Stablecoin Types Guide: Basics Beginners Should Know and How to Choose

Are you interested in stablecoins but feel that they are “complicated” or “too many types to understand”? The world of cryptocurrencies is constantly introducing new concepts, making it especially challenging for beginners to grasp the overall picture.

In this article, we will provide a clear explanation of the basics of stablecoins, the different types, and how they are actually used.

What Are Stablecoins?

Stablecoins are cryptocurrencies designed to maintain a stable price by pegging their value to assets such as fiat currencies like the US dollar or commodities like gold.

Unlike the volatile price swings of Bitcoin or Ethereum, stablecoins are created to keep their value close to “1 coin ≒ 1 dollar.” The goal is to combine the advantages of cryptocurrencies—fast transfers on the blockchain, 24/7 trading, high security—with price stability.

Rapidly Growing Market

The stablecoin market has grown dramatically in recent years. By 2025, the total market capitalization is expected to reach around $300 billion, significantly up from the beginning of the year when it was in the $200 billion range. However, as of November 2025, some monthly declines have been reported, indicating that the market is transitioning from a simple upward trend to a phase of growth and correction.

Types and Features of Stablecoins

Stablecoins are categorized based on “how they stabilize their price.” Understanding each type’s characteristics is crucial to choosing the right coin for your needs.

Fiat-Collateralized

The most common type, backed 1:1 by fiat currencies like the US dollar. Reserves are managed by custodians and are regularly audited for transparency.

Main tokens: Tether (USDT), USD Coin (USDC), Binance USD (BUSD), PayPal USD (PYUSD)

Commodity-Collateralized

Linked to physical assets such as gold or silver. Corresponding assets are stored behind the scenes. Suitable for users who want to hold assets digitally with small amounts.

Examples: PAX Gold (PAXG), Tether Gold (XAUt)

Crypto-Collateralized

Backed by other cryptocurrencies like Bitcoin or Ethereum. Due to the high volatility of these assets, over-collateralization is used—e.g., issuing $1 worth of stablecoin while locking $2 worth of crypto as collateral—to absorb risks.

Example: DAI (issued via MakerDAO protocol)

Algorithmic

Do not hold any collateral assets; instead, they automatically adjust supply through algorithms to maintain a price around $1.

Example: Frax (FRAX)

Major Stablecoins

Tether (USDT)

The largest stablecoin in the market, with a market cap exceeding $180 billion as of November 2025, holding the top position globally.

• Launch: 2014
• Peg: US dollar (1 USDT ≒ 1 dollar)
• Supported chains: Ethereum, Solana, Tron, and others

In the past, there have been criticisms regarding transparency of reserves, and in 2021, Tether was fined by the U.S. Commodity Futures Trading Commission (CFTC). Nevertheless, it remains widely used, especially in Asia and Europe, and maintains a significant market presence.

Recent concerns include S&P Global downgrading Tether’s reserve credibility to the lowest rank (“weak”) in November 2025, citing an increasing proportion of volatile assets like Bitcoin and corporate bonds. While the price remains close to $1, there is growing concern that its large scale could impact the entire financial system.

USD Coin (USDC)

A stablecoin issued by Circle, emphasizing transparency and regulatory compliance.

• Launch: 2018
• Reserves: Mainly cash and short-term U.S. Treasuries
• Audits: Regular third-party reports

Primarily used in North America and frequently adopted in DeFi services. As of November 2025, its market cap is around $75 billion, with significant growth since the start of the year. Its role as a payment infrastructure is becoming increasingly prominent.

Other Stablecoins

DAI: A decentralized stablecoin issued via the MakerDAO protocol, maintaining its peg through Ethereum over-collateralization.

PayPal USD (PYUSD): Announced jointly by PayPal and Paxos, marking their entry into the stablecoin market.

Ripple USD (RLUSD): A new stablecoin announced by Ripple, targeting international remittances and institutional investors.

How Stablecoins Maintain Price Stability

Backed by Reserves

For fiat-collateralized stablecoins, reserves of assets like bank deposits or government bonds are held equivalent to the total issued amount. When users redeem stablecoins, they receive the corresponding fiat currency.

Peg Mechanism

Maintaining a 1:1 peg with a specific currency (e.g., 1 USDT ≒ 1 dollar) is called “pegging” or “fixing.” To keep this peg, several mechanisms work together:

• User-initiated issuance and redemption
• Arbitrage opportunities when prices deviate
• Over-collateralization (for collateralized types)
• Algorithmic supply adjustments

Even if prices slightly deviate, these mechanisms work to bring the price back close to $1.

Transparency and Audits

Many issuers publish regular audits and “proof of reserves” reports to demonstrate sufficient backing assets. These reports are typically conducted by third-party accounting firms, with reserve breakdowns published periodically.

