How stablecoins have become a key part of the crypto ecosystem

Introduction: Why is volatility a problem?

When you trade cryptocurrencies, the constant price instability creates real problems. Bitcoin costs $50,000 today, but it could drop by half tomorrow. For ordinary people and companies, this makes crypto impractical for everyday life.

This is where specialized digital assets come to the rescue, designed to maintain a stable value. They allow users to take advantage of blockchain's speed, transparency, and decentralization without the fear of suffering from price fluctuations. Let's explore how they work and why millions of users around the world use them.

What is a stablecoin: definition and essence

A stablecoin is a digital token whose value is tied to another asset. Most often, this is the US dollar, but there can also be other currencies (euro, British pound) or even precious metals (gold, silver) and commodities (oil).

The main idea is simple: you get all the functionality of cryptocurrency (instant transfers, 24/7 access, low fees), but the price remains stable. The merchant receives 5 dollars in a stablecoin for coffee — and this asset will be worth 5 dollars both tomorrow and a month from now.

This allows traders to lock in profits, investors to hedge their portfolio, and payment systems to conduct transactions without unnecessary risk.

Three Models of Stablecoin Construction

Model 1: Fiat Binding

This is the simplest mechanism. The issuer holds real US dollars, euros, or other currencies in bank accounts. Each issued token is backed by the corresponding amount in reserves.

Example: TrueUSD (TUSD) operates exactly this way. For every TUSD in reserves, there is 1 US dollar. A user can convert fiat → stablecoin → fiat at a fixed rate.

Advantages: reliability, simplicity, ease of auditing. Disadvantages: dependence on a centralized issuer, the necessity of a banking system, risk of confiscation of reserves.

Model 2: Crypto collateral

Instead of dollars in reserves — cryptocurrencies (Ethereum, Bitcoin and others). Since this asset is volatile, systems use excessive collateral: to issue a stablecoin worth 100 dollars, it is necessary to pledge crypto worth 150 dollars.

How it works using DAI as an example:

To obtain 100 DAI pegged to USD, you deposit crypto collateral worth $150. ( with a ratio of 1.5x). The coin can be transferred, invested, or held as desired. To retrieve the collateral, you need to pay back 100 DAI. If the price of your position falls below the minimum acceptable ratio, the system will automatically liquidate the collateral.

The stability mechanism operates through game theory:

• When the price of DAI falls below $1 → holders are incentivized to return the tokens for collateral, the supply decreases, and the price rises.
• When the price rises above $1 → it is profitable for users to issue new tokens, the supply increases, and the price decreases.

This type is governed by smart contracts and often built as a decentralized autonomous organization (DAO), where the community votes on changes to the project.

Advantages: more decentralized, transparency through blockchain. Disadvantages: dependence on volatile assets, complexity of management, risk of failure of the mechanism.

Model 3: Algorithmic Issuance

The most radical approach is a complete rejection of physical reserves. Instead, algorithms and smart contracts control the supply of tokens.

If the price falls below the target value, the algorithm reduces the supply through token burning, staking, or buybacks. If the price rises, new tokens are issued.

This is the most complex model, and most such projects have not succeeded. But theoretically, it allows for the highest level of decentralization.

Advantages: no need for reserves, theoretically the most decentralized. Disadvantages: complexity of implementation, high risks of failure, dependence on the community.

What are stablecoins really used for

1. Position reservation on the exchange

Traders keep part of their capital in stablecoins on trading platforms. This allows them to quickly enter new positions without the need to withdraw funds back to the bank and wait several days for the deposit to be processed.

2. Portfolio Hedging

If you hold volatile assets, a stablecoin allows you to insure yourself. Allocate 20-30% of your portfolio to a stable asset — and the overall drawdown of the portfolio decreases in the event of a market crash.

3. Short Positions

Sold crypto for stablecoin when the price is high, then bought it back cheaper. The whole process takes place on the blockchain without converting to fiat.

