Stable Coins: digital assets with a stable price in the cryptocurrency world

A long warning description is ahead. The Stable Coin is a cryptographic coin tied to a stable asset—be it fiat currency or precious metals. The main goal of such coins is to provide predictability in exchange rates and minimize fluctuations inherent in volatile crypto markets. Today, three main categories are highlighted: fiat-backed stablecoins, cryptocurrency-backed ones, and those that are algorithmically managed. Regulatory bodies in all countries pay special attention to these assets due to their potential in the payment system and growing market capacity.

Why do crypto investors need stablecoins?

Not every coin is subject to price fluctuations. This is exactly why stablecoins were created—they maintain a fixed value. In the crypto ecosystem with its constant turbulence, there has been a huge demand for digital currencies that combine the benefits of blockchain with financial reliability.

The main scenario: the company accepts payments in Bitcoin, and the next day the received coins lose half of their value. Such fluctuations make business planning impossible. Previously, traders could only convert cryptocurrency back to fiat to lock in results. Stablecoins have solved this problem by allowing for volatility management within the blockchain ecosystem.

How are different types of stablecoins structured?

Any stablecoin needs a mechanism that supports its peg. Usually, a real asset is used as collateral for this. But a guaranteed pegging mechanism that works flawlessly has not yet been created.

Stable Coins backed by government currency

Such coins hold fiat money in their reserves—USD, EUR, or other currencies. Examples: one TUSD is backed by one dollar. Users can convert fiat↔stablecoin at a fixed rate through smart contracts.

Crypto-backed stablecoins

This category operates on a similar principle, however, the collateral is cryptocurrency rather than fiat. Due to the volatility of the crypto market, such systems typically require over-collateralization. For example, DAI is pegged to USD, but to mint 100 DAI, it is necessary to collateralize crypto-assets worth $150 ( at a ratio of 1:1.5). This process is managed by smart contracts, and the community can vote on changes through the DAO structure.

Self-regulating mechanism: if the stablecoin falls below $1, owners are incentivized to return coins in exchange for collateral, which reduces supply and raises the price. When exceeding $1 , users create new coins, increasing supply and lowering the price.

Algorithmic Stable Coins

This model is unique: currency reserves are not held. Instead, algorithms and smart contracts control the issuance of coins. When the price falls below the target level, the system reduces supply ( through staking, burning, buybacks ). When it rises above the target level, new coins are issued to stabilize. This approach is less common and more complex to manage.

What are stablecoins used for in practice?

Daily payments and settlements

Businesses and individuals need stability. Traditional crypto (BTC, ETH) is inconvenient for routine transactions due to price fluctuations. However, large stablecoins maintain a peg, allowing them to be used like regular money on the blockchain.

Fast Global Transfers

Stable coins are created on the blockchain, so they can be sent to any compatible wallet around the world ( is created for free in seconds ). The system eliminates double spending and fake transactions—this gives stablecoins an advantage for payment scenarios.

Portfolio Hedging

Traders and investors allocate a percentage of their portfolio to stablecoins to reduce overall risk and maintain liquidity for advantageous entry points. Volatile assets can be sold for stablecoins during a bear market and repurchased later at a lower price—all without withdrawing funds from the blockchain.

Advantages of Stable Coins: Why They Are Important

1. Practical application. Stablecoins can be used for daily payments due to their stability, unlike the high volatility of traditional cryptocurrencies.

2. Blockchain technology. Funds are sent through open networks, eliminating the risks of manipulation and ensuring transparency.

3. Portfolio Risk Management. Holders can quickly enter and exit positions, using stablecoins as an anchor of stability in crypto-assets.

Disadvantages and Risks of Stable Coins

1. Peg instability. Many projects cannot maintain a fixed rate and risk a sharp drop in price.

2. Transparency issue. Not all issuers publish full audits. Most only conduct periodic checks through private auditors, which is insufficient for confidence.

3. Centralization with fiat backing. The collateral is held by a single entity that is subject to financial regulation and has control over the coin.

4. Dependence on the community. Crypto-backed and algorithmic models require active participation or trust in the decisions of developers and DAO voters.

Real Examples of Stablecoins

DAI (crypto-backed)

DAI is one of the leaders among crypto-collateralized stablecoins pegged to USD on the Ethereum network. It is managed by the MakerDAO community through the MKR token, which grants voting rights. The system utilizes over-collateralization and smart contracts to manage collateral, ensuring reliability and transparency.

TrueUSD (TUSD) — fiat stablecoin

TUSD is pegged to the dollar and represents the first verifiable stablecoin with programmatic reserve management off the blockchain. The verification of USD reserves is carried out through the Proof of Reserves (PoR) mechanism of the Chainlink network, allowing users to independently confirm full backing.

How are stablecoins regulated around the world?

Regulators around the globe are monitoring stablecoins due to their unique position between fiat and cryptocurrency. As these coins are intended for stable payments, they can be used as real currency rather than just a speculative asset. This opens up opportunities for international transactions with minimal fees. Some governments are even experimenting with their own Stable Coins.

According to the legislation of most countries, stablecoins are subject to the same rules as cryptocurrencies. The issuance of coins with fiat reserves may require permission from regulatory authorities.

Final Recommendations

Stable coins have become an integral part of the crypto ecosystem. They are held on exchanges for quick trading opportunities, used for payments and international transfers. They allow closing positions without converting to fiat.

However, the risks should not be ignored. Individual stablecoin projects can lose their peg, deplete reserves, or become the subject of lawsuits. Despite their universality, they remain a cryptocurrency with all the inherent risks.

Reduce risk through portfolio diversification and conduct your own analysis before any investments.

Risk Warning: The information is provided for informational purposes only and without any guarantees. This is not financial or legal advice. Please consult professional advisors before making decisions. The price of digital assets is volatile, and investments may be lost entirely. You bear full responsibility for your actions. This article is written by an independent author and does not reflect the official position of Gate.