Stablecoins are a type of cryptocurrency designed to maintain a stable price. The most common are USD stablecoins, which aim to maintain a 1:1 price ratio with the US dollar.
Holding a USD stablecoin is similar to holding a physical dollar. They are primarily used to buy and sell other cryptocurrencies, and investors can hold them during idle periods without worrying about the price volatility typical of other digital assets.
In recent years, the stablecoin market has experienced rapid growth. The largest stablecoin, USDT, has a market capitalization of approximately $140 billion, while the second-largest, USDC, boasts a market cap of around $57 billion. They have become a fundamental medium of exchange within the crypto ecosystem.
This guide will explain how stablecoins work, their functions, various types, associated risks, and how you can acquire them.
What Is a Stablecoin?
A stablecoin is a special category of cryptocurrency engineered to maintain a stable value, typically by being pegged to a specific asset like the US dollar, the Euro, or gold. For example, 1 USDT (Tether) is theoretically equal in value to 1 US dollar.
In simple terms, it involves taking a real-world asset and packaging it into a cryptocurrency that can be traded on a blockchain.
USD stablecoins dominate the market
The most prevalent type is the USD stablecoin, which is designed to maintain a 1:1 price with the US dollar. Functioning as a form of digital dollar, they are sometimes just referred to as "stablecoins."
These digital dollars are used to facilitate trades between different cryptocurrencies and provide a safe harbor from market volatility.
Why Use Stablecoins? 3 Primary Use Cases
Use Case 1: Store of Value
Stablecoins are a mainstream trading pair
While you can use your local currency (like the New Taiwan Dollar) to buy some cryptocurrencies, the available options are often limited, and market liquidity can be poor.
Therefore, when investing in crypto, it's common practice to convert local currency into a USD stablecoin first and then deposit it into an international exchange for trading.
This is analogous to investing in US stocks: you convert your local currency to US dollars before sending them to a foreign broker. USD stablecoins act as a digital dollar and are the dominant unit of trade in the crypto world.
The store of value function
Cryptocurrencies are notoriously volatile. Before stablecoins existed, most people could only hold Bitcoin. To realize profits, they had to convert their holdings back into fiat currency (like TWD or USD), which was often costly and inconvenient.
With the advent of stablecoins, investors can now take profits by converting into a stablecoin, holding that stable value, and waiting for the right moment to re-enter the market.
Use Case 2: Everyday Payments
Thanks to their price stability and rapid settlement times, an increasing number of merchants are beginning to adopt stablecoins as a payment method, with USDC leading the charge.
Daily spending with USDC
- Online Shopping: In August 2023, a major US e-commerce giant announced integration with Solana Pay, allowing merchants to accept payments in USDC.
- Travel: The travel platform Travala is deeply integrated with crypto, enabling users to pay for flights, hotels, and travel expenses using USDC.
- Entertainment: Globally renowned streaming platform Twitch and the world's largest movie theater chain, AMC Theaters, both accept USDC for payments.
Credit card networks adopt USDC for settlement
- In March 2020, Visa became the first major payment network to use USDC for settling transactions, starting with a pilot on the Ethereum blockchain and expanding to Solana in 2023 to enhance cross-border settlement speeds.
- Mastercard's collaboration with USDC began in 2021, and millions of dollars in transactions have already been settled using this solution.
Use Case 3: International Trade and Remittances
Stablecoins offer a faster and cheaper alternative for cross-border payments, presenting clear advantages over traditional banking systems.
For instance, a Chainalysis report highlighted that in Sub-Saharan Africa, sending a $200 remittance using stablecoins was about 60% cheaper than using traditional fiat currency methods.
What Are the Different Types of Stablecoins?
Type 1: Fiat-Collateralized Stablecoins
This is the most popular type of stablecoin. Its value is pegged to a fiat currency like the US dollar or Euro and is backed by real reserves of that currency held in bank accounts.
The most famous example is USDT, which is directly pegged to the US dollar. Theoretically, every 1 USDT is equivalent to 1 USD.
How they work:
- Deposit Collateral: A trusted institution (like Tether or Circle) deposits fiat currency into a bank account or uses it to purchase bonds.
- Issue Stablecoins: Based on the deposited fiat, the institution creates an equivalent amount of stablecoins on a blockchain (e.g., $1 held = 1 USDT minted).
- Usage: Users can purchase these stablecoins and use them across the crypto market.
- Redemption: In theory, users can always redeem their stablecoins for an equal value of the underlying fiat currency.
Type 2: Crypto-Collateralized Stablecoins
These stablecoins are backed by reserves of other cryptocurrencies to maintain their value, which is also typically pegged to the US dollar. DAI is the most well-known example.
- Cryptocurrency as collateral: Users lock up crypto assets, like Ethereum (ETH), as collateral to generate or "mint" DAI.
- Over-collateralization: Due to the high volatility of crypto, the system requires over-collateralization. For example, you might need to lock up $200 worth of ETH to mint $100 worth of DAI.
