What Is a Stablecoin?

In a world where cryptocurrencies like Bitcoin and Ethereum often make headlines for their volatility, stablecoins stand out as the closest thing to real money (i.e., fiat currency) that currently exists on the blockchain. Stablecoins are a type of digital currency designed to maintain a stable value while gaining the efficiency, mobility, and utility of blockchain-based digital assets.

The combination of price stability and on-chain functionality makes stablecoins uniquely suited for various financial applications that require reliability and efficiency. From facilitating fast and affordable global transactions to enabling access to decentralized finance (DeFi), stablecoins are reshaping how value moves across borders and through financial systems.

This article explores stablecoin fundamentals, types, use cases, and the transformative potential of stablecoins in the financial ecosystem.

Stablecoin fundamentals

The fundamental goal of stablecoins is, simply put, to achieve the best of both worlds: the reliability and trust associated with fiat currencies combined with the advantages (like high speeds, low costs, and added security) of being a blockchain-based asset. In this way, stablecoins act as a bridge between the fast-paced, innovative world of cryptocurrency and the trust and stability of traditional financial systems.

Combining reliability and efficiency

Stablecoins minimize price volatility by anchoring their value to stable assets, such as fiat currencies, commodities, or other financial instruments. Unlike traditional cryptocurrencies, which can experience significant price swings, stablecoins aim to offer the stability and reliability of traditional money while retaining the advantages enabled by blockchain such as fast, low-cost, highly-secure, transactions. Utilizing blockchain networks also allows stablecoin transactions to bypass banks and financial intermediaries — avoiding their associated costs and resulting in faster transaction times compared to traditional banking systems. Additionally, the 24/7/365 operational nature of blockchains empowers users to transfer funds with tremendous flexibility.

The measure of a good stablecoin

A truly well-designed and high-utility stablecoin is consistently stable in price, available 24/7/365, and backed 1:1 with transparent and safe reserves. These features make stablecoins a reliable medium of exchange, a store of value, and a unit of account in the digital economy, bridging the gap between traditional finance and cryptocurrency.

How do stablecoins work? Understanding the different types of stablecoins

Stablecoins come in different forms to meet varying needs and preferences within the financial ecosystem. Each type offers unique tradeoffs in terms of decentralization, stability, and risk. For instance, fiat-backed stablecoins are the most widely adopted due to their relative simplicity and transparency, while crypto-backed and algorithmic stablecoins might appeal to those seeking decentralized alternatives, despite their higher complexity and potential risks. Here we’ll examine the four main types of stablecoins:

Fiat-backed stablecoins

Fiat-backed stablecoins are the most widely used and trusted stablecoins. They typically rely on reserves of highly liquid assets such as cash and short-term government securities to ensure their value remains stable. USDC and EURC, for instance, are leading fiat-backed stablecoins that are fully backed by real-world assets and issued by Circle, adhering to strict regulatory and transparency standards, including regular audits and reporting on reserve backing. However, not all fiat-backed stablecoins offer the same level of transparency, regulatory compliance, or reserve backing, which can result in varying levels of trust and adoption.

Commodity-backed stablecoins

Commodity-backed stablecoins offer a way to digitize and transfer ownership of physical assets such as precious metals (e.g., gold or silver), oil, and real estate, among other commodities. Commodity-backed stablecoins allow users to hold and trade tokens that represent tangible assets through blockchain technology (a process often called “tokenization”), making it easier to invest in and transfer ownership of these assets. For example, PAX Gold (PAXG) is a commodity-backed stablecoin that represents ownership of physical gold stored in secure vaults. This approach provides a seamless way to gain exposure to commodities without the complexities of managing the physical asset itself.

Crypto-backed stablecoins

Crypto-backed stablecoins use cryptocurrency as collateral to maintain their value. While their value is often anchored to a stable asset like the US dollar, they are backed by cryptocurrencies instead of the asset whose value they try to match, creating a unique dynamic. USDS (formerly DAI), for example, is a widely used crypto-backed stablecoin that’s tied to the US dollar, but backed by a diversified pool of cryptocurrencies like ETH and USDC on the Sky.money (formerly MakerDAO) platform.

