Stablecoins - what are they and what are they for
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04-13-2025
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6 min.
What is a stablecoin, what are stablecoins, how do they work, what are their pros and risks. A detailed and simple guide from AML Crypto experts for 2025.
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A stablecoin is one of the most talked-about types of digital assets in the world of cryptocurrencies. Their popularity grows year by year due to their stability, convenience, and versatility. Despite the general distrust in crypto market volatility, stablecoins have found their place among both retail traders and institutional investors. This article explains what a stablecoin is, what types of stablecoins exist, how they work, what the pros and risks are, and how to interact with them safely.
What Are Stablecoins?
Stablecoins are digital assets pegged to the value of real-world assets, most commonly fiat currencies like the US dollar or euro. The main goal of stablecoins is to maintain price stability. Put simply, a stablecoin is a cryptocurrency designed not to fluctuate wildly in value like Bitcoin or Ethereum often do.
To simplify it even further: a stablecoin is a digital equivalent of the US dollar (in most cases) within the crypto ecosystem. The key difference is that it can be transferred globally within seconds, without involving banks or other intermediaries.
Types of Stablecoins
There are several key categories of stablecoins, and understanding the differences can help you choose the right type based on your needs and risk tolerance.
Fiat-collateralized stablecoins are the most common. Each token is backed by a reserve of fiat currency, typically US dollars. Examples include USDT by Tether and USDC by Circle. These issuers claim to hold real dollars in bank accounts for every token in circulation. However, transparency levels vary: Circle publishes regular audit reports, while Tether has previously faced criticism for lack of clarity.
Crypto-collateralized stablecoins are backed by other cryptocurrencies. The most prominent example is DAI, issued by the decentralized protocol MakerDAO. To mint DAI, users must deposit collateral in the form of ETH or other accepted assets into a smart contract. The collateral must be overcollateralized — for $100 worth of DAI, one might need to lock in $150 or more in crypto. This system is less dependent on centralized institutions but can be vulnerable during sharp market downturns.
Algorithmic stablecoins are the most experimental and riskiest. They have no direct collateral; instead, they maintain stability through a balancing mechanism of token issuance and burning. A well-known example was UST, whose collapse in 2022 severely damaged trust in this model. However, development in this area continues, as the vision of a fully decentralized and independent stablecoin remains attractive to the crypto community.
Each model has its merits. Fiat-backed stablecoins are the most straightforward and familiar, crypto-backed ones align more closely with decentralization ideals, and algorithmic options represent innovation, though with greater instability.
How Do Stablecoins Work?
Most stablecoins operate on a reserve-based model: each token is backed by a specific amount of an asset. For example, for every USDC issued, the company is expected to hold one US dollar in reserve. Crypto-collateralized stablecoins are more complex, relying on overcollateralization, where the value of the crypto collateral exceeds the stablecoins issued.
Algorithmic stablecoins function differently. They don’t hold reserves in fiat or crypto. Instead, they regulate the token supply via automated smart contracts that increase or decrease the number of tokens in circulation. Think of it like a thermostat: when the token’s price falls, the system “burns” some tokens to reduce supply and push the price up. If the price is too high, it mints more tokens to increase supply. This approach is fully decentralized but, in practice, has proven to be less stable.
Algorithmic stablecoins function differently. They don’t hold reserves in fiat or crypto. Instead, they regulate the token supply via automated smart contracts that increase or decrease the number of tokens in circulation. Think of it like a thermostat: when the token’s price falls, the system “burns” some tokens to reduce supply and push the price up. If the price is too high, it mints more tokens to increase supply. This approach is fully decentralized but, in practice, has proven to be less stable.
Why Use Stablecoins?
One of the main reasons users turn to stablecoins is stability. When the broader crypto market is volatile — with some assets fluctuating 10–20% in a single day — stablecoins maintain their peg (usually to the US dollar), acting as a safe harbor.
Another major advantage is convenience. A stablecoin is a cryptocurrency, but in practice, it behaves like regular money. One USDT or USDC is nearly always equal to one dollar. This makes stablecoins extremely convenient for payments, transfers, international settlements, and business operations. There's no need to calculate prices in BTC or monitor ETH volatility — you're dealing with a familiar unit of account.
Stablecoins are also actively used in DeFi: they’re perfect for storing capital while staying on-chain, participating in farming, lending, or simply waiting for the right market moment.
Another major advantage is convenience. A stablecoin is a cryptocurrency, but in practice, it behaves like regular money. One USDT or USDC is nearly always equal to one dollar. This makes stablecoins extremely convenient for payments, transfers, international settlements, and business operations. There's no need to calculate prices in BTC or monitor ETH volatility — you're dealing with a familiar unit of account.
Stablecoins are also actively used in DeFi: they’re perfect for storing capital while staying on-chain, participating in farming, lending, or simply waiting for the right market moment.
Benefits and Risks
Stablecoins offer high transaction speed, accessibility, ease of exchange, and broad utility. But they also come with risks. If an issuer fails to maintain proper reserves, price stability may be an illusion — as was the case with TerraUSD (UST), which collapsed despite claims of being stable.
