# What are stablecoins? > Explore stablecoins, hybrid cryptocurrencies linked to stable assets like USD or gold, and their impact on the financial landscape. Learn Crypto · 13 min read On this page 1. Definition 2. Understanding stablecoins 3. Fiat-backed stablecoins 4. Commodity-backed stablecoins 5. Decentralised and algorithmic stablecoins ![A dollar-marked coin balanced at the centre of a perfectly level plank](/media/2026/07/edu-what-are-stablecoins-hero.webp?v=3f0eee04) **Key Takeaways** - Stablecoins are a virtual currency whose value is tied to a **stable asset** like USD or gold, solving crypto’s volatility problem. - The price of a stablecoin depends on the asset it is pegged to. There are fluctuations in the rate, but they are usually insignificant. - Stablecoins enhance the efficiency of crypto trading but can also be used for payments in the real world. - Stablecoins will aid in the mass adoption of cryptocurrencies, giving investors a **safe way** to access the opportunities offered by crypto technology. - A company issuing a stablecoin must keep an **equivalent** amount (or more) of collateral in their reserves. - Stablecoins bridge traditional finance and crypto, however, they are not fully decentralised like other cryptos. - Stablecoins are a relatively new phenomena, but they could well play an integral role in the future of business & finance. ## Definition A stablecoin is a type of hybrid cryptocurrency whose value is tied to a stable asset like USD or gold. ## Understanding stablecoins Stablecoins attempt to bridge traditional finance with the world of cryptocurrency. They are a type of [cryptocurrency](/education/what-is-cryptocurrency/) that is ‘pegged’ to a real-world asset like fiat currency, precious metals or even other cryptocurrencies. This adds stability to their value, reducing much of the uncertainty and volatility that deters people from investing in crypto. Initially, stablecoins were created to mimic fiat currency and to be used by traders who operated on exchanges that did not offer [**direct fiat to crypto trading**.](/) ### Why do we need stablecoins? **For trading cryptocurrency** The first major use of stablecoins was by crypto traders. Stablecoins like USDT and USDC provided an on-ramp to crypto on exchanges that didn’t provide direct fiat to crypto trading. Given that stablecoins are already on the [Blockchain](/education/what-is-blockchain/), they can also carry less fees and processing times when compared to trading with fiat currency. On certain exchanges, stablecoins are a safe place to store your crypto in times of market volatility. If you have a lot of money in Bitcoin, and the market is dipping, you can easily switch your BTC to USDT while the crash occurs, protecting your capital from the dip and buying back in once the price starts to take off again. **For fast & cheap payments** One of [Bitcoin & cryptocurrency’s](/education/what-is-cryptocurrency/) major pain points is that their value fluctuates from day to day. This makes them a risky place to store money as it could be worth X one day and then half that the next. A person might have some of their savings in crypto, or be paid by an employer in crypto, meaning the amount of spending power they have will be entirely dependent on the market at that time. Stablecoins solve this problem, offering a stable, virtual currency that can be used for fast, cheap & highly efficient cross-border and everyday payments. ### How do stablecoins have value? The company issuing the stablecoins needs to keep an **equal amount (or more)** of whatever the stablecoin is pegged to and ‘backed’ by in their reserve so people can easily switch back and forth between fiat currency and stable coins. Without this backing the stablecoin would lose its legitimacy. ### A centralised cryptocurrency? Stablecoins have gained traction by attempting to offer the best of both worlds – the instant processing, security & privacy of cryptocurrencies and the **trust and stability** of regular fiat currency. However, because each stablecoin is issued by a single company, they are essentially **centralised**, meaning they are not actually a ‘pure’ cryptocurrency like Bitcoin or Ethereum. Stablecoins have their limitations and have not yet been created in a way that offers **all** the advantages of a **fully decentralised currency.