What Are Stablecoins and How Do They Work?

Stablecoins are special cryptocurrencies designed to avoid the big price swings of other cryptocurrencies. These coins aim to maintain a steady value, usually by being linked to regular currency or assets like the dollar or gold. This makes them suitable for everyday spending and saving.

This article explains how stablecoins work, the different kinds, and how they might affect the financial system. We’ll also cover using them for payments: the good, the bad, and real-life examples.

This guide will show you how to buy and invest in stablecoins, step by step. It covers everything from understanding what they are to picking a place to buy them and making your first purchase. Whether you’re new to cryptocurrency or an experienced investor, this guide will help you get started with stablecoins.

What are Stablecoins?

Stablecoins are cryptocurrencies designed to keep a steady value, making them a safer option than other cryptocurrencies. Unlike Bitcoin and Ethereum, which are known for their changing prices, stablecoins stay stable because they’re linked to a reliable asset, like the US dollar.

This means their value is consistent, making them easier to predict. People use stablecoins to send money, pay for things, and even save money. They connect traditional banking with the cryptocurrency world, offering both stability and security.

Stablecoins are digital money tied to another currency or asset. They’re meant to be a less volatile option compared to popular cryptocurrencies like Bitcoin, which are too unpredictable for everyday spending. Most stablecoins are linked 1-to-1 with the US dollar and run on networks like Ethereum and Tron. They combine the benefits of blockchain technology with the stability needed for real-world use.

Stablecoins, which started around 2014, combine blockchain’s good points—like transparency and efficiency—with the financial stability needed for broader use. By addressing the issue of fluctuating crypto prices, stablecoins have opened up many new uses beyond just trading, attracting a wide range of users, from individuals to large companies.

At the time of writing, the total market capitalization of all stablecoins exceeds $300 billion, making it one of the most successful use cases for blockchain technology. Billions in dollars worth of stablecoins are also exchanged daily across major networks.

History of Stablecoins

Stablecoins started in 2014 with BitUSD on the BitShares network. Created by Charles Hoskinson and Dan Larimer, it used BitShares tokens as a backup but had problems and lost its dollar value in 2018.

Later in 2014, Tether (USDT), originally called RealCoin, appeared. It used real money to keep a 1-to-1 link with the US dollar. This worked better and was readily adopted by the market.

Now, stablecoins do more than help with trading. In places with unstable economies, like Argentina (where prices rose over 100% in 2022), these assets are essential for keeping money safe. They’re used for things like sending money across borders and everyday spending, showing how much they’ve changed since the beginning.

Lots of different kinds of stablecoins are being made now. From major players like Tether to innovative ideas testing new ways to manage money, each one helps us understand how digital money can remain stable in a changing market. 

What Makes Up a Stablecoin

Stablecoins, like other cryptocurrencies, use blockchain technology. They share the good points of blockchain: security, openness, and decentralization. Their main job is to keep a steady value compared to something else, making them useful as money in the digital world.

However, three major components make up a stablecoins. These include:

1. Issuer
2. Backing
3. Value Reference (“Pricing”)

Let’s take a closer look at each of these components.

Issuer

This refers to the company or entity that mints and distributes the stablecoins. In most cases, it is usually a centrally controlled entity, as is the case with Tether and Circle. The issuer creates new tokens in response to user demand for the stablecoin.

Beyond issuing tokens, the issuer ensures that there are enough assets held in reserves to back the stablecoins. They also handle redemption requests from large institutional holders who may want to mint or redeem their stablecoin for the underlying asset, such as US dollars.

Other kinds of stablecoins, like the DAI and Frax, are not managed by a centralized entity. Instead, it is managed by a decentralized autonomous organization (DAO). A DAO is essentially an internet community of individuals who share similar interests and investments to achieve a common purpose. You can read our beginner guide to DAOs here.

Backing

Stablecoins are usually a digital representation of an underlying asset. Hence, most stablecoins are asset-backed. Simply put, this means each coin is backed by a matching asset (like a dollar in a bank). Other times, the value might link to something different from the asset used as a backup.

Some stablecoins are backed by gold, silver, real estate, government bonds, and other assets. It can also be a combination of these assets, as long as the total value of the assets exceeds the amount of the stablecoin tokens in circulation.

Meanwhile, not all stablecoins use assets to keep their price steady. Some use so-called algorithms or computer programs to try to peg the stablecoin’s market value to a cryptocurrency or a group of them. An example is the Terra and UST stablecoin experiment in in 2021-2022. Notably, most attempts at creating an algorithmic stablecoin have often failed, leaving investors less impressed with the idea.

