Stablecoins are a type of cryptocurrency designed to maintain a stable price by pegging their value to a real-world asset, such as the US dollar or gold. This stability makes them a reliable medium of exchange, unlike highly volatile cryptocurrencies like Bitcoin. The current global stablecoin market is valued at approximately $255 billion as of June 2025.

How They Work

Most stablecoins work by holding a reserve of the underlying asset (like cash or government bonds) equal to the number of stablecoins in circulation. When a user wants to redeem their stablecoins, the issuer exchanges them for the equivalent amount of the reserve asset, ensuring a consistent value, usually a 1:1 ratio with the pegged currency.

Types of Stablecoins

There are four primary types of stablecoins, each using a different mechanism to maintain stability:

  • Fiat-Collateralized Stablecoins: These are backed by traditional currencies like the US dollar or the euro, held in reserves by a central issuer (e.g., USDC, Tether).

  • Crypto-Collateralized Stablecoins: These are backed by other, more volatile cryptocurrencies and are often over-collateralized to manage price fluctuations (e.g., Dai).

  • Commodity-Backed Stablecoins: Each token is backed by a physical commodity such as gold or silver (e.g., PAX Gold).

  • Algorithmic Stablecoins: These do not use collateral but rely on algorithms and market mechanisms to control supply and demand to maintain their peg (e.g., the former TerraUSD).

Benefits and Risks

Benefits

  • Price Stability: They offer the stability of fiat currency with the benefits of cryptocurrencies.

  • Enhanced Efficiency: They allow for fast, low-cost global payments and cross-border transactions, reducing reliance on traditional intermediaries.

  • DeFi Integration: Stablecoins are foundational to decentralized finance (DeFi) ecosystems, serving as key collateral and liquidity.

Risks

  • Liquidity Risk: In a "digital bank run," issuers might not have enough liquid reserves to cover mass withdrawal requests, potentially breaking the peg.

  • Regulatory Uncertainty: The treatment and oversight of stablecoins are still evolving, posing risks for businesses and investors.

  • Transparency Concerns: The trustworthiness of some issuers' reserves and management practices is a concern for some users.

Some of the most used and recommended stablecoins include:

  • Tether (USDT)

  • USD Coin (USDC)

  • Dai (DAI)

  • PayPal USD (PYUSD)

  • Ripple USD (RLUSD)

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Disclaimers:Info and knowledge sharing.Not a financial advice.

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