Introduction: Why Do We Need Stablecoins?
Imagine your paycheck fluctuates by 20–30% every week. One week you receive €1000, the next only €700. How would you plan your bills, savings, or future investments?
This is exactly the problem faced in the cryptocurrency market, where prices are extremely volatile. To solve this challenge, stablecoins were created — digital money designed to maintain a stable value, usually pegged to the US dollar or another stable currency.
Stablecoins act as a bridge between traditional finance and cryptocurrencies — providing security, flexibility, and speed. They have become an essential tool for trading and everyday payments. This guide explains how stablecoins work, their types, use cases, and risks.
1. What Is a Stablecoin? (Simple Definition)
A stablecoin is a digital currency “pegged” to a stable asset. Most often, this is the US dollar (USD), but it can also be the euro, gold, or other commodities.
The main goal is to maintain a stable value — for example, 1 USDT ≈ 1 USD.
Simply put, a stablecoin is like a digital dollar in the crypto world.
Unlike Bitcoin or Ethereum, which can fluctuate by 10% in a single day, stablecoins allow you to store funds and make transactions without worrying about sudden price drops.
2. How Do They Work? (Main Types)
Stablecoins are issued through different mechanisms. There are three main models:
2.1. Fiat-Collateralized Stablecoins
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Backed by real money in a bank account.
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For every token issued (e.g., 1 USDT), there is $1 held in reserve.
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Popular examples: USDT (Tether), USDC (Circle, Coinbase).
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Advantage: Simple and easy to understand.
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Disadvantage: Requires trust in the issuer and audits.
2.2. Crypto-Collateralized Stablecoins
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Backed by deposits of other cryptocurrencies (e.g., ETH).
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Example: DAI (MakerDAO).
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Stability is maintained through overcollateralization — usually 150%. For instance, to mint 100 DAI, you need $150 worth of ETH.
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Advantage: Decentralized, no need for banks.
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Disadvantage: More complex, harder for beginners to understand.
2.3. Algorithmic Stablecoins
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Value is maintained by algorithms controlling supply and demand.
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If the price drops below $1, supply is reduced; if it rises above $1, supply increases.
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Example: The former Terra UST (collapsed in 2022).
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Advantage: No collateral assets required.
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Disadvantage: Very high risk of collapse.
3. Why Are Stablecoins So Important in Trading?
Stablecoins have become the lifeblood of the entire crypto ecosystem. Here’s why:
3.1. Protection from Volatility
When the market crashes, traders move funds into stablecoins to preserve value and wait for better entry points.
3.2. Trading Pairs
Most crypto trading happens against stablecoins (e.g., BTC/USDT, ETH/USDC), making it easy to see asset values in dollars.
3.3. Fast and Cheap Transfers
Transferring stablecoins between exchanges is faster and cheaper than bank transfers. For example, sending 1000 USDT worldwide may cost just a few cents.
3.4. Safe Haven for Value
In uncertain markets, investors “park” funds in stablecoins while waiting for calmer conditions.
4. How to Use Stablecoins? (Practical Guide)
4.1. Buying
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Exchanges: Binance, Coinbase, Kraken.
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Fiat payments: Card or bank transfer.
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Example: Binance allows direct purchase of USDC with EUR.
4.2. Transfers
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Networks: Ethereum (ERC-20), Tron (TRC-20), BNB Chain (BEP-20).
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TRC-20 is usually the cheapest option for international transfers.
4.3. Earning Yield
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DeFi platforms (e.g., Aave, Compound) let you deposit USDT/USDC and earn interest (2–10% per year).
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CeFi platforms (e.g., Binance Earn) offer similar services.
4.4. Payments
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Some businesses already accept USDT/USDC as payment.
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Especially useful for international transactions without currency conversion intermediaries.
5. Risks You Should Know
Stablecoins are not perfect. Key risks include:
5.1. Counterparty Risk
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Does the issuer really hold all the dollars in reserve?
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USDC is regularly audited.
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USDT has faced criticism for lack of transparency.
5.2. Regulatory Risk
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Many countries are considering stricter regulation or restrictions on stablecoin issuance.
5.3. Technological Risk
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Hacks on DeFi platforms can cause losses, even if the stablecoins themselves remain secure.
6. Comparison Table: USDT vs USDC vs DAI
| Feature | USDT (Tether) | USDC (Circle, Coinbase) | DAI (MakerDAO) |
|---|---|---|---|
| Collateral | Fiat (USD) | Fiat (USD) | Crypto (ETH, etc.) |
| Centralization | Centralized | Centralized | Decentralized |
| Audit | Limited | Regular, transparent | Public on blockchain |
| Popularity | Very high | High | Medium |
| Main Strength | Liquidity | Trust and audits | Decentralization |
Conclusion
Stablecoins are a cornerstone of crypto economics. They:
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Reduce risk for traders,
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Enable convenient payments,
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Simplify international transfers,
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Serve as a base asset in DeFi platforms.
Unlike Bitcoin or Ethereum, their purpose is not speculation but stability and reliability. That’s why stablecoins have become everyday tools for millions of users.
If you want to try them in practice, open an account on an exchange (e.g., Binance or Coinbase), buy USDC or USDT, and see how easy it is to use them for transfers or payments.