What are Stablecoins? [Definition, Types, and How They Work]

Stablecoins are digital currencies that maintain their value. They are usually linked to assets like the US dollar, gold, or other reserves.

Unlike Bitcoin or Ethereum, stablecoins don’t skyrocket one day and crash the next. Their predictable value makes them useful for payments, savings, and global transactions. Businesses and individuals rely on them to avoid market volatility while still enjoying the benefits of blockchain.

But what makes them stable? How do they work, and why do people trust them? Let’s break it down.

What are Stablecoins?

Stablecoins are digital currencies created to maintain their value. Unlike Bitcoin or Ethereum, which can change prices and exchange rates quickly, stablecoins remain predictable.

According to recent data, the total market capitalization of stablecoins already exceeded $220 billion in 2025. This indicates a clear sign of their significant role in the cryptocurrency ecosystem.

Key Features of Stablecoins

• Price Stability – They don’t swing wildly in value, making them useful for payments and trading.
• Blockchain-Based – Like other cryptocurrencies, stablecoins operate on decentralized networks for fast and secure transactions.

Backed by Assets—Most stablecoins maintain their value by holding reserves in fiat money, gold, or crypto.

Types of Stablecoins

Stablecoins come in different forms, depending on what keeps their value steady. Some rely on traditional money, while others use digital assets. Here is a stablecoin list for clear understanding:

1. Fiat-Backed Stablecoins

These stablecoins are linked to traditional currencies like the US dollar or euro. Each token represents an equivalent amount of the fiat currency held in reserve by financial institutions, ensuring stability and trust.​ 

Examples:

• Tether Stablecoin (USDT): As of August 1, 2024, Tether’s USDT leads the stablecoin market with a significant margin, contributing to a total market capitalization of $161.2 billion for USD-pegged stablecoins. ​
• USD Coin (USDC): According to the latest data, USDC was launched in 2018 by Circle in collaboration with Coinbase and has a strong market capitalization. It’s fully backed by cash and short-term U.S. Treasury bonds, with reserves held in U.S. banks. ​
• Binance USD (BUSD): Issued by Binance and approved by U.S. regulators, BUSD maintains transparency through regular audits. This ensures each token is backed by an equivalent amount of U.S. dollars held in reserve.

2. Crypto-Backed Stablecoins

Other cryptocurrencies collateralize these stablecoins. Due to crypto assets’ inherent volatility, these stablecoins often require over-collateralization to maintain stability.​

Examples:

• DAI: Managed by the MakerDAO protocol, DAI is the largest decentralized stablecoin. Its market capitalization is $5 billion, and it is backed by $10 billion in various crypto assets.
• sUSD: sUSD is a stablecoin issued on the Synthetix platform. It is backed by crypto assets and maintained through decentralized governance. And a strong collateral system keeps its value stable.

3. Algorithmic Stablecoins

These stablecoins don’t hold traditional reserves. Instead, they utilize algorithms and smart contracts to automatically adjust the supply based on market demand.​

Examples:

• Ampleforth (AMPL): AMPL adjusts its supply daily based on price changes. In 2024, AMPL’s market capitalization fluctuated. However, Ampleforth (AMPL) gained 17% in value during market upswings. This shows how AMPL adapts to market shifts. ​
• Frax (FRAX): Frax employs a hybrid model, combining algorithmic adjustments with partial asset backing to maintain stability. Frax holds its $1 value by balancing collateral and supply. Traders adjust prices through minting and redemption, keeping it steady.

4. Commodity-Backed Stablecoins

These are tied to real-world goods like gold, silver, or oil. Their value depends on the price of the asset they represent. 

Investors use them to hold digital versions of physical assets.

Examples:

• Paxos Gold (PAXG): Each PAXG token stands for one ounce of gold kept in LBMA-approved vaults in London. This allows investors to own and trade gold digitally without the challenges of physical storage.
• Tether Gold (XAUT): XAUT, issued by Tether, is a gold-backed stablecoin. Each token matches a set amount of physical gold, ensuring a stable value.

Digix Gold (DGX): Each DGX token is linked to one gram of gold, offering investors a simple and secure way to invest in gold through blockchain technology. ​

How Do Stablecoins Work?

Stablecoins keep the price steady by using reserves or special rules. They follow simple steps to stay reliable. 

Here’s how they work:

1. Backing the Coin with Assets: Most stablecoins hold real money, gold, or other valuable things. If a coin is worth $1, the company keeps $1 in a bank or another safe place.

2. Using Smart Contracts: Some stablecoins run on automatic programs called smart contracts. These programs adjust supply and demand to control prices. They work without banks or middlemen.

3. Managing Supply and Demand: If demand increases, more coins are created. If demand drops, some coins are removed. This keeps the price close to the target.

4. Crypto-Backed Reserves: Some stablecoins use other cryptocurrencies as a backup. Since crypto prices change fast, they keep extra reserves to handle risk.

