What Are Stablecoins?
Stablecoins are a category of cryptocurrency designed to maintain a stable value relative to a reference asset — typically a fiat currency like the US dollar or euro. Unlike Bitcoin or Ether, which can swing 10–20% in value within a single day, a well-designed stablecoin aims to be worth exactly $1 (or £1, or €1) at all times.
This stability makes them uniquely useful in the crypto ecosystem: as a medium of exchange, a store of value during market volatility, and the foundation of decentralized finance (DeFi) protocols. Stablecoins have grown from a niche product to a critical piece of financial infrastructure, with total stablecoin market capitalization exceeding $160 billion in early 2025.
Types of Stablecoins
Not all stablecoins achieve stability the same way:
- Fiat-Backed (Centralized) — The most widely used type. For every stablecoin issued, the issuer holds an equivalent amount of fiat currency (or near-cash equivalents) in reserve. Tether (USDT) and USD Coin (USDC) are the dominant examples, together accounting for over $130 billion in market cap. Their stability is robust but they require trust in a centralized issuer.
- Crypto-Backed (Decentralized) — Backed by cryptocurrency collateral held in smart contracts. Because crypto is volatile, these are over-collateralized — you might deposit $150 worth of ETH to mint $100 of DAI. MakerDAO’s DAI is the leading example. They are more transparent and decentralized but more complex.
- Algorithmic (Uncollateralized) — Attempt to maintain stability through algorithmic mechanisms that expand and contract supply based on demand. TerraUSD (UST) was the most prominent example — its catastrophic collapse in May 2022, wiping out approximately $45 billion in value, demonstrated the existential risks of algorithmic stability mechanisms.
- Central Bank Digital Currencies (CBDCs) — Government-issued digital currencies that function as stablecoins but are a liability of the central bank. The digital euro, digital yuan, and UK digital pound are all under active development.
Key Use Cases
- Crypto trading — Traders hold stablecoins during market uncertainty, moving in and out of volatile positions without converting back to fiat
- Cross-border payments — Sending stablecoins internationally can be faster and cheaper than traditional wire transfers
- DeFi applications — Lending, borrowing, liquidity provision, and yield farming in DeFi protocols all heavily rely on stablecoins
- Remittances — Workers in developed countries can send stable-value transfers to families in countries with volatile local currencies
- Payments — Merchants can accept crypto payments without exposure to cryptocurrency price volatility
Regulatory Landscape
Stablecoins have attracted significant regulatory attention globally. The EU’s Markets in Crypto-Assets (MiCA) regulation, which came into full effect in 2024, establishes specific licensing requirements for stablecoin issuers, reserve requirements, and redemption rights for holders. Tether faced restrictions on advertising in the EU due to non-compliance concerns.
In the US, Congressional debates over a federal stablecoin regulatory framework have continued for years. The central concern: issuers of dollar-pegged stablecoins are functionally engaged in dollar creation, with systemic implications that regulators believe require oversight equivalent to banking.
Risks and Limitations
Despite their name, stablecoins carry real risks. Fiat-backed stablecoins depend on the solvency and honesty of their issuer — Tether has faced longstanding questions about the quality of its reserves. Algorithmic stablecoins have demonstrated they can collapse completely. Smart contract bugs can drain crypto-backed stablecoin reserves.
For individual users, the key questions are: Is the stablecoin fully audited and collateralized? Is redemption for the underlying asset guaranteed? What is the regulatory status in my jurisdiction?