Value Reference (“Pricing”)

Closing relating to its backing, the simplest stablecoins match the value of the underlying asset (like a coin worth $1 backed by a dollar). Others might aim for $1 but be backed by something else (like a mix of dollars and gold). Some use the value of other assets (like oil), but instead of being backed by oil, they might be backed by contracts and pay out in dollars. The value it aims for and what you get when you trade it back in is often the same, but not always.

With the knowledge of what makes up a stablecoin, it is easier to understand exactly how they work, as discussed in the next heading.

How Do Stablecoins Work?

A stablecoin begins with the creation of the token by an issuer. Take, for example, a company we would call Stablecoin Makers. It can create a theoretical stablecoin which we will call SMB. To ensure stability, Stablecoin Makers keeps one U.S. dollar in reserve for every SMB token it creates. The dollar is the value reference.

For instance, Stablecoin Makers create 100,000 units of SMB tokens while keeping 100,000 USD in bank accounts as collateral to ensure that the assets are backed by dollars. It also ensures that the stablecoin meets regulatory standards and is available for use on the blockchain.

It releases the tokens on-chain, and people can convert other crypto assets to SMB with confidence that Stablecoin Makers has assets to back the tokens. To further increase user confidence, the company can employ an independent auditor to publish regular reserve updates confirming that SMB is fully backed.

Meanwhile, a large hedge fund needing to invest in crypto but needing dollars can contact Stablecoin Makers. The hedge fund could deposit $3 million in exchange for 3 million SMB tokens. The company adds the dollar deposit to its reserves and mints the stablecoins, which it hands to the hedge fund. After its activities, the hedge fund may redeem SMB tokens and receive its deposit back based on its agreement with Stablecoin makers.

In the last part, Stablecoin Makers earns revenue by investing its reserves in low-risk, highly liquid assets such as U.S. Treasury bills or short-term bonds. These investments generate modest returns while maintaining full backing for the tokens, ensuring that the stablecoin retains market trust. The profits can, in turn, be used to incentivize users to hold SMB ahead of other stablecoins, for instance, Stablecoin Makers can offer 2-4% base interest on SMB stablecoin. At the same time, it earns more from its investments.

Stablecoin Use Cases

Stablecoins, tied to things like the US dollar, are used in many ways. Here’s how:

• Payments

Stablecoins make quick, cheap international payments easier, skipping banks and saving money. Businesses can use them for online sales, making things faster and safer for buyers. People can send money across borders cheaply and easily. They’re also used for everyday spending and sending money to each other, offering a steadier choice than other cryptocurrencies.

• Decentralized Finance (DeFi)

Stablecoins are important for online lending and borrowing, acting as a reliable asset. They’re used in ways to earn money by providing funds or holding them. They also help traders keep their investments safer. They are inseparable from DeFi.

• Protecting Against Risk
  

Stablecoins can keep your money safe when markets change. They also help businesses and people protect themselves from changing currency values. Companies can use them to manage money and lower risks.

• Other Uses

Stablecoins connect traditional money and cryptocurrency, making it simple to switch between them. They allow digital assets to be priced in regular currency. In places with weak currencies, stablecoins can be a safe way to store money.

Types of Stablecoins

There are four major types of stablecoins, primarily based on what backs the asset. Regular money, other cryptocurrencies, algorithms, and things like gold back some. Each type has its own good and bad points.

Fiat-Collateralized Stablecoins

Stablecoins backed by regular money, like the US dollar or Euro, hold the same amount of that money as they have coins. Tether says it’s backed by dollars and other things, while USD Coin is fully backed by dollars kept in banks.

Crypto-Collateralized Stablecoins

Stablecoins backed by other cryptocurrencies use additional cryptocurrency to ensure the value doesn’t change too much. Smart contracts manage this by selling off some of the value if it drops. DAI, from MakerDAO, is an example; it’s backed by different cryptocurrencies, mainly Ether (ETH) 

Algorithmic Stablecoins

Algorithmic stablecoins change how many coins there are to keep the price steady. Smart contracts do this based on what people want. Terra’s UST (before it failed) was like this, using LUNA tokens. Ampleforth and Frax are other examples; Frax mixes this with backing by other assets.

Commodity-Backed Stablecoins

Stablecoins backed by things like gold or oil represent a certain amount of that thing. This is stored safely and tracked on the blockchain. Paxos Gold (one ounce of gold per token), Tether Gold, and Digix Gold are examples.

Popular Stablecoin Issuers

Stablecoin issuers are organizations or firms managing stablecoins to maintain their value by pegging them to assets like the US dollar or gold. This 1:1 reserve backing, coupled with transparency and regular audits, builds user trust.

While hundreds of stablecoins exist, Tether (USDT) and Circle (USDC) dominate the market. Others, though smaller, are reshaping the landscape.

1. Tether

Tether is the largest stablecoin issuer and offers liquidity across numerous blockchains. Despite past scrutiny regarding reserves and transparency, Tether cites audits and stress tests, highlighting its substantial holdings—over $100 billion in US Treasury bills primarily managed by Cantor Fitzgerald, rivaling many national reserves.

Here is a breakdown of assets backing the Tether (USDT) stablecoin, according to its July 2025 attestation report.

2. Circle is the second-largest stablecoin issuer.  prioritizes transparency with weekly attestations of its cash and short-term US government treasury reserves.

3. Paxos: issues Pax Dollar (USDP) and underpins PayPal USD (PYUSD) and other global stablecoin projects. Its commitment to transparency includes monthly attestation reports verifying reserves.

4. PayPal’s PYUSD, issued with Paxos, focuses on payments and maintains public transparency through regular reports on its Paxos-managed reserves.

Staking and Yield Farming with Stablecoins

Staking and yield farming simply involve depositing your stablecoin on DeFi protocols to earn yield on the asset. There are multiple ways to do this. The basic one simply involves lending your asset to other borrowers in exchange for interest. 

Popular DeFi protocols where you can do this include:

• Aave (Ethereum)
• Kamino (Solana)
• Jupiter Lend (Solana)

Some lending platforms pay stablecoin interest in kind, meaning you receive the units of the stablecoin. Others combine this with rewards in their native token to further incentivize users.

Beyond simply depositing the asset, you can also combine multiple stablecoins to provide liquidity to other traders swapping between different stablecoins. Depositors earn some fees on each swap through their liquidity pool, and the value can be compounded over time to boost their returns.

Stablecoin Regulatory Bodies

Global and national regulatory bodies are actively shaping the stablecoin regulatory landscape. Key players include the Financial Stability Board (FSB), Hong Kong Monetary Authority (HKMA), the UK’s Financial Conduct Authority (FCA) and Bank of England (BoE), and the Monetary Authority of Singapore (MAS).

At the international level, the FSB coordinates global standards for crypto-asset regulation, encompassing stablecoins. The G20 and Financial Action Task Force (FATF) focus on anti-money laundering (AML) and counter-terrorist financing (CFT) issues related to crypto-assets, including stablecoins. The International Organization of Securities Commissions (IOSCO) addresses market manipulation, fraud, and consumer protection concerns within the stablecoin market.

Furthermore, several national authorities are also developing their approaches. The HKMA is creating a regulatory framework, particularly for payment stablecoins, and has released consultation papers. The FCA and BoE in the UK are examining stablecoins’ role in payment systems and have published discussion papers outlining future regulations.

The UK’s Prudential Regulation Authority (PRA) is assessing risks associated with stablecoins, as highlighted in its “Dear CEO” letters. Singapore’s MAS has finalized its stablecoin regulatory framework.

Finally, the Reserve Bank of India (RBI) holds broad regulatory powers, including overseeing the banking system, consumer protection, and payment systems, extending to the regulation of stablecoins.

Benefits of Using Stablecoins

Price Stability: Unlike regular cryptocurrencies with big price swings, stablecoins are tied to things like regular money or gold. This makes them good for businesses that want to avoid the risks of changing cryptocurrency values. Businesses can easily set prices without worrying about sudden value changes.

Fast Transactions: often taking minutes, unlike banks, which can take days, especially for international payments. This speeds up money flow, letting businesses get paid quicker and work more efficiently. Faster payments also make customers happier.

Lower Transaction Fees: are usually lower than credit cards and other ways to pay. Credit card fees can be 2% to 4%, which adds up for businesses with lots of payments. Stablecoin fees are much lower, saving businesses money.

Global Accessibility: let businesses easily work with customers worldwide without changing money. Regular international payments use many middlemen, causing high fees and slow times. Stablecoins are easy to send and receive globally, making international business easier.

Transparency and Security: Blockchain makes all stablecoin payments clear and safe. Every payment is recorded publicly, so it’s easy to track. This reduces fraud and gives businesses more confidence. Blockchain’s security protects against hacking and keeps both business and customer money safe.

Disadvantages of Stablecoins

Stablecoins have benefits, but businesses should also consider these cons:

Regulatory Uncertainty: Laws for stablecoins are still being made. Governments worldwide are creating rules for digital money, including stablecoins. These new rules might change how stablecoins are used, taxed, or reported. 

Risks of Central Control: Stablecoins backed by real money are controlled by big companies. Businesses have to trust that these companies have enough money and can pay back when asked. If the company fails, the stablecoin’s value could drop. 

Central control can also hide things and allow for manipulation, hurting trust. For instance, stablecoin issuers often help governments blacklist assets held in cryptocurrency addresses involved in security breaches. 

One research shows that since 2016, Tether has blacklisted over 5,000 addresses holding over $2.9 billion in its stablecoins linked to terrorist financing. This level of central control, while beneficial, undermines public trust in stablecoins. In essence, your money can be collected from you at any time.

Technological Barriers: Using stablecoins requires technical skills and integration into existing money systems. This can be hard and expensive, especially for businesses without strong tech teams. Companies need to invest in technology, training, and security to make sure payments are safe and easy.

Stablecoins vs Traditional Fiat Currencies

Stablecoins serve as a crucial link between the fluctuating cryptocurrency market and the stability of traditional fiat currencies, creating an edge. Their key advantages include:

Enhanced Transactional Stability: Stablecoins provide a dependable medium for daily transactions, allowing users to purchase goods and services and send remittances without the risk of significant price fluctuations, thereby increasing their practicality for everyday use.

Simplified Fiat Conversion: Stablecoins streamline the conversion process between fiat currencies and cryptocurrencies, acting as a vital gateway for new entrants to the crypto market and providing a straightforward exit for those seeking to convert digital assets back into fiat.

Volatility Mitigation: Traders leverage stablecoins to mitigate market volatility. During periods of intense price swings, they can convert assets into stablecoins to safeguard against potential losses.

Where Can I Buy Stablecoins?

Coinbase: You can buy stablecoins like USDC and USDT on Coinbase with an approved payment method, such as a bank account, a debit card, or a wire transfer.

Binance: You can buy stablecoins like USDT, USDC, and EURI on Binance through the “Buy Crypto” page, using fiat currencies or other cryptocurrencies with approved payment methods.

Trust Wallet: You can buy stablecoins through Trust Wallet using their verified partners. This example utilizes Tether (USDT). To buy stablecoins, simply select “Buy” on the home screen.

Kraken: You can buy stablecoins on Kraken and exchange them for other cryptocurrencies. Kraken supports the buying, selling, and trading of over 200 cryptocurrencies, including top stablecoins like USDT and USDC.

How to Buy a Stablecoin

There are two ways to buy a stablecoin. One way is to buy it through a cryptocurrency exchange. Another is to buy it directly into your cryptocurrency wallet. In either case, you could have access to various funding methods, such as bank transfers, credit/debit card payments, and cryptocurrency deposits. Select your preferred method and adhere to the instructions provided by the platform.

Here’s an example of how to buy USDT on the popular crypto exchange Binance. Note that the steps could also apply to any other exchange, barring slight differences in the user interface.

How to Buy USDT on Binance:

• Create a Binance account and verify it.
• Click on Assets and then Add Funds
• Click on Buy with USD
• Select USDT as the coin to buy. You can also change the fiat currency if you are unable to pay with USD.
• Specify the amount.
• Follow the prompts to complete your purchase using a bank transfer or a card.
• Select “Buy” from the home screen.
• The purchased USDT would be added to your Binance wallet.

How to sell stablecoins

You can sell your stablecoins in almost the same manner you bought them. Change the menu option on the buy section from Buy to Sell. Provide your receiving method and then follow the prompts to sell the coins.

Alternatively, you can use the Trade section of the app to sell USDT for BTC or other cryptocurrencies. The process is relatively straightforward.

Meanwhile, some platforms also support selling USDT through peer-to-peer exchange, such as the one offered by Binance. Selling USDT for cash on Binance via P2P involves these steps:

• Access Binance P2P: Log in to your Binance account (app or website) and go to “Trade,” then select “P2P.”
• Select “Sell” and USDT: In the P2P section, choose the “Sell” tab and select USDT.
• Filter and Choose a Buyer: Use the filters to select your preferred payment method and fiat currency. Review available ads, prioritizing those with buyers who offer good prices and high completion rates.
• Create a Selling Order: Enter the desired USDT amount. Review the price, payment method, and total received before confirming.

How to Convert Crypto to Stablecoins Without Fees

Converting cryptocurrency to stablecoins without incurring fees requires strategic platform selection. Centralized exchanges (CEXs) like Crypto.com (offering zero-fee conversions between select stablecoins like USDC, BUSD, GUSD, and TUSD, but excluding USDT) and OKCoin (providing fee-free USD/USDK conversions) are viable options.

Notably, while Binance and MEXC aren’t strictly zero-fee, they boast competitive pricing and zero-fee pairs for certain assets. Deribit also stands out for its low-fee or fee-free trading pairs.

Decentralized exchanges (DEXs) such as Uniswap and Jupiter offer another route, facilitating swaps between numerous tokens, including stablecoins, often at lower costs than CEXs. DEXs provide advantages, including broader token diversity and continuous price availability, even in less liquid markets.

However, it’s crucial to consider several factors. Understand the distinctions between stablecoin types (fiat-backed, algorithm-backed, and commodity-backed) and their associated risks. Remember that crypto-to-stablecoin conversions may have tax implications; consult your local regulations.

Finally, prioritize security by using reputable and secure platforms for all transactions. While some exchanges advertise zero-fee conversions, be aware of potential fees for withdrawals or other transactions.

Future of Stablecoins

Stablecoins are set to be very important in the digital economy. They’ll likely support the global DeFi system, making financial services efficient, decentralized, and without needing a central bank.

Moreover, they connect blockchain and traditional finance and open up finance to more people. More people are using them, helped by clearer rules and better trust. Rules in places like Europe, Singapore, and Japan are making stablecoins more accepted and part of regular finance.

However, there are challenges. Uncertain rules, misuse, and questions about how reserves are managed could hurt trust and slow down their use. But stablecoins also offer big chances for financial inclusion, especially in areas that need it. They’re changing payments, money transfers, and trade finance by cutting costs and speeding things up. They also help create new financial products and make international trade easier.

Frequently Asked Questions FAQ

• Are Stablecoins Volatile? Stablecoins are built to be steadier than other cryptocurrencies. They’re usually tied to things like regular money or gold to keep their value the same. While some stablecoins may occasionally lose their peg, for example, dropping below the $1 mark for a while, they may usually bounce back and trade close to that figure again.
• Who created Stablecoins? Unlike Bitcoin, which is attributed to Satoshi Nakamoto, no single person is known to have created stablecoins. However, BitUSD was the first stablecoin, launched in 2014, when Charles Hoskinson and Dan Larimer built it on the BitShares blockchain. These early digital coins were their idea before they became famous in the crypto world.

• What are the most popular Stablecoins? Top 4 stablecoins by market value: Tether (USDT) $143.45 billion, USDC $58.69 billion, Ethena USDe (USDE) $5.42 billion, Dai (DAI) $3.22 billion. There are 31 more.

• Is USDT a Stablecoin? Yes, Tether (USDT) is a stablecoin, a cryptocurrency that aims for a steady value, usually tied to the US dollar. It’s a very popular and prominent stablecoin, worth about $143.45 billion.

• Can you make money on Stablecoins? Yes, you can earn money with stablecoins by lending them on centralized exchanges or cryptocurrency lending platforms like Nexo. Alternatively, you make money on stablecoins by depositing them on a DeFi platform that supports them. There are also more complex earning mechanics, which involve providing liquidity, or buying stablecoins that are slightly depegged and selling them when they recover. 

• Can I use Stablecoins for transactions? Yes, Stablecoins are great for sending money across borders because they’re reliable and easy to get. They’re a fast and cheap way to move money internationally.

• Which Stablecoin is the best to buy? The best stablecoins depend on what a user prioritizes. Popular choices include Tether (USDT), USD Coin (USDC), and DAI. 

• Is BTC a Stablecoin? No, Bitcoin is not a stablecoin. Stablecoins are designed to maintain a stable value by being pegged to traditional assets like fiat currencies.

Final Thoughts

Stablecoins are a big step forward in the world of cryptocurrency. They link the unsteady world of crypto with the reliable world of regular money. People use them for everyday tasks like payments and sending money across borders, as well as for complex financial apps.

Moreover, they’re faster, cheaper, and help protect against market swings. While there are still questions about rules and risks from being controlled by one group, stablecoins have a promising future. They could change financial systems worldwide and help more people have access to money. Their success will depend on solving current problems while leveraging their strengths to create a better financial system.

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