Stablecoins have become a major player in the crypto economy. In 2024, they facilitated $26.1 trillion in transactions. Businesses are increasingly experimenting with them for cross-border payments, and they are emerging as an important alternative in countries with unstable currencies. They look like dollars and act like dollars, but they live on blockchains—available 24/7, instant, and global.
The mechanics can sound deceptively simple, but under the hood, there’s a whole spectrum of designs, from heavily audited fiat-backed tokens to riskier algorithmic experiments. Below, we’ll explore what stablecoins are, how they’re built, how they maintain their value, and why they’re becoming one of the most widely used forms of digital money today.
What’s in this article?
- What are stablecoins?
- What types of stablecoins exist?
- How do stablecoins maintain price stability?
- What are the benefits of using stablecoins?
- What risks do stablecoins pose?
- How are stablecoins used in business today?
- What does the future of stablecoins look like?
What are stablecoins?
Stablecoins are a type of digital currency built to do one thing most cryptocurrencies can’t: hold a steady value. Instead of experiencing drastic swings in value, a fiat-pegged stablecoin stays within pennies of its peg (often the US dollar). To pull this off, stablecoins use a mix of reserves and programmed supply controls to keep each token’s price anchored. The result is a form of digital cash on blockchain networks: money that can move globally in minutes but won’t lose half its value overnight.
That combination has made stablecoins a highly used form of crypto. They now account for more than two-thirds of cryptocurrency transaction volume, eclipsing even Bitcoin and Ether. Tether (USDT) and USD Coin (USDC), both pegged to the dollar, rank among the largest crypto assets in circulation and rival the market caps of entire corporations. Traders rely on them as a stable base for moving in and out of volatile tokens, and businesses are starting to use them for payments and settlements that traditional methods make slow and costly.
Unlike central bank digital currencies, which are issued by governments, stablecoins currently come from private companies or decentralized protocols. They’re issued as tokens on public blockchains such as Ethereum, Tron, or Solana. That means they run 24/7, can be transferred across borders in minutes, and integrate with programmable financial tools such as smart contracts.
What types of stablecoins exist?
Stablecoins all share the same goal of maintaining a stable value, but they go about it in very different ways.
Four main approaches dominate the current market:
- Fiat-backed stablecoins: This is the most common type. Examples include Tether (USDT) and USD Coin (USDC). Each token is backed one-for-one with traditional money (usually US dollars or short-term treasuries) sitting in reserves. When supply and demand push the price away from $1, traders step in to arbitrage—buying below a dollar and redeeming for $1, or creating new coins when the price drifts higher. Issuers publish attestations or audits to show the reserves are really there.
- Crypto-backed stablecoins: These coins lean on other cryptocurrencies as collateral. Because crypto is volatile, they require over-collateralization—you might need to lock up $300 worth of Ether to mint $200 worth of DAI. If the collateral falls too much, it’s liquidated automatically to defend the peg. Everything is on-chain and verifiable, which makes the system more transparent but also more fragile in sudden market crashes.
- Commodity-backed stablecoins: These are tied to physical assets such as gold. One token of PAX Gold (PAXG), for example, represents one troy ounce of gold held in a vault. Tether Gold (XAUT) works similarly. They don’t track dollars, but they offer a digital way to hold and move commodities that people already trust as stores of value. These are smaller in scale, but important for users who want to hedge outside traditional currencies.
- Algorithmic stablecoins: These try to hold their peg through code rather than collateral. When the price goes up, the system mints more coins; when it slips, supply is pulled back. In theory, this is like an automated central bank. In practice, it can be risky. TerraUSD collapsed in 2022 when confidence cracked and the algorithm couldn’t hold. Purely algorithmic models of stablecoins are now banned in the EU and restricted in many other regions.
How do stablecoins maintain price stability?
Stablecoins hold their value through a mix of collateral, redemption mechanisms, and market incentives. The exact method depends on the design.