- Liquidation mechanism: If the price of the collateral (e.g., ETH) falls too close to the value of the minted DAI, a smart contract will automatically liquidate the collateral assets based on pre-defined rules.
In simple terms, this is similar to taking a loan from a bank using real estate as collateral. If the property's value decreases and the loan isn't repaid, the bank will foreclose on the asset.
Type 3: Commodity-Backed Stablecoins
These stablecoins are pegged to the price of commodities like gold, silver, or oil. PAXG (Pax Gold) is a prime example, pegged to physical gold, allowing investors to gain exposure to gold through a digital token.
PAX Gold (PAXG) is a cryptocurrency backed by physical gold stored in London LBMA vaults, with monthly third-party audits to ensure full backing.
- Issued and managed by the Paxos Trust Company, regulated by the New York State Department of Financial Services.
- Each PAXG token represents 1 troy ounce (approx. 31 grams) of a London Good Delivery gold bar.
- Holders can redeem PAXG for fiat currency, other crypto assets, or even physical gold.
However, due to the abundance of alternative investment vehicles for commodities (like Gold ETFs), commodity-backed stablecoins have not seen widespread adoption.
Type 4: Algorithmic Stablecoins
This type of stablecoin relies on smart contracts and algorithms to control its supply and maintain its peg, sometimes with partial crypto collateral for added stability.
The most infamous example is UST (TerraUSD), developed by the Korean blockchain project Terraform Labs.
- If price falls below $1: The algorithm would increase the stablecoin supply to push the price back up.
- If price rises above $1: The algorithm would buy back and "burn" stablecoins to reduce supply and bring the price down.
The advantage was that they didn't require 100% fiat reserves, making them capital efficient. However, the critical flaw was their inability to handle a mass withdrawal, or "bank run."
In May 2022, UST, which had a market cap of $18 billion, entered a death spiral due to design flaws and panic-driven selling, ultimately crashing to near zero.
Following the UST collapse, this category of stablecoin largely imploded and is rarely used today.
Top 6 Stablecoins by Market Capitalization
| Stablecoin | Issuer | Pegged Asset | Market Cap | Market Share |
|---|---|---|---|---|
| USDT | Tether Limited | US Dollar | $155.5B | 67% |
| USDC | Circle | US Dollar | $61.6B | 26.5% |
| USDe | Ethena Labs | US Dollar | $5.89B | 2.5% |
| DAI | SKY (formerly MakerDAO) | US Dollar | $5.36B | 2.3% |
| USD1 | World Liberty Financial | US Dollar | $2.19B | 0.9% |
| FDUSD | First Digital Limited | US Dollar | $1.51B | 0.65% |
Source: DefiLlama
Overview of USDT (Tether)
USDT is the largest stablecoin by market cap and trading volume. It was launched in 2014 by Tether Limited.
USDT is a fiat-collateralized stablecoin, backed by a reserve of assets that includes US dollars, government bonds, and corporate debt.
Despite past controversies regarding the sufficiency of its reserves, the company has made improvements in recent years. It remains the most widely used stablecoin for trading.
Overview of USDC
USDC is the second-largest stablecoin by market cap. It is issued by US-based company Circle in collaboration with the publicly-listed exchange Coinbase.
USDC is a fiat-collateralized stablecoin, backed by reserves of US dollars and US Treasuries. It is generally considered to have higher transparency than USDT.
Overview of DAI and USDS
DAI and USDS are effectively stablecoins from the same ecosystem:
- DAI is a decentralized stablecoin launched by MakerDAO in December 2017, operating on the Ethereum blockchain.
- USDS is a new decentralized stablecoin issued through the SKY protocol (the evolution of MakerDAO). Starting September 18, 2024, DAI holders could choose to upgrade their tokens to USDS.
USDS maintains its stability through an over-collateralization mechanism, requiring users to lock up crypto assets worth more than the value of the stablecoin they mint. It is the largest decentralized stablecoin by market cap.
Overview of USDe
USDe is a synthetic dollar stablecoin issued by Ethena Labs. It uses a combination of crypto collateral and derivative hedging mechanisms to maintain its 1:1 peg with the US dollar.
Its core mechanism leverages "Ethereum staking yields" and "funding rate arbitrage" from derivatives markets to achieve a high annualized yield while preserving price stability.
According to the Ethena Labs dashboard, the USDe yield has fluctuated between 5% and 10% APY in 2025.
Overview of USD1
USD1 is a USD stablecoin issued by the startup World Liberty Financial, which has financial backing associated with the Trump family. Since its launch in 2025, its market cap has grown rapidly, surpassing $2.1 billion and overtaking others like FDUSD to become a notable player.
USD1 employs a 1:1 dollar asset reserve model, with custody handled by BitGo. However, it has not yet published a full, independent audit report. While its growth is fueled by political narratives and major exchange listings like Binance, its reserve transparency and political connections remain potential risk factors.
