Stablecoins: 10 Essential Facts and Key Risks Explained

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by

David Lee
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Modern digital illustration of a stablecoin with dollar sign on blue background

Stablecoins are a unique type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset such as the U.S. dollar, euro, or even gold. Unlike traditional cryptocurrencies like Bitcoin and Ethereum, which can be highly volatile, these crypto-pegged coins aim to provide the security of fiat currency with the flexibility of digital assets.

In this guide, we’ll explain what stablecoins are, explore 10 essential facts and key risks, and look at their role in the evolving financial system.

What Are Stablecoins?

Stablecoins are digital currencies pegged to stable assets like fiat currencies or commodities. Their primary goal is to reduce volatility in crypto transactions while still offering the benefits of blockchain technology.

Key Characteristics:

  • Pegged to stable assets (fiat, gold, or other reserves).
  • Available on blockchain networks for fast transfers.
  • Can be used for payments, trading, or saving.
  • Issued by private companies, not central banks.

Think of them as digital equivalents of traditional money but with blockchain efficiency. A dollar-pegged asset like USDC behaves like a paper bill—it holds its value against the U.S. dollar—but it can move globally in seconds, cost less to transfer, and integrate seamlessly with decentralized applications.USDC, for instance, behaves much like a banknote—it’s tied to the U.S. dollar—but can be transferred globally in seconds with low fees.

10 Essential Facts

  1. Pegged to Stable Assets – Most are tied to fiat currencies like the U.S. dollar, though some experiment with gold, commodities, or diversified reserves to spread risk.
  2. Types – There are three main categories: Fiat-backed (like USDC, USDT). Crypto-backed (such as DAI). Algorithmic (like the now-defunct TerraUSD).
  3. Low Volatility – Unlike Bitcoin’s 10% daily swings, these tokens aim for consistency. This makes them practical for payroll, subscriptions, and online commerce.
  4. Popular in Trading – Traders use them to park value during market dips. For example, when BTC crashes, moving into USDT provides stability without leaving crypto markets.
  5. Backed by Reserves – Some projects, like Circle’s USDC, publish audited reports of their reserves. Others have faced criticism for limited transparency, sparking debate about trust.
  6. Used Globally – In regions like Latin America and Africa, digital dollars serve as protection against inflation. In Asia, USDT dominates as a payment option for imports and online businesses.
  7. Not Risk-Free – Algorithmic tokens can unravel quickly. TerraUSD’s 2022 collapse wiped out billions, proving that design flaws can have devastating consequences.
  8. Regulation Increasing – The EU’s MiCA regulation and U.S. proposals now require issuers to disclose reserves and follow banking-like rules, signaling tighter oversight.
  9. Central Bank Competition – Many governments see these assets as stepping stones toward CBDCs. China’s digital yuan is already in pilot stages, competing directly with private synthetic fiat.
  10. Growing Market – By 2025, the market exceeds $150 billion in circulation, with USDT, USDC, and DAI leading the way. Their dominance in DeFi makes them unavoidable for most blockchain users.

These facts show why price-stable tokens are foundational to the digital asset economy—they provide the predictability that most cryptocurrencies lack.

Stablecoins vs. Traditional Cryptocurrencies

FeatureStablecoinsBitcoin/Ethereum
VolatilityLow (pegged to stable assets)High, market-driven
Use CasePayments, remittances, trading stabilityInvestment, speculation
BackingFiat, commodities, or algorithmsNo direct backing
AdoptionGrowing in DeFi and paymentsWidely used for trading and holding value

This comparison shows they serve complementary purposes. Bitcoin is digital gold, Ethereum enables smart contracts, and pegged currencies act as the bridge between fiat and blockchain ecosystems.

Why Do People Use Them?

People adopt these synthetic fiat coins for several reasons:

  • Trading – Provide quick conversion between volatile cryptocurrencies and stable-value assets without leaving blockchain ecosystems.
  • Cross-Border Payments – Deliver faster, cheaper, and more accessible transfers compared to banks or remittance services.
  • Savings – Offer a more predictable digital store of value for users in inflation-prone regions.
  • DeFi Applications – Enable lending, borrowing, liquidity pools, and staking—making them the backbone of decentralized finance.

For individuals in places like Argentina, Nigeria, or Turkey, where local currencies lose purchasing power rapidly, digital dollars provide stability. For businesses, they simplify payroll, cross-border invoicing, and settlement without relying on expensive intermediaries.okens give individuals a way to preserve purchasing power digitally..

Key Risks

Even though these reserve-backed crypto instruments solve volatility issues, they still carry significant risks:

  • Lack of Transparency – Some issuers fail to disclose reserve holdings fully, undermining trust.
  • Regulatory Crackdowns – Governments may impose restrictions, affecting availability and liquidity.
  • Algorithmic Collapse – Models without solid collateral mechanisms can lose their peg overnight.
  • Centralization Concerns – Many projects are run by private companies, raising concerns about accountability.
  • Dependency on Pegs – If reserves are mismanaged or redemption guarantees fail, stability can collapse.

These risks underscore why investors must choose projects with robust audits, clear governance, and regulatory compliance rather than blindly trusting every price-stable token.asize transparency and regulatory compliance.aditional banking.

Safer Alternatives and Future Outlook

  • CBDCs (Central Bank Digital Currencies) – State-backed digital money may directly compete with private pegged tokens, offering government-level assurance.
  • Regulated Coins – Assets with transparent audits, insurance, and compliance frameworks are safer for both institutions and retail users.
  • Traditional Payment Networks – Banks, PayPal, and fintech providers still offer reliable global transfers, though slower and costlier than blockchain.

The future will likely involve coexistence. Central banks may dominate the official digital currency market, while private blockchain-based stable assets remain essential for DeFi, gaming, metaverse applications, and peer-to-peer transactions.

Conclusion

Stablecoins bridge the gap between traditional finance and cryptocurrencies, offering the convenience of digital assets without the extreme volatility of Bitcoin or Ethereum. Yet, they come with risks—from opaque reserves to regulatory scrutiny—that users must understand.

By grasping the 10 essential facts and major risks, investors can evaluate how these price-stable blockchain tokens fit into their financial strategy. For traders, they provide liquidity; for remittance users, affordability; and for DeFi participants, a crucial foundation for innovation.

As adoption grows, their survival will depend on trust, transparency, and regulation. They may not replace fiat currencies or flagship cryptos, but they are positioned to remain a core part of the digital economy for years to come.

Resources

David Lee

David Lee serves as an economist at Tech24. He earned a bachelor’s degree in economics from the University of Chicago and a master’s degree in finance from the MIT Sloan School of Business. His career includes: From 2008 to 2013, he worked as an economic reporter for the Wall Street Journal, where he wrote various economic and financial articles. Since then, from 2013 to 2017, he worked as an economic analyst at Bloomberg, where he analyzed global economic trends and wrote reports. From 2017 to now, he has provided in-depth analysis and insights in technology economics as an economic analyst at Tech24. David Lee’s specialty is global economic trends, financial market analysis, the convergence of technology and economy, and start-up and venture capital. He won the “Best Economic Reporter of 2019” award from the International Economic Journalists Association and received great acclaim for his economic analysis report titled “The Impact of Technology on the Economy.” In addition, he contributed to the expansion of his readership with the series Global Economic Outlook conducted by Bloomberg. His vision is to provide readers with in-depth insights into the convergence of the global economy and technology through Tech24, and to help them make better economic decisions. Emphasizing the positive impact of technology on the economy, he wants to explore strategies for sustainable economic growth.