Stability for fiat-backed coins comes from a reserve-and-redemption loop. If USDC drifts below $1, traders buy it cheaply and redeem it with the issuer for a full dollar. If it trades above $1, new tokens can be minted and sold into the market. Arbitrage like this keeps the price glued near the peg.
Crypto-backed models, such as DAI, use over-collateralization and liquidation rules. Depositors must lock up more value in crypto than the stablecoins they create. If the collateral falls too far, the protocol automatically sells it off to preserve solvency. This way, even in volatile markets, the system can defend the peg, though extreme crashes can still strain it.
Algorithmic coins rely on supply adjustments coded into smart contracts. If demand pushes the price above the peg, the system expands supply. If the price slips, it contracts supply, often by giving users incentives to burn tokens in exchange for future rewards. When confidence holds, the peg works; when it breaks, collapse can be fast and severe.
Across all designs, blockchain infrastructure does the heavy lifting. Transactions settle globally within minutes, and collateral balances (in crypto-backed models) are visible in real time. Transparency—whether through on-chain data or third-party attestations for fiat reserves—matters as much as the mechanism itself. A peg is only stable if people believe the redemption promise will be honored.
What are the benefits of using stablecoins?
Stablecoins combine the stability of fiat money with the speed and openness of blockchain networks. They solve problems that both crypto and traditional payments systems leave unsolved.
Here are the benefits that stand out:
Less volatility: Paying a supplier or getting your salary in Bitcoin is a gamble—the value could change by double digits in days. With stablecoins, a dollar today is a dollar tomorrow. That makes them usable for commerce, payroll, and savings. Traders also park funds in stablecoins instead of cashing out to banks when markets swing.
- Expanded financial access: Stablecoins can be a practical on-ramp to digital money for people in countries with unstable currencies or weak banking systems. Anyone with a smartphone can hold a token pegged to dollars, euros, or gold and sidestep local inflation. That makes them valuable both for savings and for small businesses that want to trade globally without needing sophisticated banking infrastructure.
- Faster transactions, lower fees: Stablecoins settle at internet speed, 24/7. Businesses don’t wait for batch settlements or pay card fees on every transaction. A company can pay contractors instantly, even on a Sunday, and receive payments from customers with minimal transaction fees. The low cost makes micropayments or tipping, amounts that would be uneconomical with card or remittance fees, suddenly viable.
- Easier cross-border payments: Traditional international transfers can be slow, expensive, and often opaque. A $200 remittance that might cost 6–10% through traditional channels can cost a fraction of that in stablecoins. Businesses can also invoice and settle in a shared reference currency (usually USD-pegged coins) without waiting days for wire transfers to clear or juggling exchange rates.
What risks do stablecoins pose?
Stablecoins can help mitigate price volatility, but the trade-off is exposure to regulation, active markets, and infrastructure. Their stability is real only as long as confidence in those systems holds.
Here’s a closer look at the major risks.
Regulatory uncertainty
To lawmakers, stablecoins can be seen as straddling the line between crypto and money markets. The US’s GENIUS Act and Europe’s MiCA regulation, already in force, are strict: full one-to-one reserves, segregated custody, and mandatory reporting. Singapore, Japan, and Hong Kong have rolled out similar rules. The tension is clear—regulation could cement stablecoins as mainstream financial products or restrict their use if issuers can’t comply.
Technical and operational risks
Smart contract bugs, oracle failures, or governance attacks can destabilize crypto-backed coins such as DAI. Centralized issuers face custodial risks: if their bank collapses, as happened with Silicon Valley Bank in 2023, billions in reserves can suddenly be inaccessible. Even with audits and attestations, there’s no FDIC insurance to backstop losses if reserves are compromised. Hackers also target issuers’ wallets and redemption systems; a breach could mint unbacked coins or drain reserves.
