What Are Stablecoins?
05 Aug, 2025
3 minutes
Stablecoins are a class of cryptocurrency specifically tailored to be of stable value by price anchoring against an underlying asset, which may be a fiat currency (e.g., the US dollar), a commodity (e.g., gold), or an asset basket. The main aim is to counterbalance the excessive volatility that most cryptocurrencies, like Bitcoin or Ethereum, are infamous for, offering customers a stable exchange unit and store of value in the crypto economy.
Compared to other cryptocurrencies, which can change hundreds of dollars in worth within hours, stablecoins are by design stable in value - usually in a 1:1 comparison with the asset that it is collateralized against. Most USD-backed stablecoins will try to be equal to $1, for example.
Some general examples of what coins are stablecoins or what are stablecoins when inquiring include:
These stablecoins are dispersed far and wide across crypto exchanges, DeFi, and remittance platforms because they combine the advantages of blockchain transactions (speed, worldwide availability, openness) and price stability which is present in traditional assets.
Why Are Stablecoins Important?
Stablecoins occupy the gap between risk-hungry cryptocurrency space and traditional finance. Stablecoins give users the freedom to hold and spend digital money without risking themselves to uncontrolled price variability common with most cryptocurrencies. Stability is especially required in payment, trading, and DeFi usage.
The above are key reasons why stablecoins are significant:
1. Hedging Volatility Risk
Stablecoins offer a sanctuary to investors and traders when there is market volatility. Instead of reverting back to fiat through traditional banks, customers can simply switch to stablecoins and save the day.
2. Cross-Border Payments Convenience
As they are settled on blockchains, stablecoins allow for cheap and efficient cross-border payments. This makes them perfect for peer-to-peer payments, cross-border business transactions, and remittances.
3. Facilitating DeFi and On-Chain Applications
Stablecoins are the foundation of decentralized finance protocols, used as a stable unit of account for borrowing, lending, and yield farming. Stablecoins are utilized by the majority of DeFi applications to calculate interest rates, collateral prices, and liquidity pool balances.
4. Simplifying Crypto-to-Crypto Trading
Stablecoins act as a base pair so that other cryptocurrencies can be bought and sold. They allow easier taking profit, risk management, and uncalled-for fiat conversions.
Included in the list when responding to the question "what are stablecoins used for?" are payments, trading, lending, saving, and hedging against price fluctuations. They are a backbone of the modern-day crypto economy because they are stable and backed by the majority of blockchains.
Types of Stablecoins
When asking for just "what are two types of stablecoins?" the broad answer is fiat-backed and crypto-backed models. In actuality, however, there exist four broad types based on the approach used to stabilize prices. Knowing these makes it clear what are stablecoins and how they function.
1. Fiat-Backed Stablecoins
These are backed by a traditional currency, usually the US dollar, and underpinned by reserves held by bank or regulated custodians. For each stablecoin issued, there is an equivalent amount of fiat currency in reserve.
Examples of stablecoins that fit into this category:
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USDT (Tether)
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USDC (USD Coin)
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BUSD (Binance USD)
Advantages: Highly stable, easy to understand, and well accepted.
Drawbacks: Relying on central institutions and being able to anticipate the reserves to be held in full.
2. Crypto Backed Stablecoins
They are collateralized by other cryptos. As crypto prices cannot be guaranteed to be stable, they tend to be over-collateralized, i.e., $150--$200 of crypto can back $100 of stablecoin.
Examples:
- DAI (collateralized by ETH and other collateral on MakerDAO)
Advantages: More decentralized and transparent if managed by smart contracts.
Disadvantages: Susceptible to collateral price declines, which may lead to liquidation events.
3. Commodity-Backed Stablecoins
They are backed by physical reserves like gold, silver, or oil. The reserves are held with secure custodians.
Examples:
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PAXG (Paxos Gold)
Advantages: Provides exposure to commodities without actually holding them.
Downsides: Still depends on central parties for custodianship and reserves proof.
4. Algorithmic Stablecoins
These employ smart contract algorithms to regulate supply and demand and remain pegged instead of reserves.
Examples:
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FRAX (hybrid, with partial algorithm usage)
Advantages: Fully decentralized without recourse to the use of the traditional reserves.
Downsides: Risk of losing their peg in adverse market conditions, as has occurred in previous algorithmic stablecoin meltdowns.
So, for "what stablecoins are there," these four are listed, each with its own mechanism, pros, and cons.
