What is Stablecoin? Definition, Types, and Examples of Stablecoin

Stablecoin is an innovation in crypto development, but its existence is often misunderstood as a threat to the principle of decentralization.

For those who may not understand, what is a stablecoin, what are the types and kinds, and what are examples of stablecoins?

Read the full review in the following article.

What is Stablecoin: A Definition

A stablecoin is a form of cryptocurrency that maintains its value by linking it to an external asset, usually a fiat currency like the U.S. dollar or a commodity such as gold. 

In contrast to traditional cryptocurrencies like Bitcoin or Ethereum, which often experience significant price fluctuations, stablecoins are designed to combine the advantages of blockchain technology with consistent price stability.

Characteristics of Stablecoins

Consistent Value: Stablecoins are created to retain a steady value in line with their underlying asset, making them practical for daily use and preserving wealth.

Built on Blockchain: Stablecoins, which leverage blockchain technology, provide enhanced security, transparency, and operational efficiency over conventional financial systems.

Connection Between Fiat and Crypto: Stablecoins act as a bridge between traditional currencies and the digital asset space, simplifying the process for traders and investors to move in and out of the crypto market.

History of Stablecoins

The concept of stablecoins emerged as a response to the extreme price volatility in early cryptocurrencies like Bitcoin. 

Developers and investors sought a way to enjoy the benefits of blockchain technology, such as decentralization, transparency, and fast transactions, while minimizing price fluctuations.

Early Developments (2014–2017)

2014 – BitUSD: The first known stablecoin, BitUSD, was launched on the BitShares blockchain. It was backed by cryptocurrency collateral but struggled with adoption and long-term stability.

2015 – Tether (USDT): Tether was introduced as the first major fiat-collateralized stablecoin, pegged to the U.S. dollar. Built on the Bitcoin blockchain (using the Omni Layer), Tether became widely adopted and remains one of the most used stablecoins today.

2017 – DAI by MakerDAO: DAI emerged as a decentralized stablecoin backed by crypto collateral (primarily Ether). It introduced a new model of algorithmic and decentralized stability through smart contracts on Ethereum.

Mainstream Growth (2018–2020)

More fiat-backed stablecoins entered the market, including USD Coin (USDC) by Circle and Coinbase, and TrueUSD (TUSD).

Regulatory interest grew due to the increasing use of stablecoins in trading and payments.

Stablecoins became essential tools for crypto exchanges to provide liquidity and a hedge against volatility.

Recent Trends (2021–Present)

Facebook's Diem (formerly Libra) project, although never fully launched, drew major global attention to stablecoins and sparked regulatory discussions.

Algorithmic stablecoins like TerraUSD (UST) gained popularity but also faced critical failures, most notably the Terra collapse in May 2022, which caused massive losses and shook market confidence.

Central banks began exploring Central Bank Digital Currencies (CBDCs), inspired partly by the stablecoin model.

Major financial institutions and fintech companies have started launching or supporting stablecoins, including PayPal’s PYUSD and the expansion of USDC to multiple blockchains.

Types of Stablecoin

Stablecoins are classified according to the kind of collateral that supports them, which influences how they maintain price stability. The four main categories include:

Fiat-Backed Stablecoins

These are tied to traditional fiat currencies, usually on a 1:1 basis. For each coin issued, an equivalent amount of fiat money is held in reserve by the issuer. 

This model offers strong price stability and is easy to grasp for those familiar with conventional finance. Notable examples are Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).

Crypto-Backed Stablecoins

Backed by other cryptocurrencies, these stablecoins rely on users locking their crypto in smart contracts to mint the tokens. 

To manage price swings, they are often over-collateralized. DAI is a well-known example, utilizing MakerDAO's system of collateralized debt positions.

Commodity-Backed Stablecoins

These stablecoins derive their value from physical assets like gold or silver. 

Their price is linked to the current market value of the underlying commodity, offering a tangible asset-based alternative to fiat-pegged coins.

Algorithmic Stablecoins

Rather than being supported by physical assets, algorithmic stablecoins use code-driven mechanisms to manage supply and demand. 

Smart contracts automatically adjust circulation to keep the coin’s value near a target price, such as the U.S. dollar. 

TerraUSD (UST) was a notable example, although it struggled to maintain its peg during periods of market stress.

Each category caters to different needs and risk appetites within the broader crypto space.