** There are **3 main types** of stablecoins: - Fiat backed stablecoins - Crypto backed stablecoins - Commodity backed stablecoins ### What are the main advantages/uses of stablecoins? - Stablecoins are suited for everyday transactions, removing the price fluctuations associated with other cryptocurrencies. - Stablecoins are backed & collateralised by **real assets**, meaning you can invest in them without fear that the currency may drop in value at any time. - For exchanges that don’t provide **direct fiat to crypto trading**, stablecoins provide an efficient on-ramp to trading cryptocurrency, as well as a place to store money in times of market volatility. - Stablecoins don’t have to pass through the usual financial intermediaries, meaning lower transaction fees & shorter transfer times. - Stablecoins could be particularly valuable as an alternative to cash in countries where there is hyperinflation & economic instability. - Stablecoins pave the way for **DeFi** (decentralised finance) to revolutionise the way we do business, offering financial possibilities from loans to interest earning opportunities to a universally accessible peer-to-peer payment system. ### What are some real-world applications of stablecoins? Although still in their early stages, stablecoins have many potential real-world applications, such as: **Day-to-day payments** Stablecoins can be used like any other currency but with the added advantages of a digital currency that’s legally backed and secure. This is especially useful for cross-border payments as it eliminates the need to convert between different fiat currencies. As stablecoins exist on the [Blockchain](/education/what-is-blockchain/), this also removes the third party intermediary, meaning the potential for lower transaction costs across the board. **Streamlining recurring [smart contract](/education/what-is-a-smart-contract/) payments** Stablecoins are cryptocurrencies and thus allow the use of [**smart financial contracts**](/education/what-is-a-smart-contract/). These can be automated to execute in any way desired and would be an ideal way to handle **recurring payments** like salary payments, rent, loans and subscriptions. Given the stability of stablecoins this makes them a far better option than using a volatile asset like Bitcoin as currency. **Settlements** Currently, settlements are unable to be delivered immediately because they are subject to **normal bank hours**. This is not an issue with crypto and stablecoins as they operate on a Blockchain network and are active **24/7**. **Remittances for migrant workers** Around the world, many people send remittances (wages) through agencies like Western Union and MoneyGram to their families overseas. This is often a slow and costly process, and a chunk of the payment is lost in the transfer process due to high cross-border transfer fees. Stablecoins provide migrant workers a far more efficient method of sending money to their families, with lower fees and no significant price volatility. **Escrow** Escrow services can be completely **automated** through [**smart contracts**](/education/what-is-a-smart-contract/) that are coded to evaluate and enforce escrow conditions, without the need for a third party to be involved. The smart contract would also be publicly available for audit as they are stored **transparently** on the Blockchain. **Lending & interest earning** Mix stablecoins and [DeFi](/education/what-is-defi-decentralised-finance/) together and you get a world of **reward earning opportunities**. Stablecoin lending is currently one of the most high-yield opportunities out there, offering double-digit interest rates that put regular savings accounts to shame. **Alternative banking** **Billions** of people worldwide **do not** have access to a bank account. In the world of digital currencies, all one needs to have a stablecoin ‘bank account’ is an internet connection. **Protection from local currency crashes** Stablecoins are perfectly suited for countries with precarious economies. Hyper-inflation is a very real threat in some countries and stablecoins would provide a place for citizens of these countries to store their money during times of economic instability. They could be a viable solution for people wanting to quickly exchange their dropping currency into a stable currency, thus protecting them from further drops in value. ### What is pegging? Pegging is the mechanism which stablecoins use to mimic fiat currencies. It is also widely used as a way of controlling a country’s currency rate by tying it to another country’s currency. For example, many countries stabilise their currencies by pegging them to the **U.S. Dollar**, which is generally considered to be the most stable currency globally. Stablecoins do the same thing but they are completely digital and operate on the Blockchain. ### How can you earn yield on stablecoins? One of the key advantages of **stablecoins** is the ability to **earn yield** on them. Many **crypto lending platforms** and **[DeFi](/education/what-is-defi-decentralised-finance/) protocols** allow stablecoin holders to generate returns that often exceed traditional bank interest rates. Once you have purchased stablecoins with fiat currency, you can **earn yield** by: - **Depositing into DeFi liquidity pools** – Platforms like **Aave, Curve, and Yearn Finance** offer opportunities to provide liquidity and earn rewards. - **Lending stablecoins** – Centralised and decentralised lending platforms allow users to **lend stablecoins in exchange for interest**. - **Staking stablecoins** – Some blockchains and