Overview of FDUSD
FDUSD (First Digital USD) is a USD stablecoin issued by Hong Kong-based fintech company First Digital Limited. Launched in 2023, it has become the sixth-largest stablecoin, operating on multiple chains including BNB Chain, Ethereum, and Solana.
FDUSD's key feature is its deep integration with the Binance ecosystem, supporting Launchpool activities and zero-fee trading pairs. Its dollar reserves are managed by the trust company First Digital Trust, which publishes monthly proof-of-reserve reports audited by a third party. Although it experienced a brief de-pegging event, it currently maintains a high reserve ratio and continues to expand into cross-chain payments and compliant markets.
Are Stablecoins Safe? Understanding the Risks
The safety of a stablecoin primarily depends on its underlying mechanism and the credibility of its issuer.
While their price is designed to be stable, they are not without risk. If the mechanism fails or the issuer faces a crisis of confidence, the stablecoin can de-peg from its intended value due to panic selling.
Issuer Risk
The largest stablecoin, USDT (Tether), has faced scrutiny over the years regarding the transparency of its operations and the completeness of its disclosures.
In response to these concerns, issuer Tether regularly publishes reserve reports on its website, which can be used to assess its backing.
Reserve Asset Risk
Typically, USD stablecoin reserves are held in low-risk assets like US dollars and US Treasury bonds, which should pose minimal problems for redemption.
However, in 2023, a panic event occurred with USDC when its issuer, Circle, disclosed that a portion of its reserves were held at the failing Silicon Valley Bank (SVB). This led to panic selling, causing USDC's price to drop briefly to $0.87.
Although the price recovered to $1 after the US government stepped in to backstop SVB, some investors sold at a loss during the panic.
No stablecoin is 100% risk-free. A prudent strategy for investors is to diversify their holdings across different stablecoins to mitigate the impact if one particular asset experiences issues.
How to Buy Stablecoins
There are three primary ways to acquire stablecoins:
- Through a licensed local exchange (Most Recommended)
- Via credit/debit card purchase
- Through C2C (Peer-to-Peer) trading platforms
Using a well-established, licensed local exchange is generally recommended for most users. These platforms have proven track records, often offer better exchange rates, and provide security against fraudulent coins.
For small, immediate purchases, buying with a card is an option, though the exchange rates are usually less favorable, and additional processing fees often apply.
Buying Through a Licensed Local Exchange
If you want to fund your account with local currency, using a reputable local exchange is the best path. These platforms are regulated, have operated for years, and simplify the process of converting fiat to crypto.
When selecting an exchange, prioritize those with strong security measures, transparent fee structures, and positive user reviews. Always ensure you are using the official website and enable all available security features, such as two-factor authentication (2FA). For a deeper dive into acquisition strategies, you can explore more strategies on advanced purchasing methods and security best practices.
Buying with a Credit/Debit Card
Most major exchanges offer a built-in function to buy crypto directly with a card. On a typical platform, the process involves:
- Logging into your exchange account.
- Navigating to the "Buy Crypto" or similar section.
- Selecting your desired stablecoin (e.g., USDT, USDC).
- Choosing "Credit/Debit Card" as the payment method.
- Entering the amount and completing the transaction.
Be aware that this convenience often comes with higher fees and less favorable exchange rates compared to bank transfer methods.
Frequently Asked Questions (FAQ)
Q: What makes USDT a stablecoin, and how much is one USDT in my local currency?
A: USDT is a fiat-collateralized stablecoin, meaning it's backed by reserves of real-world assets (primarily the US dollar) held by its issuer, Tether. Its goal is to maintain a value of 1 USDT = 1 USD. Therefore, its value in your local currency is directly equivalent to the current exchange rate between the US dollar and your currency.
Q: Is Bitcoin considered a stablecoin?
A: No, Bitcoin is not a stablecoin. It is a highly volatile cryptocurrency whose price fluctuates significantly based on market supply and demand. Stablecoins are specifically designed to minimize this volatility.
Q: What is the main advantage of using a stablecoin like USDC over traditional banking?
A: The primary advantages are speed and cost, especially for cross-border transactions. Stablecoin transfers can settle in minutes, 24/7, and often with much lower fees than international wire transfers sent through traditional banks.
Q: Can algorithmic stablecoins ever be safe?
A: Following the collapse of UST, the algorithmic stablecoin model is widely viewed with extreme skepticism. Their safety is highly dependent on flawless code and market conditions that prevent panic-induced death spirals. Most investors consider them to be significantly riskier than asset-collateralized stablecoins.
Q: How can I verify if a stablecoin is fully backed by reserves?
A: Reputable stablecoin issuers (like Circle for USDC and Tether for USDT) regularly publish attestation reports from independent accounting firms. These reports provide insight into the composition and value of the reserve assets. Always check the issuer's official website for these transparency reports.
Q: Are my stablecoins stored on an exchange safe?
A: While convenient for trading, storing large amounts of crypto on any exchange carries risk (often summarized as "Not your keys, not your coins"). For significant long-term holdings, it is safer to withdraw your stablecoins to your own private, non-custodial wallet, where you control the private keys.