Benefits of Stablecoins

Price Stability

During market downturns, converting assets into stablecoins helps preserve value, allowing users to exit the ecosystem without liquidating holdings at a loss.

Efficient International Remittances

Traditional bank transfers can take days and incur fees of 5-7% or more. Stablecoins enable near-instant transfers at a fraction of the cost. For example, remittances from Sub-Saharan Africa can be reduced by about 60% compared to conventional methods.

Financial Inclusion

In regions with limited banking infrastructure, stablecoins provide access to the global economy. Users can store value securely via smartphones and access financial services without a bank account.

Foundation for DeFi (Decentralized Finance)

Stablecoins are the backbone of many DeFi protocols. They enable lending, borrowing, and yield farming without price volatility, providing stability for liquidity pools on decentralized exchanges.

• Lending and Borrowing: Users can lend stablecoins for interest or borrow against collateral
• Liquidity Provision: Serve as key components of trading pairs
• Yield Farming: Earn returns by providing liquidity to various protocols
• Synthetic Assets: Used as collateral for creating synthetic versions of stocks or commodities

Risks and Challenges of Stablecoins

Regulatory Uncertainty

As stablecoins grow in importance, regulators are paying increased attention. Frameworks are being developed worldwide to address financial stability, monetary policy, and consumer protection.

In the U.S., legislation is underway to establish guidelines for issuers, including reserve requirements and transparency standards. In Europe, the Markets in Crypto-Assets Regulation (MiCA) effectively bans algorithmic stablecoins and imposes strict reserve requirements.

Reserve Transparency Issues

Transparency of reserves remains a concern. Some issuers publish periodic proof of reserves, but lack of transparency can lead to criticism. Without sufficient transparency, confidence in full backing diminishes, risking fund safety.

Depegging Risks

There have been instances where stablecoins lost their peg. The most notable case was TerraUSD (UST) collapse in May 2022, which wiped out about $45 billion in market value within a week. This event exposed vulnerabilities in algorithmic stablecoins.

Even fiat-collateralized stablecoins can temporarily lose their peg during market stress or if issuer solvency is questioned.

Centralization and Security Risks

Many major stablecoins are issued by centralized entities, creating counterparty risk and single points of failure. Users must trust that issuers properly manage reserves and fulfill redemption obligations.

Centralized stablecoins can also be subject to address freezing or blacklisting, which conflicts with the permissionless nature of cryptocurrencies.

Use Cases for Stablecoins

Trading

Stablecoins serve as key trading pairs on exchanges, allowing traders to enter and exit positions without converting to fiat. They reduce transaction costs and processing times, providing a stable valuation benchmark for other cryptocurrencies.

For investors, stablecoins offer a way to “park” funds during volatility, enabling quick re-entry when the market stabilizes.

Payments and Commercial Transactions

Stablecoins’ stability makes them suitable for daily transactions. Unlike Bitcoin, their value remains relatively unchanged during transaction initiation and settlement, maintaining consistent purchasing power.

International Remittances

Compared to traditional bank transfers, which are costly and slow, stablecoins enable near-instant, low-cost remittances.

Value Preservation in Inflationary Regions

In high-inflation areas, stablecoins provide a means to preserve purchasing power. Converting local currency to USD-pegged stablecoins prevents asset devaluation without physical access to dollars.

Points to Consider When Choosing a Stablecoin

When selecting a stablecoin, consider the following:

• Stability Level: Fiat-collateralized stablecoins tend to be more stable, while algorithmic types carry higher risks.
• Transparency: Check if regular audits and reserve proofs are published, and assess the transparency of reserve breakdowns.
• Supported Networks: Confirm compatibility with your preferred blockchain (Ethereum, Solana, etc.) and ensure deposits and withdrawals are on the same network.
• Liquidity and Use Cases: Evaluate trading volume, available trading pairs, and DeFi protocol support to match your intended use.
• Regulatory Compliance: Monitor regional regulatory developments; more compliant stablecoins generally pose lower risks.

Future Outlook and Strategies for Stablecoins

Stablecoins are expected to grow from hundreds of billions to over $300 billion, becoming a vital bridge between blockchain and traditional finance.

With large institutional participation, their importance will further increase. This growth cements stablecoins as an indispensable part of the digital economy.

Future developments may include:

• Region-specific growth: Tailored stablecoins for local economies.
• Regulatory frameworks: Clearer rules to enhance safety and transparency.
• Integration with traditional finance: Seamless collaboration with banking systems.
• Technological innovations: Improved cross-chain interoperability and scalable payment systems.

By effectively utilizing stablecoins, individuals can enjoy price stability while benefiting from efficient international remittances, participation in DeFi, and inflation hedging—options that were previously difficult to access.

Given the rapid pace of change, staying updated and aligning your approach with your investment goals and risk tolerance is key to successfully navigating the digital financial wave.