Introduction to Stablecoins and what are their key benefits: Beginner’s Guide
- Raj Karle
- 2 days ago
- 10 min read
Updated: 17 hours ago
A stablecoin is a type of cryptocurrency built to keep a steady value. Most digital assets rise and fall in price. However, stablecoins are tied or pegged to a traditional currency such as the US dollar.
Their use has grown rapidly. Over the last 18 months, the total value of stablecoins has jumped from about $120 billion to $250 billion. Some industry forecasts even predict the market could reach $2 trillion by 2028.
Big names are joining in too. JPMorgan is testing tokenized deposits, and PayPal has already released its own stablecoin. It’s clear that digital money is becoming a major part of modern finance.
Today, stablecoins play a key role in decentralized finance (DeFi). People use them for trading, everyday purchases, cross-border transfers, and many other on-chain activities. They’ve become one of the most reliable tools in the crypto ecosystem.
Key Highlights:
Stablecoins are digital currencies designed to keep a stable value. They are usually pegged to assets like the US dollar or gold.
The global stablecoin market has grown quickly. Its total value is now around $280–$300 billion.
Stablecoins settle trillions of dollars each year on-chain. They now function as a global payment rail.
Major institutions like JPMorgan, PayPal, and Visa are adopting stablecoin-based systems.
New regulations in the US, EU, and Asia are shaping stablecoins into a trusted financial tool.
Understanding Stablecoins
Stablecoins are digital assets built to hold a steady value. They sit on blockchain networks but behave more like traditional money. Their main goal is to avoid the sharp price swings that are common in many cryptocurrencies. Each stablecoin is linked to a reference asset.
This asset is often the US dollar. It can also be a commodity or another currency. It allows users to trust that the value will remain stable.
A stablecoin has four main characteristics:
PRICE STABILITY: The token does not rise or fall the same way other cryptocurrencies do.
LIQUIDIITY: Users can convert stablecoins into other assets with ease.
TRANSPARENCY: Most stablecoin issuers publish details about the reserves that support the token.
PROGRAMMABILLITY: These assets run on blockchain networks with contracts and other digital systems.
These traits make stablecoins practical for everyday use. They give the speed of blockchain without exposing users to high volatility. This balance is one reason they have become an important part of the digital economy.
Stablecoin Market Growth (Past vs. Present)
Year | Total Stablecoin Market Cap | Source |
Jan 1, 2022 | ~$167.9B | Coingecko |
Jan 31, 2023 | ~$138.4B | Coingecko |
Dec 31, 2024 | ~$201.6B | Coingecko |
Jun 2025 | ~$250B | StablecoinInsider |
Oct 2025 | ~$308B | CoinDesk |
Nov 2025 | ~$303B | CoinDesk |
Present Live Estimate | ~$280B–$300B | StableCoin |
How Stablecoins Work
Stablecoins maintain their value through a process known as 'peg'. This connects the token to a stable asset. This connection is maintained through collateral or an algorithm that adjusts the supply. The method used depends on the type of stablecoin.
Some stablecoins are backed by cash kept aside for every token that exists. When people buy these tokens, the issuer updates the reserves to match the change. This process helps the token stay close to its intended value.
Other stablecoins rely on digital assets for support. These systems usually hold more collateral than the value of the tokens they issue. Having this extra buffer makes it easier for the token to hold its peg when the market moves sharply.
There is also a model that uses algorithms instead of reserves. Here, the system adjusts the supply of the token to keep the price stable.
Each stablecoin type comes with its own risks. Fiat-backed versions depend on how well the issuer manages and protects the reserves. Crypto-backed models depend on the price of the assets used as collateral. Algorithmic versions depend on code.
Stablecoins as a Global Payment Rail
Stablecoins are no longer used only for trading. They now move real payment value on-chain. In recent years, stablecoins have settled trillions of dollars annually. They have often surpassed traditional card networks in raw settlement volume.
On-chain data shows that stablecoins handle billions of dollars in daily transfers. Most of this activity comes from cross-border payments. It also includes exchange settlements, and treasury movements between institutions. Unlike banks, these transfers settle in minutes and operate 24/7.
This shift has pushed stablecoins from a crypto tool into a digital payments layer.
Stablecoins vs Traditional Payments
Metric | Stablecoins (On-Chain) | Traditional Banking |
Settlement time | Minutes | 1–5 business days |
Operating hours | 24/7 | Business hours |
Cross-border fees | <1% | 3–7% |
Annual settlement volume | $10T+ | Visa ~$12T |
Transparency | Public blockchain | Closed systems |
Source: Public blockchain data - Visa On-Chain Analytics
Regulation of Stablecoins
In the USA, the GENIUS Act (2025) set the first nationwide rules for stablecoin issuers. It says issuers must hold 100% reserves in cash or cash-equivalent assets. They also need to undergo monthly independent audits. Any issuer with more than $10 million in circulation must get a federal license.
