Stablecoins

What are stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value over time and avoid price swings. It’s usually achieved by pegging their value to stable assets, more often the US dollar.

Stablecoins have become important in the crypto economy. They act as digital equivalents of fiat money, particularly on platforms that don’t support traditional banking. Traders use them to move funds quickly, hedge against volatility, or store value. In decentralized finance (DeFi), stablecoins enable lending, borrowing, and payments, all without leaving the blockchain.

First introduced around 2014, stablecoins combine the benefits of blockchain with the predictability of fiat currency. By solving the volatility problem, stablecoins have laid a significant foundation for the broader adoption of crypto technologies worldwide.

What are the types of stablecoins?

Stablecoins are grouped into different types based on how they maintain their price stability. Each type uses a unique method, whether through collateral, code, or a combination of both.

Fiat-backed stablecoins

Fiat-backed stablecoins are supported by real-world assets, such as cash or government bonds, held by a trusted third party. For example, USD Coin (USDC), available on the Solana blockchain and other networks, is a fiat-backed stablecoin pegged 1:1 to the US dollar. Its issuer, Circle, claims that each USDC token is fully backed by dollar-denominated assets and can be redeemed for one US dollar.

Examples: USD Coin (USDC), RLUSD on the XRP Ledger and Ethereum blockchain.

They are widely used due to their simplicity and broad acceptance, although transparency varies between issuers.

While fiat-backed stablecoins are popular for their simplicity and wide use, transparency differs across issuers. Some, like USDC, offer regular audits and clear reserve disclosures, while others, like USDT, have faced criticism over limited transparency.

Crypto-backed stablecoins

Backed by other cryptocurrencies instead of fiat, these tokens use over-collateralization to handle volatility. For example, to issue $100 worth of stablecoins, a user might need to deposit $150 worth of crypto.

Example: DAI, which is pegged to the US dollar but backed by Ethereum and other digital assets. Smart contracts manage the collateral and adjust system parameters as needed, all without centralized control.

Commodity-backed stablecoins

These stablecoins are backed by physical assets like gold or oil. Each token represents a fixed amount of the commodity, and the token’s price reflects the market value of that asset.

Examples: PAX Gold (PAXG), Tether Gold (XAUT)

Such stablecoins offer a blockchain-based way to gain exposure to tangible assets, often appealing to users who seek inflation hedges or asset diversification.

Algorithmic stablecoins

Not all stablecoins use reserves. Some rely on algorithms rather than collateral. Such stablecoins are known as algorithmic. They use smart contracts to automatically adjust the token supply in response to price changes:

• When demand increases and the price rises above the target, the system issues more tokens to bring the price down.
• When demand decreases and the price falls below the target, the system removes tokens from circulation to push the price back up.

This rules-based approach aims to maintain stability without traditional backing, though it carries higher risk and complexity.

Examples: Ampleforth (AMPL), USDD on the TRON blockchain, Frax (which uses a hybrid model with partial collateral and algorithms)

Algorithmic stablecoins are still experimental and often more volatile than collateral-backed types.

What are stablecoins used for?

While Bitcoin payments offer speed and decentralization, their price volatility can limit day-to-day business use. Stablecoins solve this problem by providing a price-stable alternative that supports real-world applications without significant market swings.

Here’s how stablecoins can be used by businesses:

• Payments. Stablecoins are used for payments. Businesses can accept them without relying on legacy payment processors. It reduces transaction costs, especially in comparison to the 2-3% fees charged by traditional systems (actual fee rates may vary). Merchants receive funds faster and gain access to a global customer base. With blockchain, payments settle in seconds and without the risk of chargebacks.
• Settlement. Along with DOGE, ADA, BCH, and other cryptocurrencies, stablecoins are utilized for near-instant settlement. Companies that operate across time zones no longer depend on banking hours. Transactions occur 24/7 on-chain. It is especially useful for platforms that require high-frequency transactions, such as online shops or gaming applications. Stablecoin settlement eliminates delays and increases operational efficiency.
• Cross-border transfers. Stablecoins offer a faster and cheaper way to send funds to many countries of the world. Traditional remittance channels involve high fees and long wait times of up to 5 business days. Stablecoins solve these troubles by removing intermediaries. A stablecoin owner can send digital assets across borders in minutes, not days. It helps crypto holders and businesses in emerging markets where financial access is limited or unreliable.
• Payroll and payouts. Many blockchain-based companies use stablecoins for payroll. The purpose is to reduce friction in paying global teams, freelancers, or content creators. It serves to provide timely and predictable payments, even in volatile market conditions. Workers receive digital assets that retain a stable value, which they can hold or exchange at any convenient for them time.
• Access to DeFi. Stablecoins also serve as the backbone of decentralized finance. Users can lend, borrow, and trade with stablecoin pairs without converting to fiat. It helps to reduce slippage and provides price certainty.

By providing reliable value on-chain, stablecoins unlock real utility in crypto. They bridge the gap between traditional finance and digital assets and offer a stable medium of exchange built for global digital commerce.

Disclaimer: Mention of third-party stablecoins is for informational purposes only and does not imply endorsement or partnership by CoinsPaid.

Pros and cons of stablecoins

Stablecoins bring practical benefits to the crypto economy. At the same time, they come with clear limitations. Thus, it’s important for businesses to understand both sides.

Pros of stablecoins:

• Price stability. Stablecoins aim to hold a consistent value. Their peg to assets like the US dollar protects businesses from sudden market swings. It makes them suitable for daily transactions and long-term holdings.
• High liquidity. Many stablecoins trade on major exchanges. They can be easily swapped for other digital assets. This flexibility supports fast trades, portfolio rebalancing, and exits during market volatility.
• Market access. Stablecoins offer a more stable entry point into the crypto space by mitigating price volatility. They can remove the barrier of price fluctuation, which allows users to participate without managing high-risk exposure. Thus, they are rather useful for businesses that operate in crypto-first environments.
• Fast and low-cost transfers. Transactions in stablecoins process within seconds. Fees are often much lower than in traditional systems. It supports high-speed settlements and cross-border payments, which is very useful for digital commerce.
• Important role in DeFi. Stablecoins are a key element of decentralized finance. They power lending, borrowing, and yield protocols without reliance on fiat. Their stable value keeps smart contract operations efficient and predictable.

Cons of stablecoins:

• Centralization risks. Many stablecoins rely on centralized issuers. As a result, it raises concerns about reserve transparency, governance, and regulatory compliance.
• Counterparty exposure. Users must trust that issuers hold sufficient reserves and follow audit standards. Not all issuers offer the same level of verification or openness.
• Limited upside. While stablecoins protect against loss, they do not benefit from market gains. Their design prioritizes stability over appreciation.
• Regulatory uncertainty. Stablecoins attract growing attention from global regulators. Future rules may impact issuance, use cases, and availability.
• Manipulation risks. Stablecoins with poor design or governance may face issues with price control. Lack of oversight can weaken the peg and affect reliability.

Understanding the strengths and weaknesses of stablecoins helps businesses choose the right cryptocurrency payment solution.