Market dependence
Market dependence makes stablecoins fragile in extreme scenarios. Collateralized models rely on active markets for arbitrage and liquidation, and if liquidity dries up, the peg can slip fast. Runs are also possible: if users lose confidence in reserves, redemptions surge and stability unravels. The TerraUSD collapse showed how quickly confidence can evaporate in algorithmic systems, but even fiat-backed coins can show short-term volatility during market stress. Meanwhile, because issuers park reserves in instruments such as short-term treasuries, stablecoins now resemble massive money market funds. Large-scale redemptions could, in theory, affect those underlying markets, which is why regulators monitor the sector closely.
How are stablecoins used in business today?
Stablecoins started as a trader’s tool, but they’ve expanded into three major financial use cases.
Ecommerce and retail
Businesses are beginning to accept stablecoins directly, especially in regions where credit card fees are high or access is limited. A payment in USDC or USDT settles instantly and avoids the high transaction fee from card networks. For buyers, stablecoins provide a dollar-equivalent payment option without needing a card at all. Payment processors now convert stablecoins into local currency on the back end, so businesses can get paid in fiat without touching crypto.
Remittances and cross-border transfers
This is where stablecoins already outperform the status quo. International wire transfers can take days and have high transfer fees; stablecoins settle in minutes for a fraction of the cost. Migrant workers sending $200 home each week keep more of it in their families’ hands. Businesses also use stablecoins to pay overseas suppliers or settle invoices in a shared currency without watching exchange rates shift during multi-day transfers.
Treasury management
Companies are beginning to experiment with stablecoins as part of their working capital strategy. In high-inflation markets, holding stablecoins such as USDC can help reduce exposure to local currency swings. For global firms, moving stablecoins between subsidiaries can be faster than bank transfers, which helps improve liquidity management. Some treasurers are also exploring yield-bearing stablecoin variants or lending protocols to make better use of idle cash, though these approaches still carry higher risk. At the administrative level, stablecoins can simplify contractor payments, cross-border payroll, and just-in-time vendor payments, offering efficiency that’s difficult to achieve with legacy systems.
Digital banking
Fintech platforms are incorporating stablecoins to enable 24/7 transfers and support decentralized finance (DeFi) tools for yield generation and asset management on-chain. Because stablecoins allow businesses to simplify treasury management and cross-border payments in a single platform, they’re redefining global banking. For example, modern banking platform Dakota worked with Bridge to integrate stablecoin flows into wallets, giving Dakota’s users full control over their assets without relying on third-party issuers.
What does the future of stablecoins look like?
With the US dollar-denominated stablecoins reaching $225 billion in market size, stablecoins are showing no signs of slowing down. The question is how exactly they’ll evolve and who will control their trajectory.
Here’s what’s likely:
- Expansion and specialization: USD-pegged coins dominate, but euro, yen, and other regional stablecoins are emerging as regulation clarifies. Hybrid-model stablecoins—those partially backed by short-term treasuries or designed for specific use cases, such as securities settlement or machine-to-machine payments—are also starting to attract interest. As integration with consumer apps and payment networks progresses, users might increasingly experience these assets simply as “digital dollars” that move quickly and seamlessly.
- New regulation: The EU’s MiCA framework is already enforcing strict reserve requirements, custody standards, and bans on uncollateralized models. Singapore and Japan are establishing licenses that treat stablecoin issuers like banks or e-money institutions. In the US, the GENIUS Act allows only permitted payment stablecoin issuers to issue payment stablecoins. Issuers that survive will look more like regulated financial firms than crypto startups. The trade-off is greater compliance friction but much stronger mainstream legitimacy.
- More financial institution involvement: Visa and Mastercard already use stablecoins in settlement. JPMorgan issues its own internal coin for wholesale transfers. European banks are planning joint euro stablecoins. These players bring scale, compliance, and consumer reach. If adoption continues, stablecoins might blur into the financial system until they’re simply seen as another form of money—handled by banks, processed by card networks, and embedded in treasury operations.
The likely outcome is a two-tier system: tightly regulated fiat-backed coins for mainstream commerce and finance, and smaller experimental projects in decentralized finance or niche markets. Either way, stablecoins are positioned to become a core part of global payments infrastructure.
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The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Bridge does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.
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