Originally published on April 20th, 2022, and updated on April 23, 2025.

Stablecoins have emerged as a pivotal component in the cryptocurrency ecosystem, offering a bridge between the’ volatile world of digital assets and the stability of traditional fiat currencies. By pegging their value to external references like the US Dollar or commodities like gold, stablecoins aim to provide consistent value, making them an attractive option for both investors and everyday users.

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Key takeaways

• Stablecoins combine the benefits of cryptocurrencies with the stability of traditional money. They are essential for transactions, savings, and managing risk in volatile markets.
• Some of the popular stablecoins include Tether (USDT), USDC (USDC), Ethena USDe (USDe), Dai (DAI), and PayPal USD (PYUSD).
• Paxful and other platforms offer easy ways to buy, sell, and use stablecoins.

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What is a stablecoin?

A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a specific asset or a pool of assets. It’s pegged to the price of commodities like gold, oil, gas, and other reserves or the value of government-issued money like US dollars, euros, yen, and more.

Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which can experience significant price fluctuations, stablecoins aim to offer price stability, making them suitable for transactions and savings and as a hedge against volatility.

As a type of cryptocurrency, stablecoins also run their programs and operations through blockchain technology. They aim to serve the same functions as traditional money and digital assets, which can be used for payment transactions. They fall under the category of payment tokens—used as a unit of account, medium of exchange, and store of value.

Some of the most popular stablecoins on the list include Tether (USDT), USDC Coin (USDC), TrueUSD (TUSD), and more.

However, unlike certain fiat currencies that are very susceptible to inflation, and other cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), which are known for being volatile assets, stablecoins are designed to maintain their value or achieve price stability.

How do stablecoins work?

Stablecoins peg their values using different mechanisms to bridge the gap between fiat money and cryptocurrency’s price stability. Let’s take a look at its four categories.

1. Fiat-collateralized stablecoins

This type of stablecoin is backed by an existing government-issued currency, such as the United States dollar (USD), often with a 1:1 ratio. This means that equivalent fiat money is held as collateral for every digital coin issued to you. One good example is Tether (USDT), where 1 USDT is always valued at 1 USD.

Fiat-backed stablecoins are the most popular and widely used type of stablecoin in today’s crypto sphere. However, it’s considered vulnerable to fraud because they are issued by centralized groups and entities with their own rules and protocols. That’s why it’s important to look for an issuer you can trust.

💡How it works: The issuer maintains a reserve to ensure redemption at the pegged value. Regular audits or transparency reports verify the reserves. Users trust the issuer to maintain the peg and honor redemptions.

2. Commodity-collateralized stablecoins

These stablecoins are similar to fiat-backed coins, but instead of fiat money, they use other kinds of interchangeable assets and goods as collateral. These include precious metals and minerals like gold, silver, and diamonds; valuable commodities like oil and natural gas; exclusive real estate; and many more.

💡How it works: Users lock up crypto (e.g., ETH) in a decentralized protocol like MakerDAO. The protocol issues stablecoins based on the collateral’s value, maintaining a peg (e.g., 1 DAI = 1 USD). The system may liquidate assets if the collateral value drops to stabilize the peg.

3. Cryptocurrency-collateralized stablecoins

Here, instead of fiat money, the stablecoin is backed by cryptocurrencies. Since it uses cryptocurrencies as collateral, the entire process runs and operates on the blockchain in a decentralized manner. Often, crypto-collateralized stablecoins are pegged with a 1:2 ratio.

💡How it works: Each coin represents a fixed amount of the commodity (e.g., 1 PAXG = 1 ounce of gold). Reserves are audited, and users can redeem coins for the commodity or its fiat equivalent.

However, because of their complexity, cryptocurrency-collateralized stablecoins aren’t as popular as their fiat-backed counterparts. Also, because of the high amount held as reserves, they’re often referred to as “over-collateralized.”