Examples of Stablecoin

Stablecoins can be grouped based on the type of assets that support them. Below are several key examples across various categories:

Fiat-Backed Stablecoins

Tether (USDT)

Market Cap: Around $143.5 billion

The earliest and most widely adopted stablecoin, USDT, is pegged to the U.S. dollar and is heavily used for trading and liquidity across the crypto space.

USD Coin (USDC)

Market Cap: Roughly $59.46 billion

Issued by Circle, USDC is fully backed by U.S. dollar reserves with frequent audits, offering high levels of transparency and trust.

PayPal USD (PYUSD)

Market Cap: About $777.70 million

PayPal's stablecoin, backed entirely by USD reserves, is designed for seamless digital payments and e-commerce use.

Pax Dollar (USDP)

Market Cap: Approximately $2.46 billion

Created by Paxos, USDP is supported by U.S. dollars held in FDIC-insured banks and short-term Treasury securities.

Gemini Dollar (GUSD)

A U.S. dollar-pegged stablecoin issued by the Gemini exchange, maintaining a 1:1 reserve ratio with regular transparency reports.

Crypto-Backed Stablecoins

Dai (DAI)

Market Cap: Around $5.37 billion

A decentralized stablecoin running on Ethereum, DAI is maintained through over-collateralized crypto assets and smart contracts managed by MakerDAO.

Ethena USDe (USDe)

Market Cap: Roughly $5.39 billion

A crypto-collateralized stablecoin that relies on Ethereum-based assets to preserve its value.

Commodity-Backed Stablecoins

Pax Gold (PAXG)

Pax Gold (PAXG) is a gold-backed stablecoin that provides digital ownership of physical gold, offering a stable store of value tied to a tangible asset.

Algorithmic Stablecoins

Frax (FRAX)

A unique stablecoin that blends algorithmic controls with partial collateral backing to stay near the U.S. dollar peg.

TerraUSD (UST)

Once a major algorithmic stablecoin, UST lost its dollar peg in 2022, leading to a major collapse and reevaluation of algorithmic models.

These stablecoins reflect the broad range of approaches used to maintain stability in the crypto ecosystem, catering to different use cases from payments to decentralized finance.

Final Note

Stablecoins are a unique class of cryptocurrencies designed to offer price stability by anchoring their value to external assets, such as fiat currencies, cryptocurrencies, commodities, or algorithmic mechanisms. 

Unlike highly volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins aim to provide the reliability needed for everyday transactions, savings, and trading within the digital economy.

They are categorized based on the type of collateral or mechanism used to maintain their value, which includes:

Fiat-Backed Stablecoins (e.g., Tether, USDC, PYUSD): Supported by traditional currencies like the U.S. dollar held in reserve.

Crypto-Backed Stablecoins (e.g., DAI, USDe): Secured through over-collateralization using other cryptocurrencies via smart contracts.

Commodity-Backed Stablecoins (e.g., Pax Gold): Tied to tangible assets such as gold.

Algorithmic Stablecoins (e.g., FRAX, UST): Use algorithmic supply adjustments to stabilize their value without relying on direct collateral.

With growing use in payments, trading, and decentralized finance (DeFi), stablecoins are becoming an essential bridge between traditional financial systems and the evolving world of blockchain technology.

FAQ

1. What is a stablecoin, and how does it work?

A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging it to a reserve asset such as a fiat currency (like the U.S. dollar), a commodity (like gold), or through algorithmic controls. This stability makes stablecoins suitable for payments, savings, and trading.

2. What are the main types of stablecoins?

Stablecoins are categorized into four types based on their backing:

• Fiat-backed (e.g., USDT, USDC)

• Crypto-backed (e.g., DAI, USDe)

• Commodity-backed (e.g., Pax Gold)

• Algorithmic (e.g., FRAX, UST)

3. Why are stablecoins important in the crypto ecosystem?

Stablecoins provide a reliable medium of exchange, a store of value, and a unit of account in the often volatile cryptocurrency market. They enable easier trading, protect users from market swings, and are commonly used in DeFi applications.

4. Are stablecoins safe to use?

The safety of stablecoins depends on their transparency, collateral reserves, and how they are managed. Fiat-backed stablecoins like USDC are audited regularly, while algorithmic stablecoins may carry higher risks, as seen in the TerraUSD collapse.

5. How are stablecoins different from other cryptocurrencies like Bitcoin?

Unlike Bitcoin, which fluctuates in value based on market demand, stablecoins aim to stay pegged to a specific value. This makes them more suitable for practical use cases like remittances, lending, and digital payments.