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What is a Stablecoin? A Complete Guide for Beginners on How It Works, How to Choose, and Its Benefits
Are you interested in stablecoins but feel that “the mechanism is not well understood” or “there are too many types”? In the world of cryptocurrencies, new services are emerging one after another, making it especially challenging for beginners to grasp the overall picture. This article provides a clear explanation of stablecoins.
What is a Stablecoin
A stablecoin is a type of cryptocurrency designed to maintain a stable price by pegging its value to assets such as fiat currencies like the US dollar or commodities like gold. Unlike highly volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins are structured to keep their value close to “1 coin = 1 dollar.”
The goal of stablecoins is to leverage the advantages of cryptocurrencies—fast transfers, 24/7 operability, and high security on the blockchain—while achieving price stability.
Rapidly Growing Market Size
The stablecoin market has expanded rapidly in recent years. By 2025, the total market capitalization of stablecoins is expected to reach around $300 billion, significantly increasing from the beginning of the year when it was in the $200 billion range.
However, data also shows a slight decrease in November 2025 on a monthly basis, indicating that the market is transitioning from a “one-sided upward trend” to a phase of growth and correction.
Types and Features of Stablecoins
Stablecoins are classified into several categories based on “how they maintain price stability.” Understanding these differences is essential for choosing the right coin for yourself.
Fiat-Collateralized Stablecoins
The most common type, backed 1:1 by fiat currencies such as the US dollar. Reserves are managed by independent custodians and are regularly audited to ensure transparency.
Examples:
Commodity-Collateralized Stablecoins
Linked to physical assets such as gold or silver. The backing assets are stored behind the stablecoin.
Examples:
This option is suitable for those who prefer to hold physical assets digitally, starting with small amounts.
Crypto-Backed Stablecoins
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 requires depositing $2 worth of crypto—to absorb risks.
Example: DAI (issued via MakerDAO protocol)
Algorithmic Stablecoins
Maintain a near-$1 value primarily through algorithms that adjust the supply based on price, without holding significant collateral assets.
Example: FRAX (FRAX)
Major Stablecoins
The stablecoin market is dominated by a few key players employing different approaches to maintain stability and transparency.
Tether (USDT)
Tether (USDT) is the largest stablecoin as of November 2025. Its market cap exceeds $180 billion, maintaining its position as the top stablecoin.
There have been criticisms regarding the opacity of its reserves, and in 2021, it was fined by the U.S. Commodity Futures Trading Commission (CFTC). Despite this, it remains widely used, especially in Asia and Europe, with a significant market presence.
Recently, S&P Global downgraded Tether’s reserve credibility to the lowest category in November 2025, citing increased holdings of volatile assets like Bitcoin and corporate bonds. While the price remains close to $1, concerns about systemic impact due to its large scale are growing.
USD Coin (USDC)
USDC is issued by Circle and emphasizes transparency and regulatory compliance.
Primarily used in North America and widely adopted in DeFi applications. As of November 2025, its market cap is approximately $75 billion, showing significant growth since the start of the year.
Recent regulatory developments in the U.S. focus on positioning USDC as a “payment infrastructure,” further emphasizing its role in the financial ecosystem.
Other Major Stablecoins
How Stablecoins Maintain Their Value
Stablecoins keep their value close to $1 through a combination of mechanisms.
Reserve Backing
For fiat-collateralized stablecoins, reserves are held in bank accounts, government bonds, or similar assets equivalent to the total issued amount. When users redeem stablecoins, they receive the corresponding fiat currency.
Peg (Price Linkage) Mechanism
Pegging, such as 1 USDT ≒ 1 dollar, involves maintaining a 1:1 link with a specific currency. To uphold this peg, various actions are taken:
Even if the price slightly deviates from $1, these forces work to restore it close to the peg.
Transparency and Auditing
Many stablecoin issuers regularly publish audits or proof of reserves to demonstrate sufficient backing. These reports are typically conducted by third-party accounting firms, providing periodic disclosures of reserve composition.
Benefits of Stablecoins
Stablecoins offer advantages that are intermediate between “regular cryptocurrencies” and “traditional banking systems.”
Price Stability During Market Fluctuations
The biggest benefit is providing price stability in the crypto market. During downturns, traders can convert assets into stablecoins to preserve value without exiting the crypto ecosystem.