DeFi protocols offer stablecoin staking for additional rewards. ### **Risks to consider** While stablecoins are designed to **reduce price volatility**, it’s important to evaluate the **platform’s integrity, security, and risk management** before depositing funds. Some platforms have failed due to **smart contract exploits, liquidity issues, or counterparty risk**. Additionally, while stablecoins provide a **more stable** way to earn yield compared to volatile assets like Bitcoin or Ethereum, it’s still essential to **assess risk factors** such as **platform reliability, withdrawal conditions, and regulatory considerations**. ### **Why stablecoins matter for yield generation** Unlike traditional crypto assets, stablecoins **allow users to earn yield while maintaining price stability**. This makes them an attractive option for those looking to **participate in the crypto ecosystem without exposure to major price swings**. As always, **doing your research** is key before engaging with any platform or DeFi protocol. ### How are stable assets/stablecoins kept stable? The two primary reasons for the price stability of fiat currencies and stablecoins are the reserves that back them and the occasional market intervention by controlling authorities, like central banks. For instance, when an asset like the US dollar sees unnatural fluctuations in value, the authorities will step in and manage and manipulate the demand and supply of currency to maintain price stability (thus also stabilising the value of stablecoins). ### What are fiat-backed stablecoins? The most common type of stablecoins are collateralised (or backed) by fiat currency like USD, AUD EUR, or GBP. Fiat-backed stablecoins have what is called a 1:1 ratio, meaning 1 stablecoin is equal to 1 unit of currency. Thus, for each stablecoin that exists, there needs to be one unit of a real fiat currency held in reserves so that people can easily switch between the two. When someone wants to redeem cash with their stablecoins, the entity that manages the stablecoin will provide the fiat from the reserve. Then, the equivalent stablecoins returned by the person will be destroyed or taken out of circulation. ### What are commodity-backed stablecoins? Commodity-backed stablecoins are backed up by physical assets like precious metals, oil, and real estate. Commodity-backed stablecoins allow for investments in assets like Gold that may otherwise be out of reach, depending on where you live. ### What are crypto-backed stablecoins? Crypto-backed/collateralized stablecoins are backed by another cryptocurrency as collateral. While cryptocurrencies are volatile, these stablecoins use smart contracts and over-collateralisation (more than the equivalent amount is held in reserves) to ensure that the stablecoin remains relatively steady in value. When investing in a crypto-backed stablecoin, you lock your cryptocurrency into a smart contract to obtain tokens of equal value. When you are ready, you can then put your stablecoin back into the same smart contract to withdraw your original amount. ### What are the potential drawbacks of stablecoins? These hybrid cryptocurrencies are a relatively new phenomenon and they have their drawbacks. Some of these include: **Centralisation** To access stablecoins, you generally have to pass through a **third party intermediary** (the company issuing the stablecoin). This requires trusting that entity and is therefore not fully aligned with the **decentralised** spirit of cryptocurrencies. While stablecoins provide a bridge between crypto and traditional finance, given that crypto is primarily known for being a [**decentralised currency**](/education/what-is-defi-decentralised-finance/), centralisation is not ideal and removes many of the benefits of other cryptos. While not all stablecoins are centralised (DAI, for example), most of them involve a third party. **Dependence on traditional finance markets** Stablecoins are usually pegged to fiat currencies, meaning their value is entirely dependent on the condition of the economy. Like fiat, they are vulnerable to inflation and carry some of the downsides of fiat currency that crypto was invented to solve. **External Audits Needed** To ensure all the stablecoins are backed by real world assets and properly accounted for, external audits of the issuing companies will need to be done regularly. There have been instances of stablecoin companies being accused of not having a sufficient amount of collateral in their reserves. **Lack of regulation** This is a potential pro and con for the entire cryptocurrency space. Stablecoins might mimic fiat currency, but the regulators are still trying to figure out how to handle the past decades wave of digital currencies. While stablecoins could play a pivotal role in the future of business and finance, they have a long way to go in terms of being properly regulated. **Not as lucrative as other cryptocurrencies** While you can earn an interest rate with stablecoins