Stablecoins are cryptocurrencies created to minimize price volatility by being “pegged” to a stable asset like the US dollar, gold, or other financial instruments.
Stablecoins are special types of cryptocurrencies that are designed to keep a steady value – like the painting in the example above. They do this by being tied, or “pegged,” to something stable—like the US dollar.
So, if you have 1 stablecoin that’s pegged to the dollar, it should always be worth about $1, no matter what’s happening in the crypto market. This makes stablecoins useful for buying, selling, and saving money without worrying about big price swings.
Unlike Bitcoin or Ethereum, which can experience significant price swings, stablecoins offer a more predictable value, making them useful for payments, savings, and trading.
Stablecoins are useful for smart contracts and DeFi apps, allowing people to earn interest, take out loans, or make payments without needing a bank or financial institution while still being able to hold value consistently.
How Are Stablecoins Valued?
Stablecoins derive their value from the assets backing them or the mechanisms used to stabilize their price.
Fiat-Collateralized Stablecoins
These are backed 1:1 by traditional currency held in reserve by a bank or financial institution. The issuer guarantees that each stablecoin is redeemable for an equivalent amount of fiat currency.
- Example: Tether (USDT) is valued at $1 because its issuer claims to hold equivalent reserves in cash and cash equivalents.
Commodity-Backed Stablecoins
These are tied to physical assets like gold, silver, or oil. Their value fluctuates with the price of the underlying commodity.
- Example: Paxos Gold (PAXG) is backed by actual gold reserves stored in vaults.
Crypto-Collateralized Stablecoins
These stablecoins use other cryptocurrencies as reserves to maintain stability, often requiring over-collateralization to counteract volatility.
- Example: Dai (formerly Sai) by MakerDAO is backed by Ethereum-based assets locked in smart contracts.
Algorithmic Stablecoins
These coins rely on programmed rules like smart contracts to control supply and demand rather than holding physical assets. They are often more experimental and can be more prone to instability.
- Example: Ampleforth (AMPL) automatically increases or decreases the quantity of tokens in user wallets — such that the price of AMPL reverts to 1 Consumer Price Index-adjusted dollar.
US Treasury-Backed Stablecoins
These stablecoins invest reserves in US Treasury securities, combining crypto efficiency with the security of government-backed assets.
- Example: Circle’s USDC has moved toward holding US Treasury securities to strengthen its backing.
Pros & Cons of Different Stablecoin Types
Here are some advantages and disadvantages when considering stablecoins.
| Type | Pros | Cons |
| Fiat-Collateralized | High stability, widely accepted | Requires trust in issuers, centralized |
| Commodity-Backed | Tangible value, inflation hedge | Fluctuates with commodity prices, less liquid |
| Crypto-Collateralized | Decentralized, transparent | Highly volatile, requires over-collateralization |
| Algorithmic | No need for reserves, innovative | High risk of failure, price instability |
| US Treasury-Backed | Secure, backed by government assets | Limited scalability, subject to government policies |
How Are Stablecoins Regulated in the US?
Stablecoins are regulated based on their structure and function.
The SEC (Securities and Exchange Commission) may classify them as securities, while the CFTC (Commodity Futures Trading Commission) oversees their role in derivatives markets.
The Treasury Department, through the Financial Crimes Enforcement Network (FinCEN), enforces anti-money laundering (AML) compliance, and the Federal Reserve is exploring how they fit into the broader financial system.
Proposed legislation like the Stablecoin TRUST Act seeks to establish clear guidelines.
How Are Stablecoins Different from Other Coins Like Bitcoin or Ethereum?
Unlike Bitcoin and Ethereum, which derive their value from market speculation and network utility, stablecoins are pegged to external assets. Bitcoin is often seen as digital gold, and Ethereum powers decentralized applications, but stablecoins function as digital cash for seamless transactions.
For example, while Bitcoin’s price can swing by thousands of dollars in a day, USDC remains stable at around $1, making it ideal for payments and savings.
Stablecoins Tied to the US Dollar
Several major stablecoins are pegged to the US dollar, offering reliability and liquidity:
- Tether (USDT) – The most widely used stablecoin, issued by Tether Limited. While popular, concerns about its reserves have led to regulatory scrutiny.
- USD Coin (USDC) – Issued by Circle, USDC is fully backed by cash and short-term US Treasury bonds, making it one of the most transparent stablecoins.
- TrueUSD (TUSD) – Offers real-time attestations of its reserves, providing a high level of transparency for users.
- Maker Dai – A decentralized stablecoin maintained through over-collateralized crypto assets, offering an alternative to centrally issued stablecoins.
Other Popular Stablecoins
Beyond USD-backed stablecoins, other stablecoins are emerging:
- Pax Dollar (USDP) – Regulated and backed by US dollars.
- Binance USD (BUSD) – Previously issued by Binance and Paxos but faced regulatory challenges.
- Euro Coin (EUROC) – A stablecoin pegged to the Euro, offering stability for European markets.
Use Cases for Stablecoins
Stablecoins provide numerous benefits across different industries:
- Payments – Businesses can accept them and they can make for faster, cheaper transactions.
- Trading & Investing – Traders can use stablecoins to move funds between crypto exchanges without exposure to volatility.
- Remittances – People could send stablecoins internationally with lower fees than traditional bank transfers.
- Decentralized Finance (DeFi) – Many DeFi protocols rely on stablecoins for lending, borrowing, and staking.
- Hedging Against Inflation – In countries with unstable currencies, stablecoins can provide an alternative store of value.
Risks of Stablecoins
Despite their benefits, stablecoins have risks:
- Regulatory uncertainty – Governments may impose strict regulations at any time.
- Reserve transparency issues – Some issuers lack full disclosure of their backing assets.
- Algorithmic failures – Algorithmic stablecoins can lose their peg, as seen with TerraUSD.
- Counterparty risk – Centralized stablecoins depend on the trustworthiness of issuing companies.
The Future of Stablecoins
Stablecoins will likely play a key role in the evolving digital economy. Governments may introduce central bank digital currencies (CBDCs) as an alternative, while stablecoin regulations will continue to shape the industry.
As financial institutions and regulators work toward clarity, stablecoins could become a mainstream payment method, bridging the gap between traditional finance and the blockchain world.