What Are Stablecoins?

Cryptocurrencies are known for many reasons, including their decentralized nature of providing fast and low-cost international transfers. But not all cryptocurrency assets work in the same way. You may be familiar with assets such as Bitcoin or Ethereum, but do you know about stablecoins?

Stablecoins let you hold digital dollars without any bank—accessible 24/7, censorship-resistant when stored correctly, and immune to banking hours or geographic restrictions. This is your sovereign savings account.

Like traditional cryptocurrencies, they operate on blockchain networks but they have some unique features that set them apart. 

So what are stablecoins exactly? Let’s dive in.

What Are Stablecoins?

Unlike traditional crypto assets, the value of a stablecoin is pegged to a certain currency or commodity. It could be pegged to a fiat currency, such as the Euro, Yen or Pound Sterling, or a stablecoin may be pegged to the value of a commodity, such as gold. Although there’s a neverending list of assets you could peg a stablecoin to, most stablecoins are pegged to the US Dollar.

What are Stablecoins For?

Stablecoins are useful for all sorts of reasons, but the following are some of the most common reasons to own and use them.

Taking Profits Without Moving Funds Off-Chain

If you’re a crypto trader or crypto artist, you may want to realize your profits when the market is performing well. Swapping your traditional cryptocurrencies for stablecoins can be a great way to take profits for any service you offer for crypto, guaranteeing you see some funds before a market downturn. Using stablecoins in this way is especially useful for traders, who may swap between various volatile cryptocurrencies several times a day or week. In short, these types of assets allow you to hedge against market volatility without bothering with the burden of off-ramping.

Financial independence

Crypto also offers users financial independence. To explain, since the blockchain is decentralized, users can transfer funds peer-to-peer without the need for a middleman. Not only that, users can actually own their funds, using non-custodial wallets such as the Ledger Bitcoin wallet which operates without a bank or central entity’s interference. Since stablecoins act like fiat currencies but benefit from the peer-to-peer nature of blockchain transactions, they are a game changer for remittances. Using stablecoins, you can send a monetary gift anywhere in the world without waiting extra processing time to cross borders. In short, stablecoins give financial independence to those living in places with economic and political instability.

What Can You Do With Stablecoins?

Stablecoins allow you to dodge the volatility of traditional cryptocurrencies while unlocking blockchain’s core advantages; instant global settlements, borderless access, and programmable money – for everything from earning passive income to running international business operations.

DeFi Yield & Lending

Stablecoins generate passive income through DeFi protocols like Aave and Compound, where you can earn 5-15% APY by depositing USDC or DAI. Unlike traditional savings accounts offering 0.5%, these protocols pay you interest for providing liquidity to borrowers. This is the primary reason institutions hold stablecoins on-chain—predictable yields without volatility risk.

Business Payments & Payroll

Companies now use stablecoins for international invoicing, supplier payments, and employee salaries. Platforms like Deel pay remote workers globally in USDC, settling instantly with minimal fees. This bypasses SWIFT’s 3-5 day delays and high costs. With B2B stablecoin payments annualizing at $76 billion (as of August 2025 per Artemis Analytics’ survey of payment firms), corporate use cases like international invoicing and supplier settlements are accelerating, though total real-world payments remain a fraction (~1%) of overall stablecoin activity.

Savings in High-Inflation Economies

In countries like Argentina (211% inflation) or Turkey, citizens hold USDT as dollar-denominated savings accounts to preserve purchasing power. When local currency collapses, stablecoins provide access to stable value without needing a US bank account. This isn’t speculation—it’s financial survival for millions protecting their life savings.

Collateral for Crypto Loans

Lock stablecoins on platforms like MakerDAO or Alchemix to borrow against your crypto holdings without selling—avoiding taxable events. For example, deposit $10,000 USDC to borrow $7,000 DAI while keeping your Bitcoin exposure. This lets you access liquidity while maintaining your long-term positions, a core DeFi primitive.

Liquidity Provision in DEXs

Provide stablecoin pairs (USDC-USDT) on Uniswap or Curve to earn trading fees with minimal impermanent loss. Since both assets stay near $1, price volatility is low while you collect 0.05-0.30% fees on every swap. Sophisticated users generate 8-20% APY this way—passive income from market-making.

E-commerce & Merchant Payments

Shopify, Stripe, and PayPal now accept stablecoin payments, letting businesses avoid 3% credit card fees and receive instant settlement. A customer pays in USDC; you receive funds in 10 seconds instead of 3-5 banking days. This is exploding in 2026 as merchants realize they can keep more revenue.

Types of Stablecoins

The main way to classify stablecoins is by how they are backed—learn more about the different stablecoin types and definitions from financial education resources. To explain, some are backed one-to-one by whatever they are representing. Others use algorithms to keep the price stable. Each of these methods has its advantages and disadvantages. So, let’s explore the different types.