Crypto-backed stablecoins are often seen to cater to the decentralized finance ecosystem, as they often enable users to mint stablecoins on their own without relying on a centralized authority. Using the Sky.money platform, for example, users can deposit digital assets such as ETH into smart contracts to generate stablecoins. This decentralized approach offers greater autonomy in the stablecoin minting process and aligns with the principles of DeFi. However, the volatility of the underlying cryptocurrencies introduces higher risks compared to fiat-backed alternatives.

Algorithmic stablecoins

Algorithmic stablecoins use algorithms and smart contracts to regulate supply and demand in an attempt to maintain a stable value without relying on external reserves. Typically, these systems involve a two-token structure: one token functions as the stablecoin, while the other has a variable value determined by market forces. The value of the variable token is directly linked to the stablecoin's value through a mint-and-burn process that adjusts the supply of the algorithmic stablecoin based on market conditions.

When the stablecoin's price exceeds its target (e.g., $1), users are incentivized via an arbitrage opportunity to mint (or create) more stablecoins by burning (or destroying) the variable token, increasing supply and bringing the price back down. Conversely, when the stablecoin’s price falls below the target, users can burn the stablecoin to receive the variable token, reducing the stablecoin’s supply and pushing the price back up.

This theoretical stability mechanism depends heavily on market participants acting in predictable ways and on the stability of the secondary token. However, the reliance on arbitrage and market confidence makes algorithmic stablecoins particularly vulnerable to systemic risks and sudden market downturns. The collapse of TerraUSD (UST) exemplifies how these vulnerabilities can lead to catastrophic failures, causing significant losses for users and undermining trust in the model.

Note: the majority of stablecoin benefits and use cases discussed in this article apply mostly to reliable and trustworthy fiat-backed stablecoins like USDC.

Key benefits of stablecoins

Stablecoins are more than just a digital version of fiat currency. They offer distinct advantages by combining the stability of traditional money with the efficiency of blockchain technology. This unique blend makes them a versatile tool for various financial applications, allowing users to transfer value seamlessly across borders and integrate into emerging digital ecosystems.

• Price stability: Their stable value makes stablecoins ideal for everyday transactions and savings, as users can rely on stablecoins to avoid the extreme price swings seen in traditional cryptocurrencies. This reliability makes stablecoins attractive for managing day-to-day expenses and longer-term financial planning.
• Global accessibility: Individuals with an internet connection and a digital wallet in more than 180 countries around the world can use stablecoins, fostering financial inclusion by providing access to financial tools and services for the unbanked and underbanked. This ability to reach people across borders without needing a traditional bank account is transforming how individuals participate in the global economy.
• Efficiency: Stablecoin transactions that leverage blockchain technology are faster and cheaper compared to traditional banking systems, especially for cross-border payments. Unlike traditional financial systems that may take days and charge high fees for international transfers, stablecoins enable near-instant settlements at a fraction of the cost, making them ideal for remittances and global commerce.
• Programmability: Stablecoins are an integral part of the on-chain ecosystem, which is made up of smart contracts and decentralized apps (dApps). By providing a stable and predictable medium of exchange, stablecoins allow smart contracts to function more effectively in scenarios that require consistent value, such as automated payments, lending protocols, or decentralized marketplaces, opening doors to new financial services. By integrating with blockchain technology, stablecoins allow for programmable money, enabling automated transactions, lending, and more sophisticated financial instruments.

Use cases of stablecoins

Stablecoins like USDC have become integral to both traditional and decentralized finance. By maintaining stable value and offering the efficiencies of blockchain, they are used as a reliable store of value and as a tool for facilitating transactions, remittances, and various financial services across a wide range of industries. Here’s a quick look at some major stablecoin use cases:

Cross-border payments

Traditional remittance services are slow, costly, and often inaccessible to those without traditional banking infrastructure. Stablecoins provide a faster, cheaper alternative, settling transactions within minutes at a fraction of the cost. By bypassing traditional intermediaries, stablecoins enable cross-border payments that are not only efficient but also accessible to anyone with an internet connection. This makes them particularly beneficial for individuals in developing regions who rely on remittances for financial support.

