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 a category of digital currency created to minimize volatility by linking their value to stable assets such as fiat currencies, commodities, or diversified reserves. For example, one U.S. dollar–backed synthetic fiat token equals $1 in value. This peg is maintained through reserves, collateral, or algorithms depending on the type of stablecoin.

They are also referred to as price-stable cryptocurrencies, crypto dollars, or stable-value tokens, all of which describe their role as blockchain-based equivalents of money. Unlike central bank digital currencies (CBDCs), which are government-issued, stablecoins are typically launched by private companies or decentralized protocols. Their purpose is to provide liquidity, reduce volatility risks, and make blockchain technology usable for everyday payments, savings, and transfers.

Think of them as a digital version of traditional money that can move across the globe instantly, integrate with decentralized applications, and reduce costs compared to traditional banking networks.

Detailed Explanation

At their core, stablecoins solve one of the biggest limitations of cryptocurrencies: price instability. Bitcoin and Ethereum are revolutionary but often fluctuate wildly, making them impractical for day-to-day commerce. A stable-value cryptocurrency, however, offers predictable purchasing power while maintaining the benefits of blockchain.

Key Components of Stablecoins

  • Peg Mechanism – The peg is the anchor that holds the value. Most tokens are tied to fiat currencies like the U.S. dollar, euro, or yen, though some experiment with gold or mixed asset baskets.
  • Collateralization – The peg is supported in different ways. Fiat-backed stablecoins (USDC, USDT) keep reserves in banks. Crypto-backed tokens (DAI) are over-collateralized with digital assets in smart contracts. Algorithmic coins use supply-demand algorithms to maintain stability.
  • Blockchain Utility – Since they live on blockchains, stablecoins can be transferred globally within seconds, often at a fraction of the cost of bank wires. They also plug directly into decentralized finance (DeFi) applications.
  • Accessibility – They enable financial inclusion by providing an alternative in countries where banks are unreliable or local currencies are unstable.

Examples in Action

  • Trading: A trader converts Bitcoin into USDT during a crash, preserving value without leaving crypto markets.
  • Payments: A freelancer in Africa accepts payment in USDC, protecting earnings from inflation while skipping international wire fees.
  • DeFi Applications: A user deposits DAI into a lending platform, earning interest while holding an asset pegged to the dollar.

Stablecoins aren’t just tokens—they are financial instruments enabling liquidity, predictability, and innovation within the digital economy.ng stability, liquidity, and innovation within the digital economy.

10 Essential Facts About Stablecoins

1. Pegged to Stable Assets

Most stablecoins are pegged to fiat currencies such as the U.S. dollar, euro, or yen. Others explore gold, commodities, or diversified baskets. For example, USDC ensures that each token equals one U.S. dollar, while PAX Gold (PAXG) is backed by real gold reserves.

2. Types of Stablecoins

Stablecoins come in three categories:

  • Fiat-Backed (USDT, USDC): Simple and popular but rely on trust in issuers.
  • Crypto-Backed (DAI): Over-collateralized with other cryptos to reduce risk.
  • Algorithmic (TerraUSD): Managed by supply-demand mechanisms, but prone to collapse.

3. Low Volatility

Unlike Bitcoin, which can gain or lose 20% in days, stablecoins maintain steady value. This stability makes them suitable for payroll, e-commerce, and cross-border invoicing.

4. Popular in Crypto Trading

Traders park value in crypto dollars during volatile markets. For instance, during a Bitcoin downturn, moving into USDT preserves liquidity without converting back to bank-held dollars.

5. Backed by Reserves

Trust depends on reserves. USDC publishes audited reports, while Tether has faced scrutiny over transparency. This difference illustrates why reserve verification is key to credibility.

6. Used Globally

In countries like Argentina, Venezuela, and Nigeria, synthetic fiat tokens are increasingly used as digital dollars to shield savings from inflation and devaluation.

7. Essential for DeFi

DeFi protocols rely on price-stable tokens for lending, borrowing, staking, and liquidity pools. Without them, decentralized finance would struggle to function predictably.

8. Not Risk-Free

Algorithmic failures (like TerraUSD in 2022) showed that poor design can devastate investors. Even fiat-backed coins face risks if issuers mismanage reserves.

9. Regulation Increasing

Governments are implementing stricter rules. The EU’s MiCA regulation and U.S. proposals require disclosures, reserve audits, and compliance with banking-like oversight.

10. Growing Market Size

By 2025, the market for stablecoins surpassed $150 billion in circulation, led by USDT, USDC, and DAI. Their integration into DeFi and payments cements their role in blockchain economies.

History of Stablecoins

The idea of price-stable tokens emerged in the early 2010s as a response to crypto’s volatility. The first major stablecoin, Tether (USDT), launched in 2014, pegging each coin to the U.S. dollar. Despite ongoing controversies about reserve backing, Tether remains the most widely used stablecoin today.

In 2017, MakerDAO introduced DAI, a decentralized synthetic fiat token backed by crypto collateral and governed by smart contracts. This innovation made decentralized stablecoins a reality and laid the foundation for DeFi.

Later, USD Coin (USDC) was launched by Circle and Coinbase, appealing to institutions through transparency and third-party audits.

The DeFi boom of 2020–2021 highlighted stablecoins as the backbone of decentralized finance. However, the 2022 collapse of TerraUSD (UST), an algorithmic stablecoin, erased billions and revealed how fragile some models can be.

Today, stablecoins continue to evolve, while regulators and central banks explore launching CBDCs as state-backed alternatives.

Applications of Stablecoins

Everyday Payments

Stablecoins are increasingly used in e-commerce and peer-to-peer transactions, particularly in Asia. They act as digital cash that settles instantly.

Trading & Hedging

Traders use crypto dollars as safe havens during volatile markets, allowing them to hedge without leaving the crypto ecosystem.

Cross-Border Payments

Migrant workers and freelancers use synthetic fiat tokens for fast, affordable global transfers—often in minutes instead of days.

Savings & Inflation Protection

In inflation-stricken economies like Turkey, Argentina, and Nigeria, people rely on stable-value tokens to protect their purchasing power.

Decentralized Finance (DeFi)

Stablecoins are essential for DeFi applications such as lending, yield farming, staking, and liquidity pools. They provide the stability required for financial contracts.

Business Operations

Global companies adopt stablecoins for payroll, invoicing, and settlements. For international teams, paying in USDC or USDT cuts costs and delays compared to traditional banking.

Conclusion

Stablecoins blend the reliability of traditional finance with the innovation of blockchain, offering stability, liquidity, and global accessibility. While challenges like transparency and regulation remain, they are central to payments, savings, and DeFi, making them a foundational element of the digital economy and the future of money.

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.