Stablecoin Regulation
As stablecoins get more popular, regulators across the world are ever more keen to understand how they are built, what kind of reserves they maintain, and finally how they impact the stability of finance. It is important for any individual who asks themselves "what are the top stablecoins" or searches for "what are the best stablecoins" to keep in the long term to know the regulation.
1. Why Regulation Matters
Stablecoins are typically collateralized by fiat currency like the US dollar and therefore sit at the intersection of blockchain technology and mainstream finance. Without regulation, concerns that have been raised include:
Transparency of the reserves
Fraud prevention
Consumer protection
Systemic risk in the event of widespread failures
2. Global Approaches
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United States: The Stablecoin TRUST Act and supporting bills focus on requiring issuers to hold high-quality liquid reserves and subjecting them to periodic auditing.
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European Union: Under the Markets in Crypto-Assets (MiCA) regime, stablecoin issuers must meet capital requirements, reserve transparency, and licensing.
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Asia: The local Singapore and Japan have advocated for licensing regimes for stablecoin issuers as a mechanism of guaranteeing operational integrity and efficient regulation.
3. Market Impact
Regulation would make innovative stablecoins institution- and government-acceptable, leading to adoption. More regulation, however, could limit some decentralized or algorithmic types, specifying what stablecoins are and can be issued globally.
4. Compliance and Trust
Compliance tends to translate into customer trust. Top stablecoins like USDC and USDT publish attestations or audits confirming reserves and thereby make themselves more appealing to risk-averse firms and traders.
Regulation will certainly shift since stablecoins will be a central fulcrum between crypto and fiat economies.
The Stablecoins Function in the Cryptocurrency Universe
Stablecoins are today the most critical feature of the universe of digital assets. Stablecoins are the fulcrum connecting volatile cryptocurrencies to fixed fiat, facilitating free exchange of value between exchanges, wallets, and blockchain platforms.
1. Medium of Exchange
Stablecoins are now a routine payment on retail and institutional markets. They are as widely accepted by merchants as prices are stable, and anyone can be paid anywhere on Earth instantly.
2. Trading and Liquidity
Stablecoins are traders' number one base pair of choice for exchanges. Instead of converting to fiat, stablecoins enable traders to lock-in profits, hedge out volatility, and rapidly re-enter markets. That makes them an arbitrage and high-frequency trading inevitability.
3. DeFi Backbone
Stablecoins underpin lending, borrowing, and yield farming in decentralized finance. Aave, Compound, and Curve protocols significantly depend on the stablecoin liquidity pools to create stable interest and stable yields.
4. Cross-Border Transfers and Remittances
As they merge fiat stability with blockchain speed, stablecoins are progressively gaining popularity for remittances. Stablecoins bypass bank latency and lower cross-border transfer charges.
5. On-Ramp and Off-Ramp Features
Stablecoins also make this switching between the crypto and fiat economies simpler. Stablecoins allow easy cashing out and cashing in of crypto markets without having to worry about asset price volatility.
In short, in response to "what are stablecoins used for?", their applications are trading, payments, DeFi, remittances, and stable store of value in the crypto economy. They are not secondary tools by any means - they constitute a foundation level of blockchain finance.
Final Thoughts on Stablecoins
Stablecoins revolutionized the world of cryptos by providing a low-volatility stable coin that can work optimally on blockchain technology. To all those who ever wondered to themselves "what are stablecoins?", they are cryptocurrencies which can fix their value at the same point, normally against a fiat currency such as the US dollar but sometimes against commodities or other cryptocurrencies.
From commodity- and algorithmic-backed stablecoins to crypto- and fiat-backed stablecoins, stablecoins are available in every shape and size with each of their pros and cons. USDT, USDC, DAI, BUSD, and PAXG are some of the most popular stablecoins that currently exist and are used extensively for remittances, DeFi, trading, and payments.
As growing adoption brings more regulation, stablecoins are also subject to more regulation. Clearly defined rules can foster transparency and confidence, especially between users and institutions seeking compliant, well-supported alternatives. But extremely constrictive ones can also redefine what stablecoins already exist in the market by restricting certain models.
In the larger ecosystem, stablecoins are a keystone to value transfer, settlement, and liquidity. Stablecoins make lending, paying, borrowing, and trading possible in a way that provides the efficiency of blockchain and the price stability of fiat. As a borrower, trader, or just a person who wishes to have a quick and stable means of transferring money, stablecoins will likely remain a prominent aspect of the cryptocurrency market through 2030 and beyond.