that outdoes the rate offered by your bank, stablecoins are indeed ‘stable’ and there isn’t as much potential for growth when compared to holding [other cryptocurrencies](/education/what-is-cryptocurrency/) that see price volatility. Less risk, less reward. **Lack of a track record** Stablecoins are a new thing, and it is hard to predict which ones are truly reliable. While the whole idea is to maintain a similar value to a stable asset, it is possible for a stablecoin to lose its peg or be hacked/stolen. It is recommended that you do some solid research before putting your money in them. ### What are some examples of popular stablecoins? Stablecoins come in different forms, including **fiat-backed, algorithmic, and commodity-backed** variants. Here are some of the most widely used stablecoins in **2025**: ## **Fiat-backed stablecoins** These stablecoins are **pegged to traditional currencies**, typically the **U.S. dollar**, and are backed by **cash reserves or short-term government securities**. - **USD Coin (USDC)** – Issued by **Circle** and regulated in the U.S., **USDC** is one of the most widely used stablecoins. It is fully backed by **cash and short-term U.S. treasuries** and is regularly audited for transparency. - **Tether (USDT)** – The largest and most widely traded stablecoin, **USDT** is used across multiple blockchains. While controversial in the past for its reserve transparency, it remains a dominant player in the stablecoin market. - **TrueUSD (TUSD)** – Similar to **USDT**, but known for **strict regulatory compliance and independent audits** to verify its reserves. TUSD issuers also offer stablecoins pegged to other fiat currencies, such as **GBP and AUD**. - **First Digital USD (FDUSD)** – A newer entrant, **FDUSD** is a USD-pegged stablecoin issued by **First Digital Trust**, gaining traction due to its regulatory framework and increasing adoption on major exchanges. ## **Commodity-backed stablecoins** These stablecoins are backed by **physical assets** such as **gold, silver, or other precious metals**. - **PAX Gold (PAXG)** – Each **PAXG token** is backed by **one troy ounce** of gold stored in **LBMA-accredited vaults**. It allows users to gain exposure to **physical gold** while benefiting from the liquidity of crypto markets. - **Tether Gold (XAUT)** – Similar to **PAXG**, **XAUT** is backed by gold and provides digital ownership of **physical gold reserves**. ## **Decentralised and algorithmic stablecoins** Unlike fiat-backed stablecoins, these stablecoins use **on-chain mechanisms, smart contracts, and collateral reserves** to maintain their peg. - **DAI** – Issued by **MakerDAO**, **DAI** is a decentralised stablecoin that maintains its peg through **overcollateralisation** using **ETH and other assets**. Unlike USDT or USDC, it is not directly backed by fiat but is governed by smart contracts. - **LUSD (Liquity USD)** – A fully decentralised stablecoin backed by **ETH collateral**, offering interest-free borrowing through the **Liquity protocol**. ### How can stablecoins help the developing world? Considering there are literally **billions** of people in the world **without a bank account**, Blockchain, stablecoins and cryptocurrency have begun a fundamental shift in how developing countries operate. Some areas likely to see huge positive change include (but are not limited to): - Efficient money transfers (without the fee-charging third party) - Land title proof - A safe place to store assets - The ability to earn interest without a bank account - More effective humanitarian aid - Better access to loans, capital and real estate investments - Micro loans and small business funding - Access to insurance and other financial services About the author The Digital Surge Editorial Team Our editorial team writes and reviews Digital Surge’s news, insights and crypto guides, pairing plain-English explanations with the practical experience of running an [Australian cryptocurrency exchange](/about-us/). We keep every article accurate, current and easy to act on. [Read our editorial guidelines ›](/editorial-guidelines/) Learn Crypto ## Learn crypto with confidence We provide clear, straightforward education, making it easy to understand and navigate the world of crypto. [Learn Crypto What is Blockchain? Explore blockchain technology, a secure method for storing and sending money and data without third-party interference. Read article →](/education/what-is-blockchain/)[Learn Crypto What are altcoins? Explore altcoins, the diverse cryptocurrencies beyond Bitcoin, and their significance in the digital economy. Read article →](/education/what-are-altcoins/)[Learn Crypto What is a Bitcoin halving? Discover what Bitcoin halving is and its impact on mining rewards and Bitcoin supply in our informative guide. Read article →](/education/what-is-a-bitcoin-halving/) ## Get started on Digital Surge --- *Source: [What are stablecoins?](/education/what-are-stablecoins/) · Last updated: 2023-04-14*