Additionally, there are legal and regulatory risks: in some countries, the use of stablecoins may be restricted or regulated.
How to Buy Stablecoins
The easiest way to buy stablecoins is via a crypto exchange. After completing basic verification (KYC), users can deposit fiat and purchase stablecoins via trading pairs. Some wallets — like Trust Wallet — also support direct stablecoin purchases using a bank card.
Remember: the more reputable the exchange or wallet, the lower the risk of losing your funds.
Remember: the more reputable the exchange or wallet, the lower the risk of losing your funds.
The easiest way to buy stablecoins is via a crypto exchange. After completing basic verification (KYC), users can deposit fiat and purchase stablecoins via trading pairs. Some wallets — like Trust Wallet — also support direct stablecoin purchases using a bank card.
Remember: the more reputable the exchange or wallet, the lower the risk of losing your funds.
Remember: the more reputable the exchange or wallet, the lower the risk of losing your funds.
Where to Store Them
Stablecoins can be stored on both centralized exchanges and decentralized wallets. However, for large amounts, cold wallets (like Ledger) are the safest option to protect your assets from hacks.
Stablecoins can be stored on both centralized exchanges and decentralized wallets. However, for large amounts, cold wallets (like Ledger) are the safest option to protect your assets from hacks.
Earning Yield on Stablecoins
Some DeFi platforms offer interest for providing stablecoins to liquidity pools or lending protocols. Annual yields can range from 2% to 20%, but it’s important to understand that higher returns often come with higher risks.
Before using a platform, study its reputation and mechanics — at a minimum, understand where the yield is coming from.
Before using a platform, study its reputation and mechanics — at a minimum, understand where the yield is coming from.
Some DeFi platforms offer interest for providing stablecoins to liquidity pools or lending protocols. Annual yields can range from 2% to 20%, but it’s important to understand that higher returns often come with higher risks.
Before using a platform, study its reputation and mechanics — at a minimum, understand where the yield is coming from.
Before using a platform, study its reputation and mechanics — at a minimum, understand where the yield is coming from.
Stablecoin Regulation
Regulators are paying increasing attention to stablecoins, especially after the UST collapse. In the U.S., legislation is being considered that would require stablecoin issuers to obtain banking licenses. In the EU, the MiCA framework has been adopted, regulating the issuance and use of stablecoins.
In Russia, regulation is still in its early stages, but the Central Bank has already voiced concerns about the risks associated with mass stablecoin adoption.
In Russia, regulation is still in its early stages, but the Central Bank has already voiced concerns about the risks associated with mass stablecoin adoption.
Regulators are paying increasing attention to stablecoins, especially after the UST collapse. In the U.S., legislation is being considered that would require stablecoin issuers to obtain banking licenses. In the EU, the MiCA framework has been adopted, regulating the issuance and use of stablecoins.
In Russia, regulation is still in its early stages, but the Central Bank has already voiced concerns about the risks associated with mass stablecoin adoption.
In Russia, regulation is still in its early stages, but the Central Bank has already voiced concerns about the risks associated with mass stablecoin adoption.
Expert Opinion: The Future of Stablecoins
Many experts believe stablecoins will be the foundation for mass crypto adoption. They are easy to understand, price-stable, and well-suited to business operations. Meanwhile, large governments are expected to launch their own digital currencies (CBDCs), which will likely compete with stablecoins.
Over time, the market will likely weed out unreliable projects, leaving only those that can ensure transparency and resilience.
Over time, the market will likely weed out unreliable projects, leaving only those that can ensure transparency and resilience.
Where to Check Stablecoin Wallets for Risk
When using stablecoins, it's important to consider not just the token's reliability, but also who you're transacting with. There have been cases where users unknowingly sent funds to addresses linked to fraud or money laundering. This can lead to funds being frozen when trying to withdraw them on exchanges.
To avoid such situations, it’s best to check wallet addresses before sending funds using the Btrace service. It helps identify risk factors tied to wallets and transactions. Btrace is available both on the website and via a convenient Telegram bot. If you have questions, AML Crypto’s support team is ready to assist via Telegram or email.
A quick check with Btrace is a smart step toward safer crypto use.
To avoid such situations, it’s best to check wallet addresses before sending funds using the Btrace service. It helps identify risk factors tied to wallets and transactions. Btrace is available both on the website and via a convenient Telegram bot. If you have questions, AML Crypto’s support team is ready to assist via Telegram or email.
A quick check with Btrace is a smart step toward safer crypto use.
Key Takeaways on Stablecoins
- A stablecoin is a cryptocurrency pegged to a fiat currency or asset.
- They are used for payments, storing value, investing, and DeFi participation.
- The most well-known stablecoins are USDT, USDC, and DAI.
- Risks include insufficient reserves, regulatory uncertainty, and security breaches.
- Always check addresses and wallets before transacting — Btrace can help.
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