Stablecoin
A stablecoin is a type of cryptocurrency that aims to maintain a stable value relative to a specified asset, a pool or basket of assets. The specified asset might refer to fiat currency, commodity, or other cryptocurrencies. Despite the name, stablecoins are not necessarily stable. Stablecoins rely on stabilization tools such as reserve assets or algorithms that match supply and demand to try to maintain a stable value.
Historically, multiple stablecoins have failed to maintain their value relative to the underlying assets. With a growing number of market transactions involving stablecoins, their issuance and usage are increasingly regulated by governments around the world.
Background
Stablecoins emerged in 2014 as a method for investors in cryptocurrencies to park their money when they invest in other highly volatile cryptocurrencies. Stablecoins are now mainly used for buying or selling cryptoassets, and for making cross-border payments. According to the Bank for International Settlements, the size of the global stablecoin market is approximately $255 billion as of June 2025, with nearly 99% of stablecoins pegged to the US dollar.Types of stablecoin
Stablecoins can be distinguished based on their methods of maintaining their relative value with the specified asset. Some major types of stablecoins are as follows:Fiat-backed stablecoins
Fiat-backed stablecoins are stablecoins that claim to be backed by assets denominated in a fiat currency.The value of a fiat-backed stablecoin is based on the value of the backing currency, which is supposedly held by a third party custodian. The issuer defends the peg of the stablecoin by holding mostly fiat-denominated short-term assets, such as treasury bonds, high-quality commercial paper, repurchase agreements and bank deposits. Therefore, the structure of fiat-backed stablecoins closely resembles that of money market funds, and they are exposed to similar risk of large-scale redemption requests causing negative fire-sale contagion effects on the financial system.
As of August 2025, nearly 99% of fiat-backed stablecoins are pegged to the US dollar. Major examples of US-dollar-pegged stablecoins are Tether's USDT, Circle's USDC, and Binance's BUSD. For Euro-pegged stablecoins, major examples include Circle's EURC, EUR Tether, and Stasis EUR.
Cryptocurrency-backed
Cryptocurrency-backed stablecoins are stablecoins using other cryptocurrencies as collateral. The reason such stablecoins are created is that by utilizing smart contracts, they allow a decentralized network to track the price of the US dollar as closely as possible. Another use case of cryptocurrency-backed stablecoins is to convert a cryptocurrency into ERC20 compatible standard to enable trading on another blockchain.Major examples of cryptocurrency-backed stablecoins are DAI and Wrapped Bitcoin.
Commodity-backed stablecoins
Commodity-backed stablecoins are stablecoins that claim to be backed by commodities. Examples are PAX Gold and Tether Gold.Algorithmic stablecoin
Algorithmic stablecoins, sometimes called seigniorage-style stablecoin, are stablecoins with no reserve assets or only partial reserve assets. They utilize algorithms that match supply and demand to maintain a stable value. The European Central Bank suggests that algorithmic stablecoins should be treated as unbacked crypto-assets.Some major examples of algorithmic stablecoins are Celo Dollar, Tron's USDD and Kava's USDX.
"Death spiral" of algorithmic stablecoin
Algorithmic stablecoins are vulnerable to a de-pegging process known as "death spiral", in which an external event, such as the tightening of global liquidity, led to heavy redemption of the stablecoin. This triggered the minting of the linked token to burn the stablecoin, causing the supply of the linked token to increase exponentially, further causing a decrease in price.A famous case of death spiral is the TerraUSD, which was created by Terraform Labs founded by Do Kwon. TerraUSD was meant to maintain a 1:1 peg with the United States dollar. Instead of being backed by dollars, UST was designed to keep its peg by linking it with another Terra network token, LUNA. The mechanism worked by providing an economic incentive for arbitrage. If UST lost its peg and traded below $1, an arbitrager could purchase it on the secondary market and redeem it for $1 worth of LUNA. Correspondingly, if UST traded higher than $1, market actors could mint new UST by locking in $1 of LUNA and then sell the new UST on the market for a profit. However, this mechanism assumes there is sufficient market demand for UST and LUNA, making the stablecoin inherently fragile.
In May 2022, UST broke its peg with its price plunging to 10 cents, while LUNA fell to "virtually zero", down from an all-time high of $119.51. The collapse wiped out almost $45 billion of market capitalization over the course of a week.
In the case of TerraUSD, another contributing factor to its failure was its proof-of-stake mechanism. The fall in the price of LUNA caused validators to sell their stakes, allowing malign actors to become dominant validators.
Use cases and potential advantages of stablecoin
Convenience for crypto investors
The main advantage of stablecoins is they provide convenience for investors in cryptocurrencies, allowing investors to park their money while buying and selling other more volatile cryptocurrencies.Cross-border payments
Stablecoins are used for cross-border payments, especially for cross-border remittance to less developed countries. Cross-border payments are traditionally associated with high transaction costs, prolonged processing times, and limited access for unbanked populations. Since stablecoins can be sent using a smartphone, they can supersede the system of correspondent banking and messaging systems such as SWIFT, thus facilitating faster cross-border transactions for individuals with limited access to financial institutions.Hedge against hyperinflation
Stablecoins are being used in countries with hyperinflation, such as Argentina, Turkey, and Venezuela. Due to monetary policies of these countries, average citizens are often unable to obtain foreign currencies through formal financial services. Since some stablecoins could maintain a relatively steady value against specific assets such as the US dollar, they are used as a hedge against hyperinflation.Trading and humanitarian effort in financially repressed countries
Stablecoins became tools for trading and distributing humanitarian aid in financially repressed countries in Africa. Humanitarian NGOs told media that stablecoins help them get around regulatory holdups and wastage of donor funds on exorbitant banking fees. Local communities also started accepting stablecoins as payment method.Financial inclusion
A departmental paper by the International Monetary Fund on digital money suggested that the adoption of stablecoins can improve financial inclusion particularly in the Pacific Islands.The research pointed out that Pacific Island countries lack correspondent banking relationships. Therefore, foreign currency-based stablecoins are the most realistic digital money alternative for these countries with no national currencies, and limited number of retail banks and payment service providers.Financial and regulatory risks of stablecoin
Money laundering and terrorism financing concerns
Stablecoins enable person-to-person transfers without the need for a regulated intermediary, which raised concern from international financial institutions on Anti-Money Laundering and Counter-Financing of Terrorism compliance. Blockchain maintains pseudonymity for individual users, which can preserve privacy but also facilitates illegal use in the absence of Know Your Customer requirements.In 2020, the intergovernmental anti-money laundering Financial Action Task Force issued a report on stablecoins, calling out the risk of money laundering using stablecoins. In particular, the anonymity, global reach, and layering using "chain-hopping" technique are cited as risk factors.