https://www.techtarget.com/whatis/definition/stablecoin
A stablecoin is a type of cryptocurrency designed to maintain a stable market value by pegging its price to a reserve asset, such as a fiat currency, e.g., U.S. dollar (USD); a commodity, like gold; or even another cryptocurrency. Unlike traditional cryptocurrencies, such as bitcoin or Ethereum, which are highly volatile, stablecoins offer price stability, making them useful for everyday transactions, cross-border payments, decentralized finance (DeFi), and hedges against crypto market fluctuations.
Stablecoins continue to play a central role in the evolving crypto ecosystem, with businesses, governments and individual users alike adopting both centralized and decentralized models.
As a critical bridge between traditional finance and the blockchain economy, stablecoins provide several key benefits:
To understand stablecoins more clearly, it helps to explore the three major types currently in use.
Also known as fiat-collateralized stablecoins, these are backed 1-to-1 by real-world assets, such as government-issued currencies or commodities. Each token is redeemable for an equivalent value of the underlying asset, typically stored in a reserve account.
So, if a stablecoin is pegged to USD, then $1 is held in a bank account for each stablecoin issued.
If a stablecoin is pegged to the price of gold, then a specific amount of gold is held in a vault for each stablecoin issued.
In 2025, regulators in the U.S., European Union and Asia-Pacific regions implemented stricter disclosure requirements and reserve audits for fiat-backed stablecoin issuers, improving transparency but increasing operational burdens.
These are backed by other cryptocurrencies, usually overcollateralized to account for the volatility of the underlying assets. Instead of being managed by a centralized issuer, most use smart contracts to lock and release collateral.
Since the amount of cryptocurrency that backs up these stablecoins is more than the value of the stablecoin itself, any price fluctuations of the underlying cryptocurrency don't affect the value of the stablecoin.
While asset-backed stablecoins dominate in volume, a newer class uses no collateral at all, relying instead on algorithms for stability.
These stablecoins maintain their peg through automated monetary policies, typically using algorithms to expand or contract supply based on market demand. They rely on smart contracts to supply tokens to the market if the value increases and to sell tokens if the price falls below the peg. This ensures the stability of the token and enables it to hold its peg.
The asset to which the stablecoin is pegged could be a fiat currency, such as USD, or another asset, such as gold.
Since the collapse of TerraUSD in 2022, investor caution around algorithmic stablecoins has increased significantly. New models now focus on hybrid collateral-algorithm systems to mitigate risks.
As stablecoins mature, their practical applications continue to expand across both traditional finance and emerging blockchain ecosystems:
Stablecoins are also being explored for use in government-backed digital currency pilots and are integrated into Web3 wallets, blockchain-based gaming and metaverse marketplaces.
Despite their advantages, stablecoins are not without risk:
In response, stablecoin issuers have been pushed to adopt regular audits, proof-of-reserve mechanisms and transparency dashboards.
As stablecoins become more integrated into global finance, they're often compared to another form of digital currency gaining traction: central bank digital currencies (CBDCs). While stablecoins are private sector innovations, CBDCs are government-issued digital assets.
CBDCs, like the digital yuan and pilot versions of the U.S. digital dollar, are centrally controlled, offering more stability and legal clarity. Stablecoins offer faster innovation, more privacy and use in DeFi but are subject to market and legal risks.
Many financial experts expect coexistence, with stablecoins dominating DeFi and international payments, while CBDCs dominate retail public use.
Blockchain terminology may seem complex at first, but it's essential for anyone looking to navigate this innovative technology. This comprehensive glossary is your key to mastering the fundamentals of blockchain with confidence. Also, explore the benefits of cryptocurrency in business and common cryptocurrency scams and how to prevent them.
27 May 2025