In the European Union, the MiCA regulation became fully active in 2024. It requires stablecoins to maintain a strict 1:1 backing. Issuers must publish reserve reports every quarter. MiCA also limits used stablecoins to a €200 million daily transaction cap unless they apply for an “enhanced authorization.”
Visa On-Chain Analytics, These regulatory frameworks are responding to scale. As stablecoins process trillions in annual settlements, regulators are focusing on reserve quality. They consider transparency and systemic risk. The goal is to ensure stablecoins remain reliable payment instruments.
Key Benefits of Stablecoins
Many people prefer stablecoins since they avoid the big price swings seen in other coins. They offer a stable value and allow for fast transfers. This makes them great for traders and regular users. Everyone needs a reliable digital currency.
1. Price Stability in Volatile Markets
Their biggest advantage is their stable value. Crypto markets can move without warning. Sharp drops can create heavy losses. Traders use stablecoins to protect their funds during these periods. It gives them a safer place to wait until the market settles. Traders often shift their funds into stablecoins when they want to avoid risk. This gives them a safe place to hold value without leaving the blockchain. It also lets them move back into other assets when conditions improve. This simple role makes stablecoins one of the most used tools during market swings.
2. Efficient Cross-Border Payments
Sending money across borders through traditional banking can be slow. It often involves several steps and higher fees. Stablecoins solve this with fast settlement times. A transfer can reach the receiver in minutes. The cost is also much lower than most bank or remittance channels. This speed and price advantage makes stablecoins a practical option.
On-chain data shows that stablecoin transfers settle in under five minutes. In comparison, international bank transfers can take two to five business days. Fees for stablecoin transfers typically stay below 1%. The traditional remittance services often charge 5–7%.
3. Useful in DeFi
Stablecoins are essential for Decentralized Finance (DeFi). They are used for many activities. People use them to lend, borrow, and stake assets. Stablecoins also fuel liquidity pools. The steady value of stablecoins reduces risk for these activities. It helps DeFi platforms run in a predictable way.
4. Accessibility and Financial Inclusion
Stablecoins can reach users who do not have access to traditional banking. A person only needs a smartphone and internet connection to use them. This makes it easier for people in developing regions to store value and make payments.
5. Support for Institutional Use Cases
Large financial firms are also adopting stablecoins. Many use them for treasury operations because they allow quick transfers. Some institutions use stablecoins to settle trades. Fintech companies include stablecoins into their platforms to provide payment options.
Types of Stablecoins
Not all stablecoins follow the same method. Their design depends on what supports their value. The four main stablecoins are as below.
1. Fiat-Collateralized Stablecoins
These stablecoins are backed by traditional currencies such as the US dollar or the euro. For each token, the issuer holds an equal amount of cash or cash-equivalent assets. This simple structure makes them the most widely used type.
The issuer usually works with banks or regulated custodians to store the reserves. Users trust these stablecoins because the backing asset is stable and well understood.
However, this model depends on the issuer’s transparency. Clear checks and updates on reserves help people trust the project.
2. Crypto-Collateralized Stablecoins
Users put up their digital assets to create and maintain these stablecoins. These projects often hold more collateral than the number of tokens they issue. This is known as over-collateralization. It helps protect the token when market prices drop.
The value of crypto assets can move sharply, so this model must use smart contracts to manage risk. If the collateral falls too much, the system may liquidate positions to keep the peg intact. This design offers a higher level of decentralization. However, it also exposes the token to market volatility. The stability depends on how well the collateral is managed on the blockchain.
3. Commodity-Backed Stablecoins
Some stablecoins are backed by real assets like gold. Their purpose is to give users exposure to a stable physical asset through digital form. This model is useful for people who want to store value in a non-currency asset. It is also a good choice to diversify a digital portfolio.
Token (Gold-Backed) | What it Represents | Key Features |
Tether Gold (XAU₮ / XAUT) | Each token represents one fine troy ounce of physical gold stored in secure vaults (Swiss or LBMA-approved). | Gives crypto-style liquidity and ease of transfer, combined with the stability and intrinsic value of bullion. You get gold exposure without handling actual bars. |
PAX Gold (PAXG) | Each PAXG token corresponds to one troy ounce of a “London Good Delivery” gold bar, kept in LBMA-approved vaults under custody of a regulated trust company. | Offers transparency (monthly audits), regulated custody, and full redeemability. Token holders can redeem for actual gold bars or cash. |
4. Algorithmic Stablecoins
These stablecoins rely on code. The system adjusts the token supply to keep the price near target value. So, when the price rises, the supply expands. Likewise, the supply contracts when the price falls.
This approach removes the need for reserves, but it is also the most fragile model. These stablecoins have failed during volatile market conditions.
Recent projects are trying to improve this design with new safety measures. Some use partial collateral. Others use improved algorithms that react faster to market changes. This model still carries higher risk than other stablecoin types.
Several major algorithmic stablecoins have collapsed during volatile markets. Here are a few famous examples:
TerraUSD (UST) – The most famous algorithmic stablecoin failure. It used a burn-and-mint mechanism with its partner token, LUNA. When the peg slipped in 2022, the system couldn’t recover, leading to a full collapse.
Empty Set Dollar (ESD) – An early algorithmic stablecoin experiment. It used coupon-style “bond” incentives to re-peg the price. However, it struggled to maintain stability in real market conditions.
Frax (FRAX) – A more modern hybrid model. It uses partial collateral + algorithmic supply adjustments. This makes it more stable than fully algorithmic designs. Frax is one of the few algorithmic systems still operating today.
Major Stablecoins in the Market
A few major stablecoins lead the market today. These projects have strong networks and large user bases. Each stablecoin offers a different level of trust.
1. USDT (Tether)
This is the biggest stablecoin in the world. It is used on almost every major exchange and trading platform. Its biggest advantage is its liquidity. Users can move value in and out of USDT quickly, which makes it useful during fast market conditions.
USDT has also faced criticism. Most concerns are about the clarity of its reserves. USDT dominates the market even with these issues.
2. USDC (Circle)
USDC is issued by Circle, a company that follows stricter financial standards. Many institutions prefer it because the issuer provides clearer reports. This makes USDC a common choice in markets where compliance is important. Fintech companies and payment platforms also use USDC.
3. DAI (MakerDAO)
DAI stablecoin runs without a central company. It is built on MakerDAO. This system relies on smart contracts and community decisions. This setup helps the project stay transparent.
To mint DAI, users place their crypto into the system as collateral. The amount they deposit decides how much DAI they can generate.
This keeps the token decentralized. When crypto prices fall, users need to add more collateral to keep everything stable. DAI has earned a solid reputation even with these challenges.
4. PayPal USD (PYUSD)
PayPal USD (PYUSD) is a newer stablecoin created by PayPal. It is backed 1:1 by U.S. dollar deposits, short-term Treasuries, and other cash-equivalent assets. The coin is issued by Paxos, the same regulated company behind PAX Gold and Binance USD.
PYUSD is built for everyday payments. Users can send, receive, and convert it directly inside PayPal and Venmo. This makes it one of the first stablecoins integrated into major financial apps.
5. Emerging Stablecoins
Many new stablecoins are being launched as the market grows. Some projects focus on tight regulations and clear reporting.
Several governments are now creating their digital currencies. You might see them competing with private stablecoins.
Why Stablecoins Have Become So Popular Recently
Stablecoins have become common in recent years because more people now use blockchain. So, the need for a steady digital asset has increased.
1. Growth of Global Crypto Markets
The crypto market has expanded at a strong pace. Traders use stablecoins to enter and exit positions without depending on banks. Developers also rely on stablecoins to build payment tools, financial apps, etc.
As activity increases, the need for a steady digital currency becomes more important. Stablecoins fill that role by offering a stable value.
2. Macroeconomic Factors
When the economy is unstable, people turn to digital assets. They search for assets linked to stronger currencies.
USD-based stablecoins are often their first choice. These stablecoins offer the stability of the dollar in a digital format.
3. Advancements in Blockchain Infrastructure
Blockchain networks are now cheaper to use. Newer chains offer quick transactions and lower fees. This makes stablecoins more convenient for everyday payments. Security has also improved. Now, users can move tokens across different networks without trouble.
4. Expansion of DeFi, Web3, and On-Chain Applications
A lot of blockchain platforms rely on stablecoins to run smoothly.
DeFi platforms use stablecoins for lending, borrowing, and liquidity pools.
Web3 apps use them for payments and reward systems.
Many yield-based activities also depend on stablecoins because their value stays steady.
5. Corporate and Institutional Adoption
Large financial institutions are also turning to stablecoins. Some use them to settle transactions quickly. Others use them for internal transfers or to hold digital forms of real-world assets.
Many trading platforms now offer stablecoins in their investment products. This shows that stablecoins are becoming a normal part of the wider financial system.
Several governments are testing stablecoin frameworks as well. Singapore’s MAS, Hong Kong’s HKMA, and the UAE have all launched programs for stablecoin payments. Japan has also approved new rules in 2023. These rules let licensed banks and trust companies issue fully backed stablecoins.
On-chain analytics tell a different story. The growing share of stablecoin volume comes from institution-sized transactions, not retail transfers. Large-value payments now account for a significant portion of daily stablecoin settlement activity. It highlights their role in treasury and settlement workflows.
This content is for informational purposes only and should not be taken as investment advice. It is crucial for you to conduct your own research and due diligence to make informed decisions, as any investment will be your sole responsibility. Please review our disclaimer and risk warning