See how USDC enables fast, low-cost, cross-border transactions that settle within seconds.

Financial services and DeFi

Stablecoins play a central role in DeFi, serving as a critical building block for a wide range of dApps. They enable lending, borrowing, and yield farming by providing a stable and predictable medium of exchange. This stability is crucial for DeFi protocols, where the volatility of traditional cryptocurrencies could otherwise interfere with the functionality of certain financial services (e.g., a loan collateralized with BTC or ETH could fall below its collateral threshold if BTC or ETH experienced a sudden price fluctuation). Additionally, stablecoins facilitate liquidity pools and trading pairs, further expanding the functionality and appeal of DeFi platforms.

See how USDC provides a stable medium of exchange and store of value for DeFi participants.

Everyday purchases

With global reach and stable value, stablecoins are increasingly becoming a preferred choice for online and in-person purchases. They offer merchants lower transaction fees compared to traditional payment processors and enable faster settlements. For consumers, stablecoins provide a straightforward and reliable way to make payments without the need for a bank account or credit card, particularly in cross-border transactions.

See how Solana Pay is helping bring the power of USDC to retail transactions.

Savings and investments

By maintaining a stable value tied to reliable assets like the US dollar, stablecoins like USDC enable users to maintain the value of their savings relative to the US dollar. Stablecoins also serve as an entry point to global financial markets, enabling individuals to save, invest, and transact in a stable digital currency. This can be particularly transformative for communities that have limited access to traditional financial systems.

See how USDC offers dollar access in over 180 countries.

Micropayments

Stablecoins make micropayments practical and efficient for content creators, gaming platforms, and online services. By reducing transaction fees to near zero, they enable seamless and cost-effective payments for small transactions that would otherwise be uneconomical with traditional payment systems. This is particularly beneficial in industries like digital content, where users can pay-per-use or tip creators directly, fostering more flexible and inclusive monetization models.

USDC exemplifies the above use cases by enabling users to send, spend, save, and trade with speed and reliability. Whether facilitating cross-border payments with minimal fees, supporting retail shoppers with low-cost transactions, or providing a stable store of value for savers, USDC demonstrates the practical benefits of a well-designed stablecoin. Additionally, its role in DeFi highlights its versatility, offering a dependable medium for trading and other use cases in on-chain ecosystems.

What is USDC?

USDC stands out as a gold standard in the world of stablecoins, offering a unique combination of trust, transparency, and efficiency. While many stablecoins aim to provide stability, USDC distinguishes itself by adhering to stringent regulatory¹ standards and undergoing regular audits, ensuring its backing with highly liquid and transparent reserves. This sets it apart as a stablecoin users and institutions can rely on.

Designed for security, simplicity, and interoperability, USDC plays a central role in the digital financial ecosystem. It outperforms many competitors by providing:

• Faster and cheaper transactions compared to fiat systems, making global transfers seamless and cost-effective.
• 24/7/365 accessibility in over 180 countries, enabling users to transact anytime without traditional banking delays.
• Full transparency, with regular third-party attestations affirming US dollars and other highly liquid cash equivalents are in fact safely held in reserve.
• Regulatory compliance, bolstering trust and ensuring adherence to the highest financial standards.

As a bridge between the reliability of traditional currencies and the innovation of blockchain, USDC empowers a wide range of use cases across both centralized and decentralized finance. Its proven track record makes it a preferred choice for users seeking a stable, trustworthy digital dollar.

The future of stablecoins

As the financial landscape continues to evolve, stablecoins are poised to play a central role in fostering global economic connectivity and inclusion. Governments are exploring central bank digital currencies (CBDCs), inspired by the stablecoin model. Meanwhile, private stablecoin issuers are working to enhance transparency, interoperability, and compliance to meet growing demand.

Stablecoins could become the foundation for a new era of programmable money, where financial transactions are efficient, inclusive, and can unlock innovative new use cases with smart contract programmability. Their ability to integrate traditional finance with blockchain innovation positions them as a key component of the future financial ecosystem. Whether you’re a business, an individual, or a developer, stablecoins offer a reliable gateway to the future of money.