What Is a Stablecoin? A Guide to Price-Stable Cryptocurrency

Imagine you want to send money to a relative in another country using crypto, but you are worried Bitcoin might fall 5% before they receive it. Or you have a profit on Ethereum and want to lock it in, without moving funds all the way back into your bank account.

In both cases, price volatility gets in the way. Stablecoins aim to fix that problem. They are built to give you the speed, transparency, and security of cryptocurrency, combined with a value that stays close to traditional money.

What is a stablecoin?

A stablecoin is a type of cryptocurrency that tracks the value of something outside the blockchain, called a “peg.” The peg is usually $1.00, but it can also be gold or another asset.

Bitcoin’s price is set purely by supply and demand, so it can swing wildly. A stablecoin, on the other hand, is structured to stay at or near a target price, most often $1.00.

You can think of a stablecoin as digital cash that lives on a blockchain. Just like you might hold dollars in PayPal or a banking app, you can hold stablecoins in a crypto wallet.

The key difference is reach. You can send stablecoins globally, 24/7, without waiting for bank hours or paying international wire fees.

How stablecoins maintain value

To keep a token worth roughly $1.00 (or the value of its chosen asset), most stablecoins use some type of reserve system.

For every token issued, the issuer is meant to hold real-world assets in reserve. When you redeem a stablecoin for regular money, the issuer pulls from that reserve to pay you and then removes the token from circulation.

In theory, this means every stablecoin is backed by something with real value. In practice, it depends heavily on how honest, transparent, and well managed the issuer is.

Not all stablecoins are built the same way. They use different methods to try to keep their peg.

The four main types of stablecoins

Stablecoins are usually grouped by how they try to maintain their peg.

1. Fiat-collateralized

This is the most common type. These stablecoins are backed 1:1 by government currencies such as the US dollar or euro, often combined with very safe assets like short-term US Treasury bills.

• Example: USDC, EURC

• How it works: If there are 1 billion tokens in circulation, the issuer should hold $1 billion in cash and high-quality assets in bank accounts or approved custody. Users rely on the issuer's promise that tokens can be redeemed 1:1 for dollars, subject to the issuer's terms.

2. Crypto‑collateralised

These stablecoins are backed by other cryptocurrencies, not by cash in a bank. Because crypto collateral such as Ethereum is volatile, the system uses “over‑collateralisation” to stay safe.

• Example: USDS
• How it works: To create (mint) USD $100 worth of a stablecoin, a user might need to lock up USD $150 worth of Ethereum or another approved asset in a smart contract.

If the value of the collateral falls too far, the protocol can automatically sell (liquidate) it to make sure there is always enough backing behind the stablecoin.

This model removes some centralisation risk, but introduces smart contract and market risk.

3. Commodity‑backed

Commodity‑backed stablecoins are pegged to the value of physical assets, most commonly gold.

• Examples: PAX Gold (PAXG).
• How it works: Each token represents a specific amount of a real‑world commodity, for example one troy ounce of gold, stored in secure vaults.

This lets users gain exposure to assets like gold in a digital, easily divisible form, without having to arrange storage or insurance themselves.

4. Algorithmic and synthetic

Algorithmic and synthetic stablecoins are the most complex and experimental category. Instead of holding full reserves in cash or crypto, they use algorithms, smart contracts, derivatives or hedging strategies to target a stable price.

• Examples: Ethena (USDe).
• How it works: The system might automatically increase or reduce the supply of tokens, or use futures and other financial instruments, to offset price moves and keep the token close to its peg.

Some of these projects have failed in the past, with tokens losing their peg permanently. This category tends to carry higher risk than fully‑backed stablecoins. Pure algorithmic stablecoins, like TerraUSD (UST), which relied entirely on code and token mechanics without real asset backing, are now largely defunct.

Ethena's USDe uses algorithmic strategies and is often called a "synthetic dollar," but unlike UST, it is backed by crypto assets (staked Ethereum) and uses derivatives contracts to hedge against price movements.

This means it has actual collateral behind it, unlike pure algorithmic models that collapsed when market confidence broke down.

Real-life examples: How stablecoins are used

Stablecoins have grown far beyond a simple trading tool. People and businesses now use them in everyday situations.

Global remittances

Sending money across borders through banks can be slow and expensive. Transfers can take days, and fees add up.

With stablecoins, a sender can buy tokens on an exchange or app, then send them to a recipient’s wallet almost instantly. The recipient can choose to hold the stablecoins, convert them into their local currency, or use them directly, depending on local options.

Since the value is tied to something like the US dollar, both sides avoid sudden price swings during the transfer window.

Decentralized Finance (DeFi)

Stablecoins sit at the core of DeFi. Many DeFi apps are built around them because their price is relatively steady.

Users can:

• Deposit stablecoins into lending platforms to earn interest.
• Provide stablecoin liquidity to decentralized exchanges.
• Use stablecoins as collateral for loans or other strategies.

Because the asset itself is designed to be stable, yields and returns can be easier to track compared to using volatile tokens like Bitcoin or small-cap altcoins.

Trading and safety

Traders often use stablecoins as a “parking spot” when markets get choppy. Instead of converting crypto back to dollars in a bank account, they swap BTC, ETH, or other tokens into stablecoins.

This lets them keep value close to dollars while staying inside the crypto ecosystem. They can then move quickly into new trades when they see an opportunity.

In many places, selling crypto into fiat can trigger a taxable event. Moving into a stablecoin may also be taxable, depending on your local laws, so US users should talk with a tax professional.

Risks and red flags

Stablecoins are built to be more predictable than regular crypto, but they are not risk-free. It is important to understand what can go wrong.

• De-pegging events: In times of stress, technical failure, or poor design, a stablecoin can lose its peg. For example, it might trade at $0.95 instead of $1.00. Some major stablecoins have recovered from short-term de-pegs, while others have failed completely. Recovery is never guaranteed.

• Reserve transparency: You are trusting that the issuer really holds the reserves they claim. Strong issuers publish regular attestations or audits from reputable third parties, listing the types and amounts of assets held. Lack of clear, timely reporting is a red flag.

• Centralization: Fiat-backed stablecoins are managed by companies or foundations. They can freeze or blacklist specific wallet addresses when required by law enforcement or regulators. This can be positive for compliance, but it means you do not have the same level of censorship resistance as with Bitcoin.

• Counterparty risk: When you hold a centralized stablecoin, you are exposed to the health and behavior of the issuing company. If it becomes insolvent, mismanages reserves, or faces regulatory action, the token’s value and redeemability may be affected. Holders might not get all their money back in a worst-case scenario.

The future of stablecoins

As crypto matures, stablecoins are being pulled into the wider financial system, not pushed out of it. Policymakers around the world are drawing up rules that focus on reserve quality, transparency, and governance.

In Europe, for example, the Markets in Crypto-Assets (MiCA) framework sets strict standards for stablecoin issuers. In the United States, lawmakers and regulators continue to debate federal rules for payment stablecoins and their issuers.

At the same time, traditional financial players are getting involved. Major payment companies, fintechs, and banks are exploring or launching stablecoins to speed up settlements and cross-border transfers.

All of this points toward a future where stablecoins are not only tools for crypto traders. They may become a common way to move money online, pay for goods and services, and bridge between digital assets and traditional banking.