Understanding Stablecoins: How They Work and Their Role in Finance

Stablecoins are digital currencies that are designed with the goal of maintaining a fixed, or stable, value. They are structured to function much like fiat currencies, but exist instead on the blockchain. This brings with it several benefits in terms of accessibility, usability, and speed.

There are multiple types of stablecoins, each defined by the mechanism used to maintain the one-to-one value peg to their respective fiat currencies. With broader institutional adoption of stablecoins only just beginning, however, there are still risks to consider with these relatively new digital currencies.

What Are Stablecoins?

Stablecoins are digital coins that maintain a stable value. Most stablecoins are pegged to popular fiat currencies like the U.S. Dollar, Chinese Yuan, or the Euro. Some are pegged to commodities, like gold, too.

How Stablecoins Differ From Other Cryptocurrencies

In theory, a stablecoin could have its value linked to just about anything. However, stablecoins pegged to a fiat currency are the most common. As such, when someone uses the term “stablecoin,” they are most likely referring to fiat currency coins.

In terms of value, the most stable cryptocurrency will, by definition, be a stablecoin. Some of these coins see their values fluctuate by small amounts, but they tend to correct back to their normal value in short order.

If there is any volatility in the value of a specific stablecoin, it’s likely much less than that seen in other types of cryptocurrencies.

The Purpose of Stablecoins in the Crypto Ecosystem

Stablecoins have a variety of potential use cases, but the main idea behind stablecoins is to create a cryptocurrency that is not subject to the volatility experienced by other cryptocurrencies, like Bitcoin and the many hundreds of altcoins. That, in some shape or form, could provide a sense of stability to the crypto ecosystem.

Key Benefits and Drawbacks

Stablecoin transactions tend to be faster, more efficient, and cheaper than conventional payment or money transfer systems. They may allow financial institutions that leverage them to offer lower fees in certain instances as well.

More broadly, stablecoins’ low cost and accessibility to those with internet access or a smartphone may allow unbanked or underbanked groups broader access to financial services, assuming they reside in an area where these cryptocurrencies are permitted. These coins also benefit from the security of blockchain technology.

Stablecoins could also be used as a store of value, as they are often pegged to a currency or commodity.

Conversely, as for drawbacks, stablecoins also don’t have the same consumer protections in place that traditional banks do. Users will need to hold their stablecoin balance via any number of crypto storage methods and the cryptocurrency wallet of their choice.

There could also be a potential lack of transparency regarding their reserves of stablecoins. Auditors must verify that reserve requirements are met, and it’s important to know that these third-party groups are reputable, as well. In other words, it can sometimes be difficult to know whether the company behind the coin actually holds one dollar for each dollar-backed stablecoin.

Why Stablecoins Matter in the Digital Currency Landscape

A stablecoins become more common in the crypto and financial spaces, it’s important to know why, exactly, they matter.

Addressing Volatility in Crypto Markets

As noted, they can play a stabilizing role in the broader markets. They’re stable, as much as a cryptocurrency likely could be. That doesn’t mean that they’re immune from volatility, of course, but stablecoins are designed to be, well, stable. As such, they can provide a sort of ballast in terms of volatility to the larger crypto space.

Use Cases and Real-World Applications

One of the primary use cases and applications of stablecoins, as of 2025, is that they can help enable fast and cheap global remittances, or cross-border transactions.

Traditional bank transfers typically take anywhere from three-to-five business days and can cost anywhere from a few dollars to dozens of dollars. International transfers tend to be the most expensive.

Stablecoin transactions can be confirmed within minutes, or less, and at very little cost. Two people with stablecoin wallets can transact with each other from anywhere in the world at any time without the need for a third-party intermediary.

Additionally, stablecoins could be used in other areas, such as running payroll for international work, or even as something that could dampen volatility in crypto markets, as they tend to maintain a fairly level valuation.

Market Growth and Adoption Trends

Looking forward, it’s likely that stablecoins will continue to grow in terms of usage and adoption in the broader financial space. Within 18 months, total issued stablecoin value more than doubled to $250 billion from $120 billion between early 2024 and mid-2025^[1], and also, more and more companies are looking to adopt or launch stablecoins.

As of September 2-25, 13% of financial institutions around the world use them, and 54% of those that do not plan to adopt them within a year.^[2]

The 4 Types of Stablecoins

Generally, there are four types of stablecoins: fiat-backed, commodity-backed, crypto-collateralized, and algorithmic stablecoins.

1. Fiat-Backed Stablecoins

Some of the most widely-used stablecoins today use a centralized model and back new token issues with fiat currency at a one-to-one ratio. U.S. Dollar Coin (USDC) and Tether (USDT) are examples of this type of coin.

2. Commodity-backed Stablecoins

Some stablecoins are backed by other assets, like gold. The overall functions remain the same, but the value is tied to the current price of gold, with physical gold used as collateral.

3. Crypto-collateralized Stablecoins

Some other stablecoins that use a decentralized model, like DAI, have grown in popularity in the crypto community. Rather than maintaining their stable value through fiat reserves, users can lock up cryptocurrency as collateral for borrowing DAI on the Maker DAO platform.

There are also a growing number of decentralized lending platforms that allow users to deposit DAI or other stablecoins and earn interest. Network consensus, rather than a centralized team, governs DAI (similar to how Bitcoin works), which maintains a value equal to one U.S. dollar.

4. Algorithmic Stablecoins

Decentralized algorithmic coins are a newer technology and differ from the other types of stablecoins in that they don’t involve any type of collateral backing. Instead, they rely on smart contracts to maintain their price.

Comparing Stablecoins Strengths and Weaknesses

The different types of stablecoins are designed for different reasons, and therefore, can serve different purposes. In other words, they may each have strengths and weaknesses, depending on what a user wants to do with them.

So, depending on what a user wants or hopes for out of a stablecoin, those strengths or weaknesses may revolve around a specific coin’s relative stability, its risks related to regulation and centralization, its liquidity, and perhaps even its specific complexity.

Factors Influencing Stablecoins Price Behavior

Getting more granular, there are a lot of things to understand as to how stablecoins’ value is maintained.

How Stablecoins Maintain Price Stability

Stablecoins use a variety of means to maintain their price stability, and that includes various forms of collateralization, as discussed, which means they’re “pegged” to or “backed” by various forms of fiat currency, crypto, or commodities. Smart contracts, housed on blockchain networks, automatically keep stablecoin supply in check by executing trades or burning coins, which evens out with dynamic demand, and keeps values relatively stable.

Algorithmic Price Controls and Protocols

For stablecoins that maintain their value via algorithmic price control mechanisms, the process is similar. An algorithm creates or burns (destroys) coins to maintain a certain level of total coins that reaches a level of equilibrium with supply and demand. That algorithm, accordingly, maintains the stablecoins’ value. Again: Similar to smart contracts, but slightly different.

The Role of Arbitrage and Redemption in Stabilization

Crypto arbitrage, or the act of buying and selling the same stablecoins to try to profit from price differences, along with redemption, or trading in a stablecoin for its equal value in fiat currency, may help level price differences across coins. In effect, these two market factors or mechanisms, in conjunction with algorithmic or smart contract-powered price controls, can help keep a stablecoin’s value steady.

Importance of Transparency and Auditing

Each stablecoin is different, and there can be varying levels of transparency, and auditing associated with each stablecoin. Those differences can make a difference in terms of demand for a specific coin. If a stablecoin A is less transparent or somewhat riskier than stablecoin B, for instance, which would you prefer to use?

Reserve Quality, Transparency, and Auditing

A stablecoin’s reserve can also play a role in influencing its value and behavior. We’ve discussed how some stablecoins are backed by commodities or fiat. If a stablecoin is backed by a low-quality or low-value commodity, such as dirt, while another is backed by gold, that can create some divisions.

Further, there is likely to be some regard for how those reserves are tracked or audited, and how a stablecoin’s value matches up with its underlying reserve. All of that can come into play for stablecoin users.

Regulatory Environment and Evolving Legal Frameworks

The rules are changing around stablecoins, and each country will have its own way of dealing with them. That can and will also have an effect on supply, demand, and values.

Market Confidence, Track Record, and Reputation

There’s been a long-standing issue in the crypto space surrounding scams and rug-pulls, and that can give some users pause when deciding to utilize one coin versus the next. Accordingly, market confidence, track record, and reputation related to a specific coin are important factors.

Liquidity, Adoption, and Technical Reliability

Further, how widely used and reliable a stablecoin is perceived to be can also be important. Stablecoin holders will want to know that they can get their money back — that is, liquidate their holdings if and when they choose to do so — without much effort or friction.

Common Risks and Failure Scenarios

It’s possible that stablecoins could lose their value due to depegging, which is when the price of a stablecoin moves more substantially away from its pegged value. This could result from loss of confidence in the stablecoin or its reserves, panic selling, operational failures, and other factors. There are a number of things that could go wrong, and with the crypto space still evolving and still less regulated than the financial space, users should know that risks exist.

Stablecoins and Their Relationship With Traditional Finance

We’re still in the early stages of stablecoins’ integration into the broader, traditional financial space, and it’s evolving right before our eyes. But there are some use cases to be aware of, such as using DeFi blockchain technology to make loans, and more.

