Stablecoins represent a significant advancement in the world of cryptocurrencies, offering an innovative solution to the challenge of price volatility. As digital representations of traditional currencies operating on blockchain technology, stablecoins have been designed to maintain a stable value relative to another asset—most often the US dollar. Unlike Bitcoin or Ethereum, whose value can fluctuate dramatically, stablecoins aim to consistently trade at or very near their target price, typically $1.
Stablecoins work in several ways. Some are backed by reserves of fiat currency held by the issuing organization. For instance, when a user purchases one USDC, Circle, the issuer, adds $1 to its reserves. When the user redeems their USDC, Circle removes $1 from those reserves and burns the token. Other stablecoins are backed by other cryptocurrencies, typically with over-collateralization to account for potential price drops in the collateral. For instance, to create $100 worth of DAI, a user might deposit $150 worth of Ethereum into a smart contract. This over-collateralization helps maintain the peg even if Ethereum’s price drops. Some stablecoins use algorithms and smart contracts to automatically control the supply, attempting to maintain a stable value without direct collateral. For example, when the price exceeds $1, the protocol increases token supply to reduce price, and when the price falls below $1, it decreases supply to raise the price.
Since their introduction, stablecoins have transformed from simple dollar substitutes to fundamental components of the crypto economy. They facilitate trading, provide on-ramps between traditional and digital finance, power lending protocols, and serve as inflation hedges in countries with unstable currencies. In a volatile market, stablecoins offer predictability, allowing users to navigate the crypto ecosystem without the constant worry of price volatility.
The stablecoin market is dominated by two major players: Tether (USDT) and USD Coin (USDC). Together, they account for a vast majority of stablecoin market capitalization and trading volume. Tether, launched in 2014, was the first successful stablecoin, and with a market capitalization exceeding $144 billion as of early 2025, it remains the market leader. However, Tether has faced ongoing scrutiny regarding its reserves, leading to some skepticism among investors. USDC, launched in 2018 by Circle and Coinbase, has grown to become the second-largest stablecoin, with a market cap of about $60 billion. USDC’s clear regulatory approach and transparent reserves have made it the preferred stablecoin for institutional adoption, particularly in the United States.
While USDT and USDC dominate the market, several other stablecoins also serve important roles in the ecosystem. These include DAI, the first decentralized stablecoin created by MakerDAO; BUSD, a major stablecoin issued by Paxos in partnership with Binance; FRAX, a partially-collateralized stablecoin that uses a hybrid model combining collateral with algorithmic supply controls; Ethena’s USDe, a newer “delta-neutral” stablecoin; and TUSD (TrueUSD), a fully collateralized stablecoin with real-time attestations of reserves.
Stablecoins have a variety of practical uses, from preserving value during market volatility and facilitating easy on-ramps and off-ramps between traditional currency and crypto, to enabling fast, low-cost international transfers and providing a means to explore decentralized finance applications without the risk of price volatility. More advanced users can utilize stablecoins for liquidity provision in stablecoin pairs, lending their stablecoins on centralized or decentralized platforms to generate passive income, and implementing dollar-cost averaging, among other strategies.
Despite their stability, stablecoins are not without risks. These include counterparty risk, depegging risk, smart contract risk, and regulatory risk. Mitigation strategies include diversifying across multiple stablecoins, monitoring stablecoin prices on exchanges, favoring protocols with thorough security audits, staying informed about regulatory developments, and maintaining compliance with relevant laws regarding crypto reporting and taxes.
