What Is a Stablecoin?

A stablecoin is a cryptocurrency whose value is linked to another asset, usually the U.S. dollar. It is a digital currency designed to maintain a stable value by being tied to a reference asset such as fiat currencies, precious metals, or other financial instruments.

Unlike cryptocurrencies like Bitcoin, which are extremely volatile, stablecoins are perfect for those who want to invest in digital assets without having to worry about the constantly changing market value of their investments.

So, if you are interested in stablecoins and you want to learn more about them, this article is perfect for you. Keep reading to learn everything you need to know.

How Do Stablecoins Work?

Stablecoin issuers like Tether, which issues USDT, and Circle, which issues USDC, create and manage stablecoins. When users deposit fiat currency, these companies issue an equivalent amount of stablecoins backed by reserves. These reserves may include:

• Cash
• Treasury securities
• Money market funds

Issuers must maintain enough high-quality, liquid assets to ensure that each stablecoin can be redeemed at $1. This is why it is important to trade stablecoins from reputable issuers only. Unfortunately, there are issuers that simply don't have the reserves that they claim they have.

In crypto exchanges, stablecoins are used in secondary markets, acting as trading pairs (BTC/USDT), safe havens during volatility, and liquidity sources in DeFi and lending protocols. In short, they serve as a bridge between crypto assets and fiat currencies.

As such, they are perfect for digital payments, especially for cross-border payments, where traditional payment methods would require intermediaries and higher payment processing fees. They are also great for crypto enthusiasts who want to use crypto in day-to-day transactions.

4 Main Stablecoin Types

There are four main stablecoin types:

• fiat-collateralized
• crypto-collateralized
• commodity-backed
• algorithmic

Fiat-Collateralized Stablecoins

These stablecoins are backed 1:1 by fiat currencies. This means that, for every dollar (or another currency), buyers get one stablecoin. Probably the most famous fiat-collateralized stablecoins are Tether and USDC. Both stablecoins are pegged to the U.S. dollar.

Fiat-collateralized stablecoins are popular because of their transparency and simplicity. Investors in these coins are protected against the volatility of other cryptocurrencies, and there are frequent audits that ensure the legitimacy of these coins.

However, while traditional cryptocurrencies are completely decentralized, stablecoins come with a certain level of centralization.

Crypto-Collateralized Stablecoins

These stablecoins are backed by other cryptocurrencies (collaterals), using smart contracts to stay decentralized. They are usually over-collateralized, which means they aren't backed 1:1 by another cryptocurrency.

Instead, the value of the collateral exceeds the value of the stablecoin. This ensures some level of safety in case the price of the collateral becomes unstable.

The most popular crypto-collateralized stablecoin is DAI (running on the Ethereum blockchain). While it is more decentralized, its main disadvantage is that it can be riskier and more volatile than fiat-backed stablecoins due to the fluctuating value of its crypto collateral.

Commodity-Backed Stablecoins

Surprisingly enough, there are many users who want to combine cryptocurrencies with more tangible commodities, such as gold and oil. This is a great and practical way to trade these commodities, without ever having to leave the online world.

Additionally, commodity-backed stablecoins can experience rapid growth if the commodities backing them appreciate, which is usually the case. However, this can also lead to depreciation and loss of value.

There are also certain safety concerns regarding these stablecoins, as well as the issue of maintaining reserves.

Algorithmic Stablecoins

Unlike the previous three types, this stablecoin type isn't actually backed by dollars, other cryptocurrencies, commodities, or any other assets. Instead, complex algorithms are used to control this stablecoin's supply, which is not that different from central banks controlling the money supply.

In theory, these stablecoins should be as safe as reserve-backed coins, thanks to these complex algorithms and game theory.

However, one of the most famous algorithmic stablecoins, TeraUSD, proved this to be wrong. It was an algorithmic stablecoin that collapsed in 2022 and caused its issuer company to file for bankruptcy 2 years later.

Do Stablecoins Maintain Their Value?

The main purpose of creating stablecoins was to create cryptocurrencies that would maintain their value over time. However, several cases have shown that these coins can lose their peg, and the consequences are often catastrophic.

Still, even though they aren't a perfect solution, stablecoins usually maintain their value. If you are looking to invest in a stablecoin, do some research first. Only invest in transparent stablecoins that are well-backed.

What Are the Top 5 Stablecoins?

If you had to choose only one stablecoin to invest in, which coin would it be? Well, that depends on several factors, including your goals and expected return on investment. However, here are the most popular stablecoins at the moment:

• USDT (Tether)
• USDC (USD Coin)
• DAI
• FDUSD (First Digital USD)
• TUSD (TrueUSD)

USDT (Tether)

USDT is the oldest and most widely used stablecoin. It is backed 1:1 by the U.S. dollar, and its reserves are held in several forms: cash, treasury securities, and other short-term instruments. This stablecoin is extremely liquid, which is why it is so popular among crypto traders.

That's why USDT is one of the most traded cryptocurrencies in the world, and there are days when it surpasses the traded amounts of Bitcoin%20in%20financial%20transactions.). Another benefit of USDT is that its issuers are constantly working on improving the transparency, publishing regular reserve reports.