4. Algorithmic stablecoins

Also referred to as non-collateralized, these stablecoins aren’t backed by fiat money or cryptocurrency. Instead, they maintain stability through an algorithm or working mechanism. Smart contracts manage the supply and demand scheme and guarantee stablecoins’ price stability.

💡How it works: If the stablecoin’s price rises above the peg, the algorithm increases supply to reduce the price. If it falls below, it reduces supply to increase the price. This is often managed via smart contracts.

TerraUSD (UST) was an example, though it faced significant challenges leading to its collapse in 2022.

Why are stablecoins important?

Like other cryptocurrencies, stablecoins aim to provide the developed functions of traditional money worldwide. Let’s take a look at some of their significant benefits.

1. Price stability

Stablecoins are designed to have a stable value over time. Because of this, many crypto enthusiasts and investors consider them an ideal safe-haven asset. The value of fiat and cryptocurrencies could experience dramatic spikes and plunges at any time, which is why stablecoins are an excellent option for people looking for ways to preserve their wealth. They can store their wealth in an asset without seeing any risk of loss due to inflation.

2. Privacy and decentralization

Since stablecoins are a type of cryptocurrency, they also enjoy the same features and technology that make other digital assets like Bitcoin the most secure in the world. They run and operate on a blockchain, which prevents double-spending and hackers while allowing the network to be decentralized. 

3. Programmability

Stablecoins are programmable and can be designed to fit the users’ needs since they are “fundamentally made up of code.” One common way of implementing this is through rewards or loyalty programs. If a company builds its program on top of its stablecoin, it can design an application where users can easily and quickly check their stablecoin and rewards at once. 

Popular stablecoins on the market right now

As of April 2025, here are some of the leading stablecoins by market capitalization:

1. Tether (USDT)

As the name suggests, Tether is a stablecoin pegged to the value of the US Dollar (1 USD = 1 USDT). It currently ranks #3 among all cryptocurrencies on the market.
Value: 1.00 USD
Market cap:$144.82B

2. Dai (DAI)

Maintained and regulated by MakerDAO, Dai is an Ethereum-based stablecoin that also pegs its value to the US Dollar through collateralized debt. Its reserves are not held in US Dollars but in ether (ETH) through collateralized debt.
Value: $0.9999
Market cap: $5.36B

3. USD Coin (USDC)

USD Coin (USDC) is a stablecoin that’s fully backed by US Dollars, meaning that it’s a fiat-collateralized coin pegged to USD.
Value: $0.9995
Market cap: $61.59B

4. True USD (TUSD)

Like other examples on this list, True USD is a fully collateralized stablecoin verified by the Ethereum network. It also pegs its value to the US Dollar and maintains the 1:1 ratio, the way most stablecoins do.
Value: 0.9994 USD
Market cap: $494.84M

5. Pax Dollar (USDP)

Originally traded under the PAX ticker, the Paxos team later rebranded it to Pax Dollar (USDP). It’s also built on the Ethereum blockchain and maintains a 1:1 ratio with USD.
Value: 1.00 USD
Market cap: $76.24M

6. TerraUSD (UST)

Unlike the other examples on this list, TerraUSD’s 1:1 ratio with the US Dollar is maintained through another cryptocurrency: LUNA, one that’s much more volatile than UST.
Value: 0.9997 USD
Market cap: $494.65M

7. PayPal USD (PYUSD)

PayPal USD is a fiat-collateralized stablecoin issued by Paxos Trust Company and backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents. Launched by PayPal, PYUSD is designed for seamless integration into digital payments and transfers within the PayPal ecosystem and beyond.​

Value: $0.9998 USD

Market Cap: $867.9 million

👉Additional reading: What’s PayPal USD (PYUSD)?