Stablecoins in Financial Trading and DeFi

Stablecoins are becoming a necessary component of the decentralized finance (DeFi) space. Holders can make transactions like peer-to-peer lending — where people make direct loans to each other via blockchain — with stablecoins.

Some users might prefer this option to other cryptocurrencies, which could hurt their rate of return if the price goes down. A stablecoin’s steady value may also add an element of confidence to financial arrangements.

Integration WIth Existing Financial Systems

Stablecoins and crypto are again being increasingly adopted by traditional and long-standing financial institutions. As such, they’ll likely become further ingrained and integrated into the broader financial space.

Centralization vs. Decentralization Considerations

One thing that attracts many users to the crypto space is its decentralized nature, which may allow them to access financial services more easily — from their smartphone or computer — and with fewer and lower fees.

Stablecoins could become more centralized as they’re adopted by bigger players and further integrated into the financial industry. However, this could also allow these groups to offer lower fees in some cases and increase accessibility since fewer intermediaries, if any, may be needed for transactions.

Regulatory Oversight and Compliance Challenges

There have been new rules and regulations floated to help smooth the path for stablecoins’ wider adoption in the financial space. The GENIUS Act, specifically, tasks the Treasury Department to encourage stablecoin innovation and adoption, and lays out which existing laws and regulations that they may be subject to. This is all still being worked out, but in the U.S., it is a change in how the federal government has, in the past, viewed most cryptocurrencies.^[3]

Practical Applications of Stablecoins for Businesses and Individuals

There are numerous potential applications for stablecoins.

•   Cross-border payments and remittances: Money, in its numerous forms, is designed to store and transfer value. Stablecoins can do the same, and perhaps with less associated costs. It can be expensive to make international payments or transfers, but it’s possible stablecoins could provide an alternative.

•   Treasury protection in high-inflation economies: It’s possible that stablecoins could provide some protections from inflation since they’re often backed by treasuries, particularly in places where inflation is a very serious problem. While we’ve had issues in the U.S. related to inflation in recent years, some countries have much higher rates of inflation, and stablecoins could provide ways to alleviate it.

•   Payroll solutions for remote teams and contractors: As discussed, stablecoins may prove useful in facilitating international payments. That could be a boon for business owners operating remote teams, or working with international freelancers or contractors.

•   Ecommerce and settlement: Stablecoins could prove a viable alternative to simple fiat currencies, like U.S. dollars, in certain cases to facilitate other types of purchases.

•   Addressing volatility in crypto markets: As mentioned, stablecoins may serve as a ballast in the crypto markets, lowering overall volatility.

•   Promoting financial inclusion for the unbanked and underbanked: There are a significant number of “unbanked” individuals in the U.S., or those who either choose not to use traditional banking services, or otherwise can’t access them. Stablecoins could bring those people into the fold, or prove a way for them to access the financial space.

The Future of Stablecoins

The future of stablecoins is still up in the air, but they do have momentum.

Emerging Trends and Innovations

Stablecoins are trending, as more and more financial institutions are starting to use them to facilitate transactions, and some will likely issue their own. As that happens, innovation will occur, as well, as users find new use cases or other ways to take advantage of stablecoins going forward.

Potential Impact on Global Finance

We don’t know what’s going to happen, but stablecoins could potentially have a significant impact on global finance. If they do prove successful at offering a quicker and more accessible payment system that can be used worldwide, the implications are wide-ranging.

The Takeaway

Stablecoins are cryptocurrencies that are designed to keep their value stable in relation to another asset — most commonly, an existing fiat currency, such as the U.S. dollar. Issuing these coins on a blockchain may help remove certain barriers to entry associated with traditional, legacy financial systems at large. It also has the potential to provide greater access to financial services to those who may not otherwise have the opportunity to participate in the world of finance.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

FAQ

What is the most stable cryptocurrency?

Theoretically, any stablecoin should be stable; most of them see their values fluctuate very little on a daily basis. The decentralized and algorithmic stablecoins have experienced somewhat more volatility than the centralized coins, historically.

What are some examples of stablecoins?

There are numerous stablecoins on the market, including DAI, Tether, Binance USD, USD Coins, and Paxos.

Can stablecoins offer protection from inflation?

It’s possible that stablecoins could provide some protections from inflation since they’re often backed by treasuries, particularly in places where inflation is a very serious problem.

About the author

Brian Nibley

Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Business Insider, Cointelegraph, Finance Magnates, and Newsweek. Read full bio.

Photo credit: iStock/tomap49

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