
While stablecoins aren’t designed for dramatic price gains, they offer unique investment opportunities:
- Earn Interest: Platforms like Aave, Compound and centralized services like Nexo or BlockFi.
These platforms allow users to lend out their stablecoins and earn interest that often exceeds traditional savings accounts.
According to data from DeFi Rate, average yields on stablecoin lending in 2024 ranged between 5–8%annually, depending on market conditions and platform risk.
- Liquidity Mining: Provide stablecoin liquidity on DEXs and earn rewards.
- Hedging: Protect your portfolio during bear markets.
When considering “how to invest in stablecoins”, remember the focus is on steady yield, not moonshots.
The Future of Stablecoins
As the cryptocurrency landscape changes, stablecoins are set to play an increasingly pivotal role:
- Wider Institutional Adoption: Major financial institutions are actively exploring stablecoin initiatives.
For instance, Fidelity Investments is testing a dollar-pegged stablecoin, reflecting the growing mainstream interest in cryptocurrencies.
- Cross-Chain Functionality: Efforts are underway to enhance interoperability, enabling stablecoins to operate seamlessly across multiple blockchain platforms.
- Integration with CBDCs: The relationship between central bank digital currencies (CBDCs) and stablecoins is taking center stage, with some regions supporting dollar-backed stablecoins while others focus on developing CBDCs to ensure financial stability.
- Smart Contract Automation: Stablecoins are increasingly being integrated into smart contracts, facilitating automated and programmable financial transactions.
Staying ahead of these trends is essential for anyone participating in the evolving crypto landscape.
Final Thoughts
Stablecoins serve as the bridge between traditional finance and the decentralized world of crypto.
They answer the crucial question, “What is a stablecoin?” by providing a reliable, versatile digital asset that keeps the entire crypto economy grounded.
Whether you’re a trader, investor or just curious, understanding stablecoins is key to navigating the blockchain space with confidence.
So dive in, stay informed and explore the stable side of crypto with us here at Stablecoin Insider.
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FAQ
1. What is the main purpose of a stablecoin?
Stablecoins are designed to provide price stability in the crypto market by pegging their value to a stable asset like the US dollar.
This makes them useful for payments, trading and DeFi applications.
2. Are stablecoins safe to invest in?
While generally less volatile than other cryptocurrencies, stablecoins still carry risks such as regulatory changes, lack of transparency from issuers and platform vulnerabilities.
3. How do I choose the right stablecoin?
Consider factors like reserve transparency, decentralization, market adoption and your use case.
USDC is known for transparency, while DAI is popular among DeFi users.
4. Can I earn interest on stablecoins?
Yes.
Platforms like Aave, Compound and centralized providers like Nexo offer interest-bearing accounts for stablecoins, often with annual returns between 4–10%.
5. Will stablecoins replace traditional fiat currencies?
Stablecoins are not likely to fully replace fiat currencies but will increasingly coexist with them, especially for cross-border payments, DeFi and digital commerce.
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