Facilitating International Transactions and Remittances
Stablecoins enable faster and cheaper cross-border payments compared to traditional banking. For example, remitting $200 from Sub-Saharan Africa using stablecoins can reduce costs by about 60% compared to conventional methods.
Promoting Financial Inclusion
In regions with limited banking access or unstable local currencies, stablecoins offer individuals a means to participate in the global economy. Providing a stable store of value accessible via smartphones helps serve unbanked populations worldwide.
Foundation for DeFi (Decentralized Finance)
Stablecoins underpin many DeFi protocols, enabling lending, borrowing, and yield farming without price volatility. They are also ideal for liquidity pools on decentralized exchanges.
Main uses:
Risks and Challenges of Stablecoins
Despite their advantages, stablecoins face several risks and issues.
Regulatory Concerns
As stablecoins grow in importance, regulatory scrutiny increases. In the U.S., both the House and Senate are advancing legislation to establish guidelines for stablecoin 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 on others.
Reserve Transparency Issues
Transparency regarding the reserves backing stablecoins remains a concern. Some issuers publish regular proof-of-reserve reports, while others face criticism for lack of transparency. Without sufficient transparency, users cannot be fully confident that stablecoins are backed as claimed.
Depegging Risks
There have been instances where stablecoins lost their peg, notably the collapse of TerraUSD (UST) in May 2022, which wiped out about $45 billion in market value within a week. This event highlighted vulnerabilities, especially of algorithmic stablecoins.
Centralization and Security Risks
Many major stablecoins are issued by centralized entities, introducing counterparty risk and single points of failure. They may also be subject to address freezing or blacklisting, impacting user control.
Use Cases for Stablecoins
Stablecoins have a wide range of applications in retail and corporate contexts.
Trading and Investment
Stablecoins serve as important trading pairs on crypto exchanges, allowing traders to enter and exit positions without converting to fiat. This reduces fees and processing times and provides a stable reference point for evaluating other cryptocurrencies.
For investors, stablecoins offer a way to “park” funds during market volatility, enabling quick re-entry when conditions improve.
Payments and Commercial Transactions
The stability of stablecoins makes them suitable for everyday commercial transactions. Unlike Bitcoin or Ethereum, their value does not fluctuate significantly between transaction initiation and settlement, maintaining consistent purchasing power.
International Remittances
Traditional cross-border payments via banks or remittance services are often costly and slow, with processing times of days and fees exceeding 5-7%. Stablecoins enable near-instant international transfers at a fraction of the cost.
Value Preservation in High-Inflation Regions
In countries experiencing high inflation or currency controls, stablecoins provide residents with a means to preserve purchasing power. Converting local currency to dollar-pegged stablecoins helps prevent asset devaluation without needing physical dollars or foreign bank accounts.
Regulatory Environment for Stablecoins
The regulatory landscape for stablecoins is continuously evolving, with governments and financial authorities recognizing their growing importance.
Regional Regulatory Approaches
United States: Both the House and Senate are working on legislation to establish frameworks for stablecoin issuers, including reserve requirements, transparency standards, and oversight mechanisms.
European Union: Implemented the Markets in Crypto-Assets Regulation (MiCA) in 2023, which effectively bans algorithmic stablecoins and mandates third-party custody of reserves for others.
Singapore: The Monetary Authority of Singapore (MAS) has finalized a regulatory framework for single-currency stablecoins pegged to the Singapore dollar or G10 currencies.
Future Regulatory Outlook
It is expected that regulations will move toward:
How to Buy and Use Stablecoins
Getting started with stablecoins is accessible even for beginners. Here is a basic overview of how to purchase and utilize them.
Basic Flow for Buying Stablecoins
How to acquire stablecoins:
Tips for Safe Usage
To use stablecoins securely, keep in mind:
Summary: The Future and Strategy for Stablecoins
Stablecoins have grown from a few hundred billion dollars to over $3 trillion, becoming a vital bridge connecting blockchain and traditional finance. The entry of major institutions like PayPal further underscores their importance.
Future developments are expected to include:
By effectively leveraging the benefits of stablecoins—such as price stability, efficient international remittances, participation in DeFi, and inflation hedging—individuals can access options previously difficult to reach.
In this rapidly changing field, staying informed and aligning your investments with your risk tolerance and goals is key. Gradually following the latest developments and engaging with stablecoins in a measured way will help you ride the wave of digital finance successfully.