Crypto Stablecoins Explained: A Beginner’s Guide

As cryptocurrency becomes more mainstream, stablecoins have taken on an important role in the digital finance space. They are designed to bring together the best of both worlds - offering the speed, innovation, and flexibility of crypto with the steady value of traditional currencies like the US dollar or Australian dollar.

From everyday payments and trading to powering decentralised finance (DeFi) platforms, stablecoins help bring balance to what can often be a fast-moving and unpredictable market.

If you are new to crypto or simply want to understand what stablecoins do and why they matter, this guide will take you through everything you need to know: how they work, the different types, where they are used, and the key risks to be aware of.

Key Takeaways

• Stablecoins are a type of cryptocurrency that aim to keep a steady value, often by being linked to a real-world asset like the US dollar, Australian dollar, or even gold.
• They provide a more stable way to store and move money on the blockchain, avoiding the big price swings you often see with other cryptocurrencies like Bitcoin.
• Not all stablecoins work the same way - some are backed by cash in a bank, others use crypto as collateral, some are tied to physical commodities, and a few rely on algorithms to control their value.
• They are used in lots of ways, including fast international payments, trading, earning interest through DeFi, and as a simpler entry point into the crypto world.
• But they are not risk-free - things like regulation, trust in the issuer, lack of transparency, or market stress can all affect how stable they really are.

What Are Stablecoins?

Stablecoins are a type of cryptocurrency designed to keep their value steady over time. Unlike other cryptocurrencies like Bitcoin or Ethereum, which can rise or fall in price quite dramatically, stablecoins aim to stay consistent. They do this by being linked or pegged to something more stable, like a fiat currency (such as the AUD or USD) or a physical asset like gold.

Because of this stability, stablecoins are far more practical for everyday use. Whether you are sending money overseas, holding digital savings, or using decentralised finance (DeFi) platforms, stablecoins make it easier to use crypto without worrying about major price swings.

How Do Stablecoins Work?

At their core, all stablecoins are designed to do one main thing: keep their price stable by closely following the value of another asset. Most of the time, that asset is a fiat currency like the US dollar or Australian dollar, but in some cases, it could be something like gold.

While the goal is the same, the way each stablecoin achieves this stability can differ quite a bit. Some use traditional bank reserves, others rely on cryptocurrency as collateral, and some use smart contracts and algorithms to control supply and demand.

The type of stablecoin you choose can affect how reliable or risky it might be, so understanding how they work is key to using them confidently.

Why are Stablecoins Important?

One of the biggest challenges with cryptocurrencies is their price volatility. While this can create opportunities for traders, it makes everyday use more difficult. That is where stablecoins come in.

Stablecoins bring a much-needed sense of predictability to crypto. Because their value stays relatively constant, they are ideal for things like sending money, storing value, and using financial tools on decentralised platforms.

They also make it easier to move money around the world without needing a central bank. Whether it is for cross-border payments, remittances, or accessing DeFi services, stablecoins allow people to tap into the benefits of blockchain technology in a way that feels more familiar and manageable.

In short, stablecoins help make crypto more practical, accessible, and useful in everyday life.

Key Benefits of Stablecoins

Stablecoins bring a range of practical advantages to the table, making them a popular choice among everyday users, crypto traders, and developers alike. Here are some of the main benefits:

Reduced Volatility

One of the biggest selling points of stablecoins is that they are designed to hold their value. Unlike cryptocurrencies that can swing wildly in price, stablecoins aim to remain steady, making them a more dependable option for storing and using funds.

Borderless Payments

Like other digital currencies, stablecoins can be sent across the world without the need for banks or third-party services. This makes them especially useful for international transfers and sending money to family and friends abroad.

Lower Transaction Fees

Because they run on blockchain networks, stablecoin transactions are often cheaper than traditional banking or money transfer services, particularly when it comes to sending money across borders.

High Liquidity and Flexibility

Stablecoins are widely accepted on crypto exchanges and DeFi platforms. This makes it easy to trade them, swap between other assets, or cash out when needed.

Smart Contract Integration

Stablecoins can be used in smart contracts, which power many DeFi applications. This includes lending, borrowing, staking, and other automated financial tools that operate without middlemen.

Digital Access to Fiat Value

With stablecoins, users can hold digital versions of traditional currencies on the blockchain, without needing to convert back to actual cash. This makes it easy to stay in the crypto ecosystem while keeping exposure to familiar currencies.