8. Ethena USDe (USDe)

Ethena USDe is a synthetic stablecoin designed to maintain a 1:1 peg with the US Dollar. It achieves this stability through a combination of crypto-backed reserves and algorithmic mechanisms, aiming to provide a decentralized and scalable solution for digital dollar transactions.​

Market Cap: $4.8 billion

Value: $0.9995 USD

*Data provided are accurate as of the time of writing: April 23rd, 2025

Common use cases for stablecoins

Here’s how people are using stablecoins every day

1. Store value during market volatility

During market volatility, stablecoins offer traders a way to protect their profits and avoid the extreme ups and downs of Bitcoin and other altcoins. Traders often move funds into stablecoins when markets dip to ride out the storm.

• Example: A trader sells Ethereum for USDT to lock in profits when the market falls.
• On Paxful: You can swap Bitcoin for USDT when the market feels shaky

2. Payments

Stablecoins make everyday payments and business transactions faster and cheaper, especially across borders. Unlike traditional wire transfers, crypto payments happen in minutes and often cost less than a dollar.

• Example: A freelancer in the Philippines gets paid in USDC from a client in the U.S.
• Paxful tip: Use USDT or USDC for peer-to-peer payments directly through trusted offers on the platform.

3. DeFi

Stablecoins are the backbone of DeFi (Decentralized Finance). They provide a consistent unit of value for lending, borrowing, earning interest, and trading on blockchain-based protocols.

• Example: Users deposit USDC into Aave to earn interest, or use DAI as collateral for a crypto loan on MakerDAO.

4. Remittances

Sending money internationally can be expensive and slow, but stablecoins fix that. They cut down transfer fees, eliminate intermediaries, and instantly deliver funds.

• Example: A worker in the U.S. sends USDT to family in Nigeria or the Philippines via Paxful. The recipient cashes out in local currency.

Risks of using Stablecoins

While stablecoins offer convenience and price stability, they’re not without risks. Here are some of the risks:

1. Centralization risks
Fiat-backed stablecoins like USDT (Tether) and USDC rely on centralized entities to manage their reserves. This setup creates a single point of failure. Users are exposed to major risks if the issuer mismanages funds or lacks transparency. For example, Tether has faced repeated scrutiny over whether its reserves are fully backed.

2. Regulatory pressure
Governments around the world are paying closer attention to stablecoins. Regulatory crackdowns—like the SEC’s ongoing investigations into various crypto firms—can lead to restrictions, lawsuits, or even trading bans. This uncertainty can shake investor confidence and affect liquidity on platforms.

3. Depegging events
Stablecoins are meant to maintain a 1:1 peg with a reference asset like the U.S. dollar, but that’s not always true. TerraUSD (UST) is a high-profile example that lost its peg in 2022 and crashed to nearly zero, wiping out billions in investor funds. Even algorithmic stablecoins with clever mechanisms can fail under pressure.

4. Counterparty risk
If a stablecoin’s reserves aren’t fully backed—or can’t be accessed when needed—users could lose trust in the token. In worst-case scenarios, this could lead to a bank-run-style selloff. For instance, during the 2023 Silicon Valley Bank collapse, USDC briefly dropped below its peg due to fears about reserve exposure.

(FAQ)

What is the primary purpose of a stablecoin?

Stablecoins aim to provide price stability, making them suitable for transactions and savings and as a hedge against the volatility of other cryptocurrencies.​

Are stablecoins safe to use?

While stablecoins offer stability, their safety depends on the underlying mechanisms and the credibility of the issuing entity. It’s essential to research and choose reputable stablecoins.​

How do stablecoins maintain their peg?

Depending on their type, stablecoins maintain their peg through collateralization (fiat, commodity, or crypto) or algorithmic mechanisms that adjust supply based on market demand.​

Can I earn interest on stablecoins?

Many platforms offer interest-bearing accounts for stablecoins, allowing users to earn passive income.​

How do I acquire stablecoins?

Stablecoins can be purchased on various cryptocurrency exchanges, including Paxful, using fiat currencies or by exchanging other cryptocurrencies.

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