Cryptocurrencies like Bitcoin and Ethereum are known for their volatility — prices can swing wildly in a single day. But what if you want the speed and innovation of crypto, without the risk of unpredictable value? That’s where stablecoins come in.
Stablecoins are a special type of cryptocurrency designed to maintain a stable value, often pegged to a real-world asset like the US dollar or euro. They combine the best of both worlds: the transparency and efficiency of blockchain, with the price stability of traditional currencies.
In 2025, stablecoins have become essential to the crypto economy. They’re used for trading, savings, cross-border payments, and powering DeFi platforms. In fact, they’re now the most widely used type of crypto in terms of transaction volume.
In this guide, you’ll learn:
- What stablecoins are and how they work
- The main types of stablecoins
- Their real-world use cases and why they’re crucial
- The risks behind their “stability”
New to crypto? Start here: What Is a Cryptocurrency? A Beginner’s Introduction
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency designed to keep its value stable — typically pegged to a fiat currency like the US dollar (USD), the euro (EUR), or even commodities like gold.
Unlike Bitcoin or Ethereum, which can swing up or down in price within minutes, a stablecoin aims to maintain a fixed value, such as $1 per token. This makes it ideal for everyday transactions, savings, and use within decentralized finance (DeFi) platforms.
But stablecoins still live on the blockchain. That means:
- You can send them globally, 24/7
- They’re fast and borderless
- They can interact with smart contracts, dApps, and DeFi protocols
In other words, stablecoins are the “crypto dollars” of Web3 — combining the stability of fiat with the power of decentralization.
Did you know? As of 2025, the most traded digital assets in crypto are no longer Bitcoin or ETH — they’re stablecoins like USDT and USDC.
How Do Stablecoins Work?
Stablecoins maintain their price stability by using different mechanisms to “peg” their value to a stable asset — usually 1:1 with fiat currency like the US dollar.
There are three main models used to keep a stablecoin’s price steady:
- Fiat-Backed Stablecoins
These are backed by real money in a bank. For every 1 USDT or USDC, there’s (supposedly) 1 actual dollar held in reserve.
They’re considered the most straightforward — and most widely used — type of stablecoin.
- Crypto-Backed Stablecoins
Instead of fiat, these are backed by other crypto assets like ETH. Because crypto prices are volatile, these stablecoins are often overcollateralized (e.g., $150 in ETH to mint $100 in DAI).
- Algorithmic Stablecoins
These rely on algorithms and smart contracts to maintain price stability by automatically adjusting supply and demand.
Warning: This model is experimental and has had failures — like TerraUSD (UST), which collapsed in 2022.
Not all pegs are created equal. Some stablecoins can lose their peg due to mismanagement, low reserves, or market panic.
Main Types of Stablecoins
Let’s take a closer look at some of the most popular and widely used stablecoins in each category:
Fiat-Backed Stablecoins
These are the most dominant in the market and are backed 1:1 by traditional currency held in reserves.
- USDT (Tether): The oldest and most traded stablecoin. Backed by a mix of cash, bonds, and other assets.
- USDC (USD Coin): Issued by Circle and known for greater transparency and regulatory focus.
- EURC (Euro Coin): Pegged to the euro, useful for users in the EU.
Use case: Trading, DeFi, remittances, payments.
Crypto-Backed Stablecoins
These rely on overcollateralized crypto assets like ETH or other tokens, often managed via smart contracts.
- DAI (by MakerDAO): One of the most respected decentralized stablecoins. Backed by ETH, USDC, and other assets.
- crvUSD (by Curve): A newer decentralized stablecoin gaining adoption in DeFi ecosystems.
Use case: DeFi lending, borrowing, yield farming.
Algorithmic Stablecoins
These use code and game theory to try and stay pegged — with mixed results.
- FRAX: Partially collateralized, partially algorithmic — a hybrid approach.
- UST (TerraUSD): Infamous example of failure — lost its peg and collapsed in 2022, wiping out billions.
Use case: Experimental, often high-risk.
Pro Tip: Fiat-backed coins dominate today, but decentralized stablecoins like DAI are essential for censorship-resistant finance.
What Are Stablecoins Used For?
Stablecoins are the backbone of real-world crypto usage. While volatile assets like BTC and ETH dominate headlines, it’s stablecoins that drive most of the activity behind the scenes.
Here are the main ways stablecoins are used today:
- Trading and Market Liquidity
Stablecoins like USDT and USDC are used as trading pairs across nearly all crypto exchanges. They provide a stable base asset to enter or exit positions without going back to fiat.
- Decentralized Finance (DeFi)
Most DeFi platforms use stablecoins for lending, borrowing, and earning yield. You can deposit USDC or DAI into lending protocols to earn interest — or borrow against them.
- Payments and Remittances
Sending stablecoins globally is fast and cheap — ideal for cross-border transactions, freelancers, and families sending money home. In many cases, cheaper and faster than banks or PayPal.
- Inflation Protection
In countries with high inflation or unstable currencies, users convert local fiat into stablecoins to preserve value. This makes them a powerful tool for financial inclusion.
- On-ramps and Off-ramps
Stablecoins act as a bridge between traditional finance and Web3. They’re used to cash in, cash out, or move funds between blockchains.
Whether you’re a trader, saver, or Web3 builder — stablecoins are essential to using crypto day to day.
Stablecoin FAQs
Are stablecoins really stable?
They’re designed to be — but stability depends on the backing model and market conditions. Fiat-backed coins like USDC are usually more stable than algorithmic ones, which can lose their peg in high volatility.
Can stablecoins lose their peg?
Yes. This can happen due to poor collateral management, market panic, or smart contract failures. A well-known example is TerraUSD (UST), which collapsed in 2022.
Is USDT safe to hold?
USDT is widely used and liquid, but it’s faced criticism for a lack of full audits. USDC is considered more transparent. Always do your research and diversify when possible.
What’s the best stablecoin to use?
It depends on your goals: USDC for transparency, DAI for decentralization, USDT for liquidity and availability
How do I store or transfer stablecoins?
You can hold stablecoins in any crypto wallet that supports them — from mobile apps to hardware wallets. Transfers are fast, global, and often cost just cents.
Final Thoughts: Why Stablecoins Matter in Crypto
Stablecoins are one of the most powerful innovations in the crypto space — combining the best of two worlds: the stability of traditional currencies and the efficiency of blockchain technology.
They make crypto usable for everyday payments, trading, saving, and building. And in 2025, they’re more than just a convenience — they’re a foundational layer of the Web3 economy.
But not all stablecoins are created equal. Understanding how they work — and which ones are safe — is key to using them wisely.
Whether you’re a beginner or a seasoned investor, mastering stablecoins is a must if you want to navigate the future of finance.
Ready to take the next step?
- Start your journey: How to Buy Your First Crypto
- Store it safely: Best Crypto Wallets in 2025 – Top Desktop & Mobile Wallets Ranked