5. Algorithmic Control: A few stablecoins don’t use any assets. Instead, they follow special rules to control prices. If prices go up, they make more coins. If prices drop, they remove some.

Benefits of Stablecoins

Stablecoins make digital money easier to use. They reduce risks, speed up transactions, and help more people access cryptocurrency. 

Here’s how they improve accessibility.

1. Less Price Fluctuation: Bitcoin’s price jumps around like a roller coaster. Stablecoins stay steady by linking their value to real assets, making them easier to use in daily transactions.

2. Faster and Cheaper Transactions: Traditional banks charge fees and take days to process payments. Stablecoins move instantly with lower costs, making global transfers smooth.

3. Easy Entry for New Users: Stablecoins offer a simple way to step in without dealing with sudden price drops. Many exchanges allow easy swaps between stablecoins and other cryptocurrencies.

4. Financial Inclusion: Not everyone has a bank account, but many have internet access. Stablecoins let people save, send, and receive money without a bank. 

5. Smart Contract Compatibility: Stablecoins work well with smart contracts, enabling automated payments and decentralized applications. This opens doors for new financial solutions.

The Impact of Stablecoins on Global Finance

Stablecoins are changing how people send, save, and use money. They provide fast, low-cost transactions without banks. 

Many developing countries use them to avoid unstable currencies and high fees.

Use Cases of Stablecoins

People use stablecoins for remittances, savings, and global payments. Here’s how they help in daily life:

• Remittances: Workers send money home using stablecoins, avoiding high bank fees and delays. For example, Félix uses USDC to reduce costs when transferring funds from the U.S. to Mexico.
• Savings: In countries with weak currencies, stablecoins protect money from inflation. Holding stablecoins can offer a stable store of value compared to local currencies.
• Cross-Border Payments: Businesses use stablecoins to pay international suppliers efficiently. BCRemit uses USDC to optimize global remittances, achieving unprecedented efficiency and cost savings.

The Role of Decentralized Finance (DeFi)

Stablecoins power DeFi platforms, where people borrow, lend, and trade without banks. Here’s how they help:

• Lending and Borrowing: You can lend stablecoins to earn interest or borrow them without strict bank rules.
• Trading: Traders can use stablecoins to switch between cryptocurrencies without losing value.
• Yield Farming: Investors stake stablecoins in DeFi pools to earn rewards.

How Are Stablecoins Regulated?

Their regulation varies globally, with countries adopting different approaches to ensure financial stability and consumer protection.

United States

In the U.S., stablecoin regulation involves multiple agencies:

• Financial Crimes Enforcement Network (FinCEN): Classifies stablecoins as convertible virtual currencies, subjecting them to anti-money laundering laws under the Bank Secrecy Act.
• Securities and Exchange Commission (SEC): Evaluates if stablecoins qualify as securities, bringing them under its jurisdiction.
• Commodity Futures Trading Commission (CFTC): Oversees stablecoins classified as commodities.

Recent legislative efforts, such as introducing the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, aim to create a federal regulatory framework for the payment of stablecoins.

United Kingdom

The United Kingdom is actively developing a comprehensive regulatory framework for stablecoins. Key developments include:

Financial Conduct Authority (FCA):

• The FCA has published Discussion Paper DP23/4, outlining its proposed approach to regulating fiat-backed stablecoins.

Guidance on Crypto Assets- 2019:

• This Consultation Paper (CP 19/3) brings digital assets, including stablecoins, within the UK’s regulatory perimeter.

Bank of England:

• The Bank of England has released a discussion paper on stablecoin regulations and is asking for feedback on its proposed rules.

These efforts show the UK’s push to regulate stablecoins while keeping payments secure and transparent.

European Union

The EU has introduced the Markets in Crypto-Assets (MiCA) Regulation to standardize crypto regulation across member states:

• E-Money Tokens (EMTs): Stablecoins tied to one fiat currency must follow electronic money regulations for compliance.
• Asset-Referenced Tokens (ARTs): Stablecoins backed by different assets must keep enough reserves to stay stable.

MiCA enforces transparency rules, requiring issuers to provide transparent reserve reporting and ensure 1:1 backing of their stablecoins.

Russia

Russia has taken a restrictive stance on cryptocurrencies, but discussions on stablecoin regulations are ongoing.

• Digital Financial Assets (DFA): Bans cryptocurrency payments but allows companies to issue private stablecoins under government supervision.
• Bank of Russia: Supports the development of a state-backed digital ruble instead of privately issued stablecoins.

Japan

Japan has legalized stablecoins under the Revised Payment Services Act:

• Stablecoin Issuers: Must be licensed banks or trust companies.
• Reserve Requirements: Stablecoins must be fully backed by cash or short-term debt instruments.
• Anti-Money Laundering (AML): Stablecoin transactions must comply with AML and counter-terrorism financing laws.

China

China has a strict ban on cryptocurrencies, including stablecoins. However, it is developing its own central bank digital currency (CBDC), the Digital Yuan (e-CNY).