4. Payments and Transfers

International money transfers in dollars or euros through traditional channels take days. Stablecoins arrive within minutes with minimal fees. This is especially relevant for countries with weak banking systems.

5. Loans and yield-farming

Users deposit stablecoins into DeFi protocols and earn income. This is safer than speculation on volatile assets, but still more profitable than traditional bank deposits.

Advantages of Stablecoins: Why They Are So Popular

Stability + blockchain. This is a unique combination. You get predictable value ( like in fiat ) and innovative technology ( like in crypto ).

Global accessibility. Create a wallet in 10 seconds — and you can receive transfers from any country. Double spending is impossible, transactions are irreversible.

Speed of settlements. Unlike the traditional banking system, where international transfers take 2-3 business days, stablecoins arrive in minutes.

Investment Flexibility. You can enter and exit positions in the crypto market without rebalancing fiat. This reduces transaction costs.

Practical application. Unlike speculative assets, stablecoins have real use — payments, settlements, hedging.

Disadvantages and Risks

Despite their popularity, stablecoins have serious limitations.

Binding is not guaranteed. There have been many projects that failed and lost their value due to lack of reserves or technical failures.

Lack of transparency. Not all issuers publish complete audit results. Many only provide periodic attestations from private auditors. How can one be sure that the reserves being claimed actually exist?

Centralization. Fiat-backed stablecoins are controlled by a single company, which may be subject to government regulation. This means that your funds could be frozen or confiscated.

Dependency on the community. Crypto-collateralized and algorithmic stablecoins depend on the decisions of the community. If the community makes a wrong decision, the project may collapse.

Systemic risk. If a large stablecoin loses its peg, it could trigger panic and a serious crisis across the entire crypto market.

Practical Examples

DAI — a crypto-collateralized stablecoin

DAI is a token on Ethereum that is governed by the MakerDAO community through the MKR token. Anyone can participate in voting for the development of the project.

The system uses excessive crypto collateral and smart contracts for the automatic management of token issuance and burning. This makes DAI one of the most decentralized stablecoins.

TUSD — fiat-backed stablecoin

TrueUSD — pegged to the US dollar. The first stablecoin that introduced programmatic control of token issuance with instant on-chain verification.

The TUSD reserves are controlled through the Chainlink oracle, allowing users to independently verify that each token is indeed backed by US dollars.

How to Choose a Stablecoin

Reputation and track record. Has the project been around long enough? Have there been any critical incidents?

Transparency Level. Are regular audits published? Can the reserves be independently verified?

Stability mechanism. Do you understand how this stablecoin maintains its value?

Level of decentralization. Does one entity control the entire project, or are there community governance mechanisms?

Commissions. What are the costs for issuance, burning, and transfer?

Regulatory Situation

Stablecoins have drawn the attention of regulators around the world. Their combination of fiat and crypto makes them unique from a legal standpoint.

Some countries are developing their own stablecoins (, for example, digital versions of their national currencies ). Others are setting requirements for issuers regarding transparency and capitalization.

Fiat-backed stablecoin issuers often require a banking license and are subject to financial regulation. Crypto-backed stablecoins exist in a more gray area — legislation is still evolving.

Conclusion: A Practical Tool with Real Risks

Stablecoins are an integral part of the modern crypto ecosystem. They are used for trading, payments, loans, and hedging. Millions of users hold them on exchanges for entering and exiting positions.

But these are still cryptocurrencies with their risks. We have seen projects with failed peg, missing reserves, and legal issues. Stablecoins are a convenient tool, but not a miracle cure.

Main rules when working with stablecoins:

• Do your own research before investing
• Diversify your portfolio, don't keep everything in one stablecoin.
• Do not invest more than you can afford to lose
• Check the transparency level of the issuer
• Stay updated on the news of the regulated sector

Stablecoins are a powerful tool for those who understand how they work and what risks they carry.