USDC (USD Coin)

USDC is praised as the most transparent stablecoin, which is promising in case future stablecoin legislation attempts to limit trading to only selected stablecoins. Just like USDT, USDC is fully backed by the U.S. dollar and short-term treasury securities.

Within the DeFi system, traders use USDC for lending, borrowing, and yield farming. Thanks to its integrations with Visa, Shopify, and various fintech platforms, USDC is being used in various payments.

It has lost some market share to USDT recently, especially in Asia. However, it remains a strong candidate for long-term, regulated stablecoin infrastructure.

DAI

DAI is an example of crypto-collateralized stablecoin. It is backed by Ethereum, and as such, it operates on the Ethereum blockchain. Unlike the previous two options, DAI is governed by a decentralized community, which makes it more similar to traditional currencies.

This stablecoin is especially popular in protocols that require trustless, decentralized assets. That's what makes it an important part of the DeFi system. Even though this coin is relatively stable, some value volatility can happen, which is why DAI's issuer company, MakerDAO, has recently begun using some real-world assets as a reserve.

As a result, DAI is becoming less of a classic crypto-backed stablecoin and more of a hybrid model.

FDUSD (First Digital USD)

Despite its name, FDUSD is a relatively young stablecoin. It is a fiat currency-backed stablecoin issued by First Digital Trust, a Hong Kong-based company. FDUSD has experienced a rise in popularity in 2023 and 2024, when Binance began promoting it as a trading pair for many transactions.

Frankly speaking, FDUSD isn't as liquid as USDT or as transparent and regulated as USDC. However, it is experiencing massive growth, and it seems like a regulated and transparent option. It is becoming increasingly popular in Asian markets, and it is only a matter of time before it conquers the global market.

TUSD (TrueUSD)

TUSD is a fiat currency-backed stablecoin and one of the first stablecoins to offer real-time reserve attestations. As its name suggests, the aim of this coin was to build user confidence through transparency. TUSD maintains its 1:1 peg with the U.S. dollar and has seen an increase in popularity in Asia, especially on Binance and Huobi.

However, despite its efforts for full transparency, TUSD has experienced fluctuating demand. There are also some recent concerns over changes in management and market confidence. Still, it is widely used in trading pairs. Its relatively stable pegging keeps it relevant in the trading ecosystem.

Is Stablecoin a Good Investment?

The answer depends on what you are trying to achieve with this investment. If you want to make some quick profits, investing in stablecoins isn't the right choice for you. For quick money, you should turn to more volatile tokens, but be prepared for potential risks that come with such a choice.

Stablecoins are designed for stability, not for growth. They are great as a trading asset, especially for users with limited banking options. Many use them as a form of savings or as a means for cross-border payments.

In short, stablecoins can be a good investment, but not for get-rich-quick schemes. Instead, be realistic with your expectations, and you won't regret investing in stablecoins.

Are Stablecoins Regulated?

Yes, to some extent. Some countries have already developed and adopted laws in order to regulate stablecoins. Other countries have no regulations, neither for stablecoins nor for cryptocurrencies in general. This means that there isn't a unified approach to this topic, even though regulating this market could be beneficial for everyone involved.

Despite the lack of regulation (at least compared to other markets), the stablecoin market doesn't have to be shady and lawless. Before investing in any stablecoin, do some necessary research first. Or, if you don't have much time for that, choose some of the well-known options, several of which we have listed above.

Avoid less-known stablecoins, especially if they are issued by suspicious and shady companies. Don't fall for too-good-to-be-true scenarios - for example, stablecoins that promise and rise significantly in value. That's not the point of investing in stablecoins, so stay away from them.

As they become more widely used, stablecoins will become more regulated, and some bills are already being proposed. Until these bills are adopted, stay vigilant and choose safety over false promises.

Conclusion

Stablecoins offer a practical solution for anyone seeking the benefits of cryptocurrencies without the extreme price volatility. They are especially useful for saving, trading, and everyday transactions.

However, like all investments, stablecoins carry risks, so it’s essential to research and choose trustworthy options carefully.

Frequently Asked Questions

Is Bitcoin a Stablecoin?

No, Bitcoin isn't a stablecoin. As a matter of fact, Bitcoin is an extremely volatile cryptocurrency, and its value isn't pegged to any other asset. Yet, Bitcoin serves as a reference asset for some stablecoins, either as a peg or as collateral.

Can You Make Money on Stablecoins?

Yes, you can, but don't expect some wild earnings. When compared to classic cryptocurrencies, interest earned on stablecoins is minuscule.

What Are the Risks of Investing in Stablecoins?

The value of reference assets could drop significantly, which would cause a drop in stablecoin value. Additionally, if the stablecoin issuer doesn't want to or can't fulfill redemption requests, you might lose your invested money. There are also risks connected to the lack of regulation, so stay safe when trading with stablecoins.

What Is a GENIUS Act?

The name of this act is short for "Guiding and establishing national innovation for US stablecoins," and as its name suggests, it is an act proposed in early 2025. It is supposed to help regulate stablecoin payments.

If the GENIUS Act becomes law, stablecoin issuers would have to fulfill rigorous standards, just like traditional financial institutions.