• Private stablecoins like USDT and USDC are illegal for domestic use.
• The Digital Yuan (e-CNY): The state-backed currency is being tested for cross-border transactions and domestic payments.

Singapore

Singapore positions itself as a crypto-friendly hub with clear stablecoin regulations under the Payment Services Act (PSA):

• Stablecoin Issuers: Must register with the Monetary Authority of Singapore (MAS).
• Capital Reserves: Stablecoins must maintain 100% fiat backing.
• Consumer Protections: Issuers must provide clear redemption rights for stablecoin holders.

Singapore focuses on regulatory clarity and responsible innovation in the digital asset space.

The Future of Stablecoins

Stablecoins are rapidly evolving. It’s influencing the financial sector with its stability and efficiency. 

A new study by Juniper Research indicates that by 2028, businesses could save up to $26 billion globally by integrating stablecoins into their operations.

Projected Growth and Adoption

Stablecoins are gaining traction in global finance. In 2023, they settled $10.8 trillion in transactions. These numbers show a growing trust and reliance on stablecoins for everyday transactions.

Adoption is also rising because emerging markets are also turning to stablecoins. They offer faster, stable payments where local currencies struggle. 

For instance, Wyoming is advancing towards launching its own stablecoin by mid-2025.

Proposed Developments in Stablecoin Technology

The future of stablecoins involves several key developments:

• Regulatory Frameworks: Governments are working on clear regulations to ensure the safe issuance and operation of stablecoins, which is expected to boost user confidence and adoption.
• Technological Innovations: Advancements such as AI-powered stablecoin development are being explored to enhance stability and performance.
• Integration with Traditional Finance: Major financial institutions are increasingly engaging with stablecoins. For example, Visa is developing the Visa Tokenized Asset Platform (VTAP) to connect fiat currencies with blockchain.

Challenges and Concerns Around Stablecoins

Stablecoins offer many benefits, but they also bring challenges. From regulations to security, several issues need attention.

• Regulatory Uncertainty: Governments are still figuring out how to handle stablecoins. Some worry about their impact on national currencies and financial stability.
• Trust in Reserves: Not all stablecoins have clear backing. If reserves aren’t transparent, users may question whether their coins hold real value.
• Security Risks: Hacks and smart contract failures can lead to lost funds. A single flaw can put millions at risk.
• Centralization Concerns: Some stablecoins rely on central organizations. If they fail, users could lose access to their money.
• Market Manipulation: Price stability depends on strong systems. Weak designs can lead to sudden crashes, as seen in past stablecoin failures.

How Webisoft Can Help You Integrate Stablecoin? 

Adding stablecoins to your business can make transactions faster and more reliable. Webisoft, a blockchain development expert, helps you integrate them smoothly and securely.

Ensuring Regulatory Compliance

Stablecoin rules can be complex. Webisoft guides you through legal requirements, ensuring your business follows global compliance standards.

Stablecoin Development and Integration

Stablecoins are growing in importance. Webisoft helps you develop and simply integrate them. If you want to do it yourself, you can create a stablecoin, too.

Webisoft’s Blockchain Expertise

Webisoft has years of experience in blockchain solutions. Our deep knowledge allows us to create solutions that fit your business needs.

• Blockchain Platform Development: They have developed decentralized platforms that enhance data sharing and automate tasks using smart contracts, resulting in efficient and transparent business processes.
• Supply Chain Solutions: Webisoft’s blockchain supply chain development services provide businesses with transparent views of their supply chains. This will securely record transactions and ensure trust among stakeholders.
• Product Development: Webisoft offers advanced blockchain product development. Their expertise extends to building scalable blockchain products, which can help meet specific business needs.

Final Thoughts

Stablecoins bring stability to digital money, making payments and global transactions easier. They offer a reliable way to store and transfer value without the price swings of other cryptocurrencies.

However, security risks and regulations are still challenges. Businesses need secure and trusted solutions to use stablecoins safely.

As digital finance expands, stablecoins will play a more prominent role in the future of money. Understanding how they work will help you make better financial decisions and stay ahead in this evolving space.

FAQs

1. What is the primary purpose of stablecoins?

Stablecoins are designed to be stable, but there are risks. Security depends on reserves, regulations, and intelligent contract reliability.

2. Can stablecoins lose their value?

Yes, if reserves are mismanaged or trust is lost. Algorithmic stablecoins have failed before.

3. How do I choose a reliable stablecoin?

Check if it’s fully backed, audited, and widely accepted. Webisoft assists businesses in integrating trusted stablecoins into secure payment systems.

4. What is the best stablecoin to use?

It depends on your needs. USDC and USDT are popular for payments, while DAI offers a decentralised alternative

5. What happens if a stablecoin provider goes bankrupt?

If not adequately managed, reserves may be seized or lost. Webisoft helps implement decentralized alternatives that reduce reliance on single entities.