What Are Stablecoins? The Calm in the Crypto Storm

Imagine a boat on a wild sea. Prices of cryptocurrencies like Bitcoin or Ethereum are rising and crashing within minutes. Now, imagine a lifeboat—steady, balanced, reliable. That’s a stablecoin.

Stablecoins are digital currencies designed to stay stable in value, unlike most cryptocurrencies. And in the volatile world of crypto, that’s a big deal.

The Problem: Crypto Is Volatile

Let’s say you’re a freelancer in India working for a client in the US. They want to pay you in crypto because it’s faster and cheaper than bank transfers. Sounds great, right?

Now imagine this: You receive 500 USDT (a popular stablecoin) today. But what if it were in Bitcoin? The value could drop 10% by tomorrow. That’s risky.

That’s where stablecoins come in.

So, What Exactly Is a Stablecoin?

A stablecoin is a type of cryptocurrency that’s pegged to a stable asset—usually a traditional fiat currency like the US Dollar (USD), Euro (EUR), or even gold.

The idea is simple: 1 stablecoin = 1 unit of the pegged asset (e.g. $1 USD).

The 3 Main Types of Stablecoins

Let’s break it down like a menu:

1. Fiat-Backed Stablecoins

(Most Popular)

These are backed by real-world assets stored in a bank. For every coin, there’s actual money or collateral behind it.

Examples:

• USDT (Tether) – The most used stablecoin in the world. Backed by reserves including cash and equivalents.

• USDC (USD Coin) – Issued by Circle. Known for transparency and regular audits.

• BUSD (Binance USD) – Issued by Binance, pegged 1:1 to the US Dollar.

How it works: You send $1 to the issuer, they give you 1 stablecoin. You return the stablecoin, they give you back $1.

2. Crypto-Backed Stablecoins

Backed by other cryptocurrencies (like ETH), but over-collateralized to account for price swings.

Example:

• DAI – Created by MakerDAO, backed by crypto like ETH, but designed to stay close to $1 in value.

How it works: You deposit $150 worth of ETH to get $100 worth of DAI. This buffer protects the system if ETH prices drop.

3. Algorithmic Stablecoins

These aren’t backed by assets but are controlled by smart contracts that automatically expand or contract supply to maintain the $1 peg.

Example:

• FRAX – A mix of algorithmic and partially backed model.

• Note: Some failed badly (like Terra’s UST in 2022), so this model is high-risk.

Why Stablecoins Matter

• Global Payments: Send money across borders instantly without losing value.

• Savings & Earning: Store value in crypto without the rollercoaster ride of Bitcoin.

• DeFi & Trading: Most decentralized finance (DeFi) apps use stablecoins for lending, borrowing, and trading.

Real-Life Use Case

In Argentina, where inflation has devalued the local peso, many people save in USDT or USDC. It’s easier, faster, and safer than trying to buy physical dollars.

For crypto traders, stablecoins are the go-to during bear markets. It’s where people park their profits.

The Risks

Stablecoins are not magic. Some are more trustworthy than others. Always check:

• Is it audited?

• Who controls the reserves?

• What happens if the system breaks?

Governments are watching too. Regulation is coming fast—especially for fiat-backed stablecoins.

Final Thoughts

Stablecoins are the unsung heroes of crypto. While everyone chases moonshots, stablecoins quietly power the ecosystem—bringing stability, trust, and real-world use to digital finance.

Whether you’re a trader, a freelancer, or just curious about crypto, understanding stablecoins gives you a big edge.

If you found this helpful, follow me on X (@ShefaliOnChain) for more simple breakdowns of complex crypto topics.

Let’s decode the future of money—together.