Stablecoins are digital currencies that are designed to maintain a value that is pegged to an external reference asset. Most commonly, this reference asset is a fiat currency, like the dollar, but some stablecoins might be designed to track the price of a commodity like coffee. Unlike Bitcoin or Ethereum, which can experience significant fluctuations on a daily basis, fiat-denominated stablecoins solve crypto's volatility problem by anchoring their value to stable assets.

BitUSD became the first ever stablecoin when it launched in 2014, and was followed by Tether (USDT), which has since reached a market capitalization of over $160 billion. Stablecoins are now powering everything from international remittances to decentralized trading, while major regulatory developments, such as the US GENIUS Act, are providing much needed regulatory clarity for the sector. Stablecoins processed $27.6 trillion in transactions in 2024, surpassing Visa and Mastercard combined. With 500 million wallets holding stablecoins and a $251 billion market cap, they have swiftly become the foundation of digital finance. Mainstream adoption of stablecoins is likely to continue accelerating over the coming years.

How Stablecoins Work: The Three Main Models

Fiat-backed: Real Dollars, Digital Tokens

Each stablecoin is backed 1:1 by real assets securely held in bank accounts or with custodians and prime brokers. Tether holds mostly US Treasury bills and cash, while Circle keeps around 80% of its reserve assets in US Treasury bonds and roughly 20% in bank deposits.

The peg mechanism is simple arbitrage: when USDC trades at $0.98, traders buy cheap USDC and redeem them directly with Circle for a dollar.The reserve assets ensure that traders will always be able to redeem 1 USDC for 1 dollar, preventing a loss in confidence in the peg, and anchoring the market price near $1.00 .

Monthly audits verify that the value of the reserves of the company issuing the stablecoin match the value of the tokens in circulation, thus maintaining trust that providers will always be to redeem one token for one dollar.

Crypto-backed: Code as Collateral

While Tether and Circle are centralized stablecoins, MakerDAO's DAI is a more decentralized stablecoin that uses cryptocurrency as backing instead of bank deposits. Users can deposit $150 of ETH and in return mint $100 of DAI. The 150% collateral ratio helps to absorb any potential price swings.

If ETH crashes and your collateral drops below the threshold, then automated liquidation kicks in and the system sells your ETH to repay the DAI debt, protecting other users.

Here, smart contracts and mathematics replace TradFi banks and government assets. The drawback is that you need $1.50 to back every $1.00 of stablecoin.

Algorithmic: Software-Controlled Supply

These stablecoins maintain their peg through code that automatically adjusts the supply of the token. When demand rises, the system mints new tokens. When demand falls, it burns existing ones.

TerraUSD was designed using this approach and spectacularly failed in May 2022, when it lost its peg and destroyed $42 billion in value within days. The confidence-dependent mechanism created a death spiral: falling prices triggered panic selling, which caused prices to fall even further. These models are highly experimental and remain largely unproven at mass scale.

Why Stablecoins Matter

Banking Alternative: For the 1.4 billion unbanked adults globally, stablecoins provide access to dollar-denominated savings and payments through just a smartphone. Traditional banking infrastructure isn't required.

Instant Global Payments: Send money anywhere instantly for under $1 in fees. Traditional wire transfers take days and cost $15-50. Stablecoins settle in minutes on blockchains like TON, the 4th largest blockchain for USDT with over $1.4 billion in circulation.

DeFi Infrastructure: 65% of lending protocols use stablecoins as base assets. Beyond lending, they power automated market makers on platforms like Uniswap, where stablecoin trading pairs provide deep liquidity with minimal slippage. Stablecoins represent 40% of daily crypto volume.

Inflation Protection: In high-inflation countries, stablecoins can preserve purchasing power. While Argentina's peso might lose significant value every year, dollar denominated stablecoins grant easy access to a much more stable currency in the form of USD. This inflation hedge has been key to the rapid growth of stablecoin adoption in emerging markets, which have led growth at 30% year-over-year.

Programmable Features: Smart contracts using stablecoins can more easily enable automatic payment splitting, scheduled transfers, and condition-based transactions. Gaming platforms are able to pay rewards that maintain their value, rather than rewarding users with volatile tokens that could quickly become worthless.

TON has positioned itself as a leading stablecoin platform by natively supporting major stablecoins and integrating USDT across 100+ applications, providing fast, cheap stablecoin transfers within Telegram's billion-user ecosystem.

Risks and Challenges

Centralization Risk: Fiat-backed issuers can freeze accounts, face regulatory pressures, or even mismanage reserves. While new US laws require strict backing and licensing, you're still trusting new providers and third-party institutions when transacting with most stablecoins.

Market Stress: Crypto-backed stablecoins struggle during crashes. When collateral values drop rapidly, liquidations can spiral and create losses for users expecting stability.

Technical Failures: The Terra collapse showed how algorithmic models can break down completely. Confidence-based mechanisms become worthless when confidence disappears.

Due Diligence: Check recent reserve reports, understand redemption processes, and research the issuer's track record. No stablecoin is risk-free, even those backed by real dollars and supported by major investments.

Proper oversight, transparent reserves, and robust infrastructure reduce these risks significantly. Stablecoins already serve millions of users safely when deployed responsibly.

Conclusion

Stablecoins transform volatile cryptocurrencies into practical digital money. They enable instant global payments, power decentralized finance, and provide a stable store of value in unstable economies. With proper oversight, transparency, and responsible deployment, stablecoins can provide meaningful utility to millions of people, supporting institutional adoption and enabling new forms of financial activity.