Explained: What is a stablecoin?

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If you spend even one day in crypto, you quickly learn a universal truth. Prices swing fast. One moment, your portfolio looks unstoppable; the next, you are questioning every financial decision you’ve ever made.

That unpredictability is part of crypto’s appeal, but not everyone wants digital assets that constantly rise and fall.

Traders, businesses, and everyday users increasingly need something steadier: a digital currency that behaves more like cash.

Stablecoins fill that gap. They are cryptocurrencies designed to keep their value stable, usually pegged to a real-world asset such as the United States dollar.

If Bitcoin (BTC) is digital gold, then stablecoins act as digital cash.

Their promise is simple: fast global payments, no banks as middlemen, and far less price drama.

The three main types of stablecoins

Not all stablecoins work the same way. Their stability model determines how much risk they carry and how resilient they are during market stress.

1. Fiat-backed stablecoins

These are backed 1:1 with actual money held in bank accounts or cash-equivalent assets.

Tether’s USDT and Circle’s USDC are the most widely used examples. For every token in circulation, there should be a real dollar somewhere in reserve.

2. Crypto-backed stablecoins

These rely on crypto collateral instead of traditional money. Because crypto prices fluctuate, they are typically overcollateralized.

DAI — issued by MakerDAO — is the best-known example. Locking up $150 of Ether (ETH) might mint $100 of DAI to protect against volatility.

3. Algorithmic stablecoins

These depend on code, incentives and supply adjustments — not collateral — to maintain their peg.

Think of them as autopilot systems attempting to balance market demand with token supply. They work until market conditions overwhelm the mechanism, as seen in past failures.

Each model has trade-offs, and none is immune to stress.

More from Explained:

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• Explained: What is sustainable Bitcoin mining?

Why stablecoins have become essential to global crypto use

Stablecoins have quietly become one of crypto’s biggest pillars. Their rise is driven by real-world utility rather than speculation.

They allow users to:

• Move money across borders in seconds.

• Earn yield in decentralized finance (DeFi) markets.

• Trade on crypto exchanges without touching traditional banking rails.

• Store value in economies facing rapid currency depreciation or inflation.

For millions of people around the world, stablecoins are not a crypto experiment — they are a lifeline.

They offer access to digital dollars in regions across Latin America, Southeast Asia, and parts of East Africa, where local currencies can lose value quickly.

The risks: stability depends on what backs the stablecoin

More on Stablecoins:

• Solana Foundation exec says ‘stablecoins are top of mind for everyone’ as Western Union launches stablecoin on Solana

• Largest private gold holder shuts down Bitcoin mining operations

• 175-year old fintech giant reveals plans to launch stablecoin on Solana

The risks: stability depends on what backs the stablecoin

Stablecoins offer reliability — but only when what backs them is solid.

Key risks include:

• Reserve transparency: Users must trust that issuers truly hold the assets they claim.

• Collateral quality: Crypto-backed stablecoins can fail if their collateral crashes too quickly.

• Algorithmic fragility: Non-collateralized designs require robust failsafes to survive extreme market events.

• Regulatory uncertainty: Oversight is evolving, and global frameworks are still catching up.

A stablecoin is only as stable as its foundation. Once that foundation cracks, the peg can break — sometimes dramatically.

Stablecoins as the bridge between traditional finance and Web3

So, what is a stablecoin at its core?

It is crypto that aims to behave like cash — fast like the internet, stable like the dollar. Stablecoins now act as a bridge between the old financial system and the decentralized one currently being built.

Their growth suggests a future where digital dollars flow as easily as messages online, powering payments, savings, trading and global commerce.

This story was originally published by TheStreet on Nov 28, 2025, where it first appeared in the Explained section. Add TheStreet as a Preferred Source by clicking here.