Fiat Collateralized stablecoins

Fiat collateralized stablecoins are backed by fiat currencies, such as Euros and dollars. Issuers of these coins claim to have a reserve of that currency, to collateralize the on-chain stablecoin. These coins are pegged to the value of the currency in reserve. You can also collateralize stablecoins with precious metals such as gold or silver, but US dollars are by far the most popular.

Tether (USDT)

A great example of a fiat-backed stable is Tether (USDT). Tether claims they have one US dollar in reserve for each USDT coin they have created, as shown in their real-time transparency reports. Today, USDT is the biggest stablecoin in terms of market capitalization.

USD Coin (USDC)

Another good example of a stablecoin backed by fiat reserves is USDC. This stablecoin is issued and managed by the financial company Circle. Circle stores its fiat reserves in centralized financial institutions, which means using USDC introduces counterparty risk.

Commodity-Backed Stablecoins

Commodity-backed stablecoins are pegged to physical assets like gold, silver, or oil rather than fiat currency. Each token represents ownership of a specific quantity of the underlying commodity stored in secure vaults.

PAXG (Pax Gold)

PAXG is backed 1:1 by one troy ounce of London Good Delivery gold held in Paxos Trust Company vaults. This lets you hold tokenized gold with blockchain liquidity, avoiding storage fees and enabling fractional ownership. You get gold’s stability with crypto’s portability.

XAUT (Tether Gold)

Tether’s gold-backed stablecoin works similarly, with each token representing physical gold in Swiss vaults. These commodity stables are popular with investors hedging against inflation or seeking precious metal exposure without physical custody challenges.

Crypto Collateralized Stablecoins

Some issuers opt to collateralize their stablecoins with cryptocurrencies instead. This is possible, but a little tricky, as cryptocurrencies can be extremely volatile. To ensure they have enough liquidity to cover withdrawals, issuers over-collateralize. This allows the currency to drop in value while leaving a sort of insurance amount to cover assets as needed.

DAI

A good example of a Crypto Collateralized stablecoin is MakerDAO token DAI. While this coin is pegged to the US dollar, DAI is backed by Ether and some other cryptocurrencies, including fellow stablecoin USDC. Although DAI is fully backed, relying heavily on crypto and stablecoins with counterparty risk means it’s vulnerable to depegging. For example, market downturns or illiquid reserves could impact DAI’s price.

USDA

Another good example of a crypto over-collateralized stablecoin is USDA dollar stablecoin. USDA by Angle Protocol maintains a 1:1 parity with the U.S. dollar through reserves consisting of tokenized Treasury Bills and Government Bonds, Ethereum, Bitcoin, as well as other liquid USD stablecoins. Some of these assets in the backing generate a yield that is automatically allocated to USDA holders. Angle Protocol also issues a Euro stablecoin called EURA (formerly known as agEUR), relying on a similar infrastructure.

Algorithmic Stablecoins

Algorithmic Stablecoins use computer programs to keep the price consistent. This means they may not hold real reserves. Essentially they work much as traditional banks do. Instead of holding the asset, an algorithm controls the supply, which in turn controls the price.

However, it’s not always so easy. While banks have control over what happens on their network, the blockchain is decentralized. That means if the programming is bad, there’s no single entity that can help restore the price peg.

Real-World Asset (RWA) Backed Stablecoins

RWA-backed stablecoins are collateralized primarily by tokenized real-world assets like US Treasury bills and government bonds rather than cash or crypto. These emerged in 2024-2026 to meet institutional compliance standards, offering government-grade security with blockchain efficiency.

USDA (Angle Protocol)

USDA maintains 1:1 parity with the US dollar through reserves consisting of tokenized Treasury Bills and Government Bonds, Ethereum, Bitcoin, and other liquid USD stablecoins. Some backing assets generate yield automatically allocated to USDA holders. Angle Protocol also issues EURA, a Euro stablecoin using similar infrastructure.

USDM (Mountain Protocol)

USDM is 100% backed by overnight US Treasury securities, making it one of the most conservative stablecoins available. Its reserves consist entirely of short-term government debt, providing institutional-grade collateral that satisfies regulatory frameworks like the GENIUS Act.

Yield-Bearing Stablecoins

Unlike traditional stablecoins that maintain $1 value, yield-bearing stablecoins automatically generate returns for holders without requiring deposits into DeFi protocols. They appreciate in value or distribute rewards natively through their smart contract design.

sDAI (Savings DAI)

sDAI earns yield from MakerDAO’s DAI Savings Rate automatically. Instead of manually depositing DAI into a protocol, simply holding sDAI accrues interest that compounds in real-time. Your balance grows as the protocol distributes earnings from borrowing fees.

sUSDe (Ethena)

Ethena’s sUSDe generates yield from delta-neutral trading positions that hedge market volatility. It combines stablecoin stability with passive income generation, offering institutional-grade yields (5-15% APY) while maintaining $1 peg through sophisticated derivatives strategies.