Types of Stablecoins

While all stablecoins aim to maintain a stable value by being pegged to another asset, the way they achieve this can vary significantly. These mechanisms not only affect how each stablecoin functions but also influence their risk, reliability, and ideal use cases.

Here are the four main types you’ll encounter in the stablecoin market:

Fiat-Collateralised Stablecoins

These are the most common type of stablecoin. Each one is backed one-to-one by traditional currency, like the US Dollar, Euro, or Australian Dollar. The actual money is held in reserve by a regulated bank or custodian. Some issuers also hold safe investments, such as short-term government bonds or other cash equivalents.

• How it works: When someone buys fiat backed stablecoins, the issuer stores the same amount of money in reserve. If the user decides to redeem the stablecoin, it is removed from circulation, and the matching amount of fiat currency is returned to them.
• Why it matters: This type is simple and trusted. It is often used for trading, sending payments, or just holding value in the crypto ecosystem. 
• Examples: USDT (Tether), USDC (USD Coin), AUDD (Australian Dollar Digital).

These stablecoins are highly liquid, widely accepted, and trusted by many due to regular audits and regulatory oversight. 

Crypto-Backed Stablecoins

Rather than using fiat reserves, these stablecoins are backed by other cryptocurrencies. Since crypto prices can be quite volatile, these stablecoins are usually over-collateralised - meaning they hold more value in reserve than the amount issued.

• How it works: Users deposit crypto into a smart contract and receive stablecoins in return. If the value of the crypto backing drops too much, the system may automatically sell some of it to keep the peg stable.
• Why it matters: These stablecoins are decentralised and run on code rather than companies. However, they are more exposed to the ups and downs of the cryptocurrency market.
• Example: DAI, backed by a variety of crypto assets through the MakerDAO protocol.

This type appeals to users who prioritise decentralisation and transparency, but it’s important to understand the risks tied to fluctuating crypto prices.

Algorithmic Stablecoins

Algorithmic stablecoins use software rules, not assets, to keep their value stable. They rely on algorithms and smart contracts to adjust the supply of coins based on market demand.

• How it works: If demand increases and the price rises above the peg, new tokens are minted. If the price drops, tokens are burned or removed to reduce supply. Some models use a second token to help stabilise value through arbitrage.
• Why it matters: Algorithmic stablecoins aim to be fully decentralised and do not require physical reserves, which can make them more efficient. But they are also more fragile.
• Example: TerraUSD (UST) was one of the most well-known algorithmic stablecoins, but it famously collapsed in 2022, leading to widespread losses and shaking confidence in the algorithmic stablecoin model.

While innovative, this kind of stablecoin carries the highest risk due to its lack of collateral and heavy reliance on market confidence.

Commodity-Backed Stablecoins

These stablecoins are backed by physical assets such as gold, silver, or even oil. Each token represents a unit of the underlying commodity, offering a way to gain exposure to real-world assets through crypto.

• How it works: The issuer holds the actual commodity in reserve, and users can sometimes redeem tokens for the physical asset or its cash equivalent.
• Why it matters: These tokens let users hold a digital version of tangible assets like gold, which is appealing during times of inflation or market uncertainty.
• Examples: PAX Gold (PAXG), Tether Gold (XAUT)

Commodity-backed stablecoins combine the benefits of blockchain with the stability of traditional stores of value, without the hassle of physically owning or storing the commodity.

What Are the Risks of Stablecoins? 

Stablecoins are designed to offer more predictability than other cryptocurrencies, but that does not mean they are risk-free. In fact, several types of risk can affect how stable a stablecoin really is, especially during times of financial stress or uncertainty in the crypto market.

Here are the main risks to understand before using or holding stablecoins:

Stablecoin Regulation Risk

Governments around the world, including in Australia, are still figuring out how stablecoins should be regulated. As the legal framework evolves, new rules could change how stablecoins are issued, traded, or accessed.

In Australia, upcoming regulations could bring stablecoin issuers under the supervision of ASIC (Australian Securities and Investments Commission) and AUSTRAC. This may require full reserve backing, clear redemption policies, and compliance with financial crime laws. For users, this could mean changes to which stablecoins are available and how they can be used.

Issuer and Counterparty Risk

Most stablecoins depend on a central company to hold and manage the reserves that back the token. