WHAT IS: Stablecoins
Stablecoins are digital currencies (cryptocurrencies) whose value is pegged, or tied, to that of another currency, commodity, or financial instrument.
Have you ever heard someone say they’re saving their money in stablecoins, and you just kind of nod like “ah yeah, for sure,” even though deep down you're like “Wait—what even is a stablecoin?”
At certain times, you’ll hear things like “it helps with inflation” or “it's safer than Bitcoin,” and then you sit there wondering if this is something you’re supposed to know by now.
While some might know it as the gateway or exposure to cryptocurrency, it goes much further than the basic understanding. However, it's not complicated either.
Now, before you think of converting your earnings into stablecoins, it’s important you know what it is and what they entail.
David Adubiina
What is a Stablecoin?
Basically, stablecoins are digital currencies (cryptocurrencies) whose value is pegged, or tied, to that of another currency, commodity, or financial instrument.
To explain this: it's like holding something digital that doesn’t swing wildly in value every day, because it’s tethered to something stable, like the US Dollar, Euro, or even gold.
Stablecoins aim to provide a non-volatile utility, an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC) and Ethereum (ETH), which to be honest are good for long-term holding but sometimes feel like financial roller coasters in the short-term.
What Brought About Stablecoin Relevance?
Bitcoin might be seen as digital gold, sometimes even more valuable than the real thing, but it’s wildly unpredictable and volatile. One moment you're up, the next you're in a dip. It’s like playing a game of probability without a guaranteed outcome.
And while volatility is part of what fuels the crypto market, giving traders room to profit, it makes daily transactions tricky. You don’t want to be that person who paid 2 BTC for a pizza in 2010, only to find out you dropped hundreds of thousands on a few slices.
For a currency, especially one that isn’t legal tender, to work as a reliable medium of exchange, it needs stability. And that’s where stablecoins come in. They bridge the gap between the predictability of fiat money and crypto adoption.
Types of Stablecoins
Now, not all stablecoins are created equal. Their stability comes from different backing mechanisms, and here’s how they’re categorized:
1. Fiat-Collateralized Stablecoins
These are backed 1:1 by fiat currencies like the US Dollar or Euro, usually held in bank accounts. Think of them as the most straightforward version.
- Examples: USDT (Tether), USDC (Circle), BUSD (Paxos/Binance — now phased out)
- How it works: For every stablecoin issued, there’s a real dollar sitting in a reserve somewhere (in theory, at least).
- Good for: Traders needing a quick parking spot between crypto trades. Also useful for cross-border remittances.
2. Commodity-Backed Stablecoins
These are backed by tangible assets like gold or oil. It’s crypto with a taste of the physical world.
- Examples: PAXG (Paxos Gold), XAUT (Tether Gold)
- How it works: Each token represents ownership of a certain amount of the commodity, stored in a vault.
- Good for: People who want exposure to precious metals but in digital form, or who want to hedge against inflation without trusting fiat.
3. Crypto-Collateralized Stablecoins
Now this one's a bit more DeFi-native. These are backed by other cryptocurrencies. Sounds risky? It is — kind of — which is why they’re usually overcollateralized.
- Examples: DAI (MakerDAO)
- How it works: You lock up more value in crypto than you mint in stablecoins. For example, lock $150 of ETH to mint $100 of DAI.
- Good for: Users and folks who want a decentralized option that isn't backed by banks or a centralized entity.
4. Algorithmic Stablecoins
These ones try to stay pegged not by holding reserves but by using code. Smart contracts adjust the supply based on market demand.
- Examples: (Notable past one: TerraUSD — which spectacularly collapsed)
- How it works: Think of it like a central bank but run by code. If the price drops below $1, the supply contracts. If it goes above, supply expands.
- Good for: Experimentation, though most of these have struggled to maintain long-term stability.
How Do Stablecoins Work?
At the core, stablecoins try to stay pegged to whatever they’re tied to — usually $1. They do this by:
- Holding reserves in banks (fiat-backed)
- Using overcollateralized smart contracts (crypto-backed)
- Or adjusting supply automatically (algorithmic)
When done right, this means your $100 in stablecoins today is still worth $100 tomorrow. You get the flexibility of crypto and the reliability of traditional money.
Real-World Use Cases
Stablecoins are not just some niche side project in the crypto space. People and institutions are using them every day in ways that actually solve problems. Some of which include:
1. Everyday Payments
Sending money across borders is still a nightmare with banks. Stablecoins let people move value instantly, with lower fees and no middlemen.
2. DeFi & Yield Farming
Stablecoins are the base currency for most DeFi apps. You can earn interest, provide liquidity, and participate in complex strategies — all while staying stable.
3. Protection Against Inflation
In countries where local currencies are falling apart (Nigeria, Brazil, Ghana), people are turning to stablecoins to survive. It’s easier to get USDC than actual USD in many places.
4. On/Off Ramps
They’re also a gateway. When you convert your cash into crypto, chances are you're buying stablecoins first. Same when you’re cashing out.
Challenges
Stablecoins might seem solid, but they’ve got their own share of issues, just like any new tech product launched.
Regulatory Pressure
Governments are watching closely. A $160+ billion market that behaves like money but doesn’t go through the same checks? That’s got regulators on edge. There’s real talk of treating big stablecoins like financial infrastructure — the same category as big banks and payment networks.
Trust & Transparency
Not all stablecoins are open books. Some don’t show clear audits. Some claim to be fully backed but only reveal partial info. If people lose trust in a stablecoin’s backing, its peg can break, and things get messy real quick.
Algorithmic Failures
The collapse of TerraUSD showed that code isn’t always enough. Algorithmic stablecoins sound smart, but when confidence dies, no algorithm can save the price. Billions were wiped out, and it reminded everyone that not all “stable” coins are truly stable.
David Adubiina
Conclusion
While stablecoins have proved their worth as a financial instrument — a way to hedge against inflation, skip the volatility, and still stay in the crypto game — it’s important to remember they aren’t foolproof.
They can depeg. And when they do, it’s usually not pretty.
Sometimes this can be due to poor reserve management, market manipulation, or pure panic, and once people start losing confidence, it’s a slippery slope. We’ve seen it happen with Terra's USD stablecoin and others.
So yeah, stablecoins are useful. Game-changing, even. But don’t let the word “stable” fool you into thinking they’re immune to market uncertainties. Do your homework. Understand what’s backing it. And never risk more than you’re willing to lose.