Risks and Criticisms

There are several concerns regarding interacting with stablecoins. While they may seem just like digital dollars, they are much more complicated than that. Before you steam ahead, it’s important to understand the risks of using any stablecoin.

Centralization Concerns with Fiat-Backed Stablecoins

While some issuers may claim their token is fully backed one-to-one with fiat currencies, where are their reserves stored? Unfortunately, keeping access to those kinds of funds is almost impossible without using the traditional banking system. And that’s exactly what stablecoin issuers do. In fact, many coins backed by fiat have their reserves sitting in the very banks we’re trying to avoid. That means if the bank goes bust, your stablecoins’ value goes along with it. Yes, even though that goes against the very ethos of blockchain technology!

Centralized Issuer Risk: On-Chain Freezing

USDT and USDC smart contracts include “blacklist” functions that allow Tether and Circle to freeze any address instantly. This means even with perfect self-custody, the issuer controls your funds—not you. 

If an issuer suspects illicit activity, faces regulatory pressure, or simply makes an error, they can render your stablecoins unusable without warning. This is why storing stablecoins in your hardware wallet is critical: you maintain access to your private keys and can move funds before freezes occur, unlike exchange users who are completely exposed.

Risk of Failure with Crypto-collateralized Stablecoins

Crypto-collateralized stablecoins don’t have to worry about banks failing. Instead, they have the crypto market to worry about. As previously mentioned, if they are backed by crypto, these coins are usually over-collateralized to overcompensate for potential volatility. However, if a cryptocurrency decreases in price significantly, this can pose a problem.

Regulatory Uncertainty

Right now, stablecoins are getting a lot of attention. Mainly, crypto users are noticing that they aren’t all as secure as others. But that means governing bodies are noticing too. As a result, around the world governments are calling for tightened regulation on these types of coins.

How Do Regulations Affect Stablecoins? (Genius Act & MiCA)

The regulatory landscape for stablecoins has transformed dramatically with new legislation. In the United States, the GENIUS Act (signed July 2025) establishes the first federal framework for payment stablecoins, requiring 100% reserve backing with liquid assets like U.S. dollars or Treasury bills. Issuers must publish monthly reserve disclosures and comply with Bank Secrecy Act anti-money laundering standards. The law defines “permitted issuers” as federally regulated banks or licensed nonbank entities, providing clarity but introducing strict compliance costs.

Across the Atlantic, the European Union’s MiCA regulation (effective June 2024 for stablecoins) harmonizes rules across member states, mandating robust reserve requirements and consumer protections. MiCA effectively bans algorithmic stablecoins and requires Crypto-Asset Service Providers (CASPs) to obtain authorization. However, its stringent capital requirements have driven some major issuers to exit the EU market entirely, creating tension between regulation and innovation.

Both frameworks aim to protect investors while integrating stablecoins into traditional financial systems, fundamentally changing how issuers operate and how users should evaluate counterparty risk.

Future of Stablecoins

For now, it’s unsure how the stablecoins will play out. While regulation is still so unclear, it’s impossible to know what the future holds. That said, stablecoins offer a real tangible solution for beginners using cryptocurrencies. If you want to transfer value in a decentralized and secure way without using banks or having to watch cryptocurrency price fluctuations, then stablecoins are a good option. In essence, stablecoins have all of the benefits of the asset they represent but they also benefit from the way the blockchain works. Since the blockchain is unhackable, this is a huge plus point for some financial services. Believe it or not, TradFi firms get hacked all the time, and stablecoins could offer them a welcome solution.

Manage Your Stablecoins Securely With Ledger

As mentioned previously, most stablecoins operate as tokens on blockchains belonging to a different cryptocurrency. By far most of these are on the Ethereum network (being ERC-20 tokens such as USDT, USDC, DAI or TrueUSD), but they can equally be found on others like the Tron blockchain (using TRC20 standard). At all rates, it is important to keep all of your digital assets secure and out of reach from anyone that would want to steal your hard-earned money.

That’s where Ledger comes in.

At Ledger, our mission is to provide top-notch security for your critical digital assets. Ledger signers keep the key to unlocking your crypto wealth offline, away from online hacks. They are also protected against a wide array of physical attacks, since they use cutting-edge Secure Element chips to keep access to your crypto secure.

Not only do we provide security, but you can also manage a plethora of different coins directly in our all-in-one software solution: Ledger Wallet.