Stable Coins: stability amidst the volatility of the crypto market

Stable coins are cryptoassets tied to stable underlying assets, such as fiat currencies or precious metals. Their main purpose is to provide price stability in conditions where the cryptocurrency market demonstrates significant volatility. To date, there are three main types of stablecoins, each with its own mechanisms of collateralization and management.

Why did stablecoins emerge in the crypto space?

Volatility is an inherent characteristic of traditional cryptocurrencies. Bitcoin, Ethereum, and altcoins can sharply change in value over short periods, creating problems for practical application. Imagine a coffee shop that accepts payments in BTC: today a cup of coffee costs $5, tomorrow the received cryptoassets lose half of their value. Such fluctuations make it impossible to conduct normal business and plan.

Before the emergence of stablecoins, investors and traders did not have a tool to secure profits without converting to fiat. The solution was the creation of digital assets that inherit the advantages of blockchain — speed, accessibility, and the absence of intermediaries — while maintaining a peg to a stable asset.

Three types of stablecoins: mechanisms of operation

To create a coin that tracks the price of another asset, a pegging mechanism is required. Although there is no perfect guarantee, the industry has developed three main approaches.

Stable Coins with fiat backing

This is the simplest and most common type of stablecoin. Each token is backed by a corresponding amount of fiat currency (usually USD or EUR), held in the reserves of the issuer. For example, one TUSD is guaranteed by one US dollar held off the blockchain.

The advantage of this approach is transparency and ease of understanding: a token can always be exchanged for fiat at a fixed rate. The disadvantage is centralization: users are completely dependent on the reliability and honesty of the storage where the reserves are held.

Crypto-backed stablecoins

This type of stablecoin is backed by cryptocurrency, which creates an interesting situation: the collateral is as volatile as regular cryptoassets. Therefore, over-collateralization ratios are used to protect against price fluctuations — for example, to obtain 100 stablecoin tokens, it may be necessary to deposit cryptocurrency worth $150.

A classic example is DAI from MakerDAO. The user deposits cryptoassets into a smart contract, receives DAI pegged to the dollar, and can use it freely. To retrieve their collateral, they need to return an equivalent amount of DAI. If the value of the collateral falls below a set threshold, the contract may automatically liquidate the position.

The price self-regulation mechanism works through game theory: when DAI falls below $1, users are incentivized to convert crypto into DAI (, increasing demand and raising the price ). When DAI rises above $1, there is an incentive to create new tokens (, expanding supply and lowering the price ). Governance is conducted through decentralized community voting.

Algorithmic Stable Coins

The most complex and rare type of stablecoin. There are no reserves here — the peg is maintained solely by algorithms and smart contracts that control the emission.

The logic is simple: if the token price falls below the target level, the system reduces its supply ( through staking, burning, or buybacks ). When the target price is exceeded, new tokens are issued to lower the cost. Such a model requires well-tuned mechanisms and a strong community, otherwise the system can easily go out of balance.

Practical Application of Stable Coins

Stable coins solve several important issues in the crypto industry:

Daily payments and transfers. Stable tokens can be relied upon when organizing payment systems and international transfers. Unlike volatile cryptocurrencies, they are suitable for everyday use.

Portfolio Management. Traders and investors use stablecoins to hedge risks. By allocating part of the funds to stablecoins, it is possible to reduce the overall volatility of the portfolio while maintaining liquidity for entering new positions. This also allows for quick exits from trades without withdrawing funds from specialized platforms.

Blockchain advantages without volatility. Sending a stablecoin to any point in the world can be done in minutes, costs are minimal, and the risks of double spending and counterfeiting are virtually eliminated.

Challenges and Limitations

Despite their usefulness, stablecoins have serious limitations:

Maintaining the peg remains an unresolved issue for some projects. Many tokens periodically deviate from the target price, while others completely lose their peg and become worthless.

Transparency is often limited. Not all issuers publish complete independent audits of their reserves; more often they provide only regular attestations from private auditors, which creates an information gap.

Centralization is a problem for fiat-backed stablecoins. Reserves are held by a single entity, which may be subject to financial regulation. Users must trust that the reserves truly exist and fully back the issued tokens.

Community dependence is relevant for crypto-backed and algorithmic options. Here, the fate of the project depends on the voting and consensus of the participants, which can lead to conflicts of interest and poor decisions.

Known practical examples

DAI (MakerDAO). A cryptoasset-backed stablecoin on Ethereum, governed by the community through the MKR token. It uses over-collateralization and smart contracts to maintain its peg to the dollar.

TUSD (TrueUSD). Fiat-backed Stable Coin pegged to USD. The first project to implement software-controlled reserves with instant verification. Reserves are audited through decentralized mechanisms, allowing users to independently verify the completeness of the backing.

Regulatory Attention to Stable Coins

Global regulators are closely watching stablecoins. The reason is simple: unlike speculative cryptocurrencies, stablecoins can function as a means of payment and compete with traditional money. Their ability to provide fast cross-border transfers with low fees attracts the attention of central banks and financial regulators.

Some countries are even experimenting with creating their own digital stablecoins. According to the law of each jurisdiction, stablecoins are likely to fall under the same requirements as cryptocurrencies. Issuing tokens backed by fiat may require special licensing and approval from regulators.

Conclusion: the place of stablecoins in the portfolio

Stable coins have firmly established themselves in the crypto ecosystem. Investors and traders hold them on exchanges for quick opportunity capture, use them in payments and international transfers, and add them to portfolios to reduce risk.

However, stablecoins remain a cryptocurrency with inherent risks. Some projects fail to maintain their peg, lose reserves, or face legal challenges. When working with stablecoins, it is important to remember the need for portfolio diversification and thorough analysis before investing funds.

Remember: the information here is provided for educational purposes and is not financial or legal advice. All investment decisions are made at your own risk and responsibility.