What is a Stablecoin? The Complete Guide for Individuals and Businesses Exploring Stablecoins
Crypto is fast, global, and constantly evolving. But for all its innovation, it comes with one major drawback: price volatility. That’s where stablecoins come in. These digital currencies combine the efficiency of crypto with the reliability of fiat. Whether you're making cross-border payments, protecting your savings, or building on blockchain rails, stablecoins offer a practical solution.
In this article, we explain what stablecoins are, why they matter, how they're used, and how you can get started.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency that is designed to maintain a stable value by being pegged to a traditional asset like the US dollar, euro, or even commodities such as gold. This makes them unique in the crypto ecosystem, where most assets are known for high volatility.
Depending on the approach, stablecoins may use reserves, collateral, or algorithmic mechanisms to maintain that peg. This stability makes them useful for global payments, savings, payroll, and more. In summary, they bring together the speed and openness of crypto with the reliability of fiat money.
Breaking it down further, there are four primary types of stablecoins:
- Fiat-backed stablecoins are backed 1:1 by reserves of traditional currency held in banks. Each unit of the stablecoin can be redeemed for a corresponding amount of fiat currency, such as U.S. dollars or euros.
- Crypto-backed stablecoins use other cryptocurrencies as collateral and are managed through smart contracts. These are typically overcollateralized to account for the volatility of the underlying assets.
- Commodity-backed stablecoins: Commodity-backed stablecoins are pegged to the value of physical assets like gold or silver. Each token typically represents ownership of a specific quantity of the underlying commodity, which is held in reserve by a trusted custodian.
- Algorithmic stablecoins rely on algorithms and smart contracts to automatically manage the supply of the stablecoin and keep its value pegged to a target. These carry significantly higher risk and have experienced instances in the past when they lost their peg to the target value.
Although various types of stablecoins exist, the most widely used are those pegged to the US dollar, with USDC, USDT, and DAI being the most widely adopted.
The Benefits of Stablecoins for Users and Businesses
Crypto’s price swings can make it hard to use for everyday purchases or savings. Stablecoins address this by providing price stability without sacrificing crypto’s key benefits: decentralization, security, speed, and borderless access. It’s this blend that helps stablecoins connect traditional finance with the emerging crypto world.
For example, stablecoins enable people in countries with high inflation to preserve the value of their savings in a dollar-pegged asset. For businesses, they simplify cross-border transactions, reducing the time and fees associated with international banking. They also offer a safe haven for crypto users who want to avoid market risk while keeping their funds onchain. And we’re still just scratching the surface.
Aside from user benefits, stablecoins are an integral part of decentralized finance (DeFi), where they serve as collateral, liquidity, and a medium of exchange. Their influence is quickly expanding beyond crypto, transforming payments, remittances, and business finance.
How Stablecoins Compare to Other Cryptocurrencies
Summarizing the information above, here is how stablecoins compare to traditional cryptocurrencies such as Bitcoin and Ether:
Stablecoin Adoption: Who's Using Them and Why?
Stablecoin adoption is accelerating across a growing range of users. Let’s take a closer look at how some individuals and businesses are putting them to use:
- Global users: In countries facing high inflation or currency instability, people use stablecoins to preserve the value of their savings. Others rely on them to send money abroad instantly and affordably, bypassing slow and costly remittance services.
- Freelancers and contractors: Workers across the globe choose stablecoins to receive payments quickly and reliably, avoiding traditional banking delays, currency conversion issues, and high fees.
- Crypto enthusiasts: For crypto power users, stablecoins serve as a stable onchain alternative to fiat currency. They’re essential for lending, borrowing, and yield generation in DeFi protocols, and also allow users to avoid market risk.
- Small businesses: Businesses turn to stablecoins for treasury management, global payroll, and cross-border payments, cutting out delays and foreign exchange costs.
- Institutions: Larger organizations are exploring stablecoins for B2B payments, cross-border settlements, and supply chain finance. Their programmability also allows for things like automated treasury operations.
- Nonprofit organizations: Humanitarian organizations are increasingly turning to stablecoins to deliver direct aid in unstable regions, where banking systems may be unreliable or inaccessible.
Key Considerations Around Stablecoins
While stablecoins unlock a lot of utility, there are important considerations to keep in mind:
- Regulatory uncertainty: Governments around the world are still developing legal frameworks for stablecoins. Regulatory shifts could impact how they are issued, used, or taxed. The next section explores regulation in more depth.
- Collateral risks: The security and transparency of reserves are critical. If the issuer lacks proper audits or is not truly backing their coins, the peg could collapse.
- Smart contract vulnerabilities: For decentralized stablecoins, bugs or exploits in the smart contract code can result in financial loss or de-pegging.
- Custodial risks: With centralized issuers, there is always a risk of funds being frozen or seized due to legal orders or platform failures.
To minimize these risks, users should choose reputable stablecoins, verify audits, and stay informed about regulatory developments.
Stablecoin Regulation & Compliance
As stablecoins gain momentum in both crypto-native and traditional financial ecosystems, regulatory clarity is becoming a top priority. Policymakers around the world are racing to define frameworks that balance innovation with consumer protection and transparency. Here’s how major jurisdictions are approaching stablecoin regulation:
United States
Stablecoin regulation in the U.S. is a group effort, with different agencies tackling different parts of the puzzle:
- The Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) are assessing whether certain stablecoins fall under securities or commodities classifications, an important distinction that impacts how they’re issued and traded.
- Legislative proposals such as the Stablecoin Transparency Act have pushed for tighter safeguards. These include 1:1 reserve backing and independent audits to reinforce trust and reduce systemic risk.
- The Treasury Department and the Office of the Comptroller of the Currency (OCC) are examining the role of stablecoins in payments and broader financial stability.
European Union
The European Union has taken a proactive stance through Markets in Crypto-Assets (MiCA), which aims to standardize how stablecoins are issued, managed, and redeemed across member states. MiCA covers:
- Reserve transparency: MiCA requires stablecoin issuers to provide regular audits proving that they maintain full reserves.
- Licensing for issuers: Only regulated financial institutions, such as banks or licensed e-money providers, can issue stablecoins for broad public use.
- Consumer protections: MiCA provides clear rules on redemptions and investor rights to prevent misuse.
Asia
Asia has emerged as an influential force in shaping stablecoin frameworks, with several key markets leading the way:
- Hong Kong is building out a stablecoin-friendly regulatory regime as part of its broader crypto hub ambitions, offering clarity to attract both regional and international participants.
- Japan has introduced legislation classifying stablecoins as a form of digital money, requiring issuers to be licensed financial institutions with strong compliance practices.
- Singapore’s MAS (Monetary Authority of Singapore) has outlined proposals for rigorous capital and reserve requirements, aiming to support responsible innovation and institutional confidence.
How to Start Using Stablecoins: A Beginner's Guide
Whether you're sending money or exploring DeFi, getting started with stablecoins is easier than ever. Here’s a simple guide to help you take your first step:
- Choose a wallet: To use stablecoins, you’ll need a wallet. Some are mobile apps, others work in your browser, and each one has its own strengths. Look for one that supports the chains and features you care about. (Fun fact: Dynamic’s multi-chain adapter supports over 500 of them!)
- Pick a specific stablecoin: Decide which stablecoin fits your needs. Consider who's behind it, how transparent the reserves are, and what you plan to use it for.
- Acquire stablecoins: To get your desired stablecoin into your newly created wallet, you’ll need to onramp funds. This can either be done through a crypto exchange like Kraken, an on-ramp service such as Banxa, or by receiving funds from another user or wallet.
- Use them how you like: You can now send stablecoins to others, use them for purchases, put them to work in DeFi protocols, and much more. We cover different ways that you can use them in our Stablecoin Sandwich blog.
Whether you're a developer, founder, or business exploring stablecoin payments, having the right wallet infrastructure is key. Dynamic makes it easy to onboard users, support stablecoin transactions across chains, and integrate secure, scalable wallets into your product—without the complexity.
Get in touch with us to see how we can help bring stablecoin functionality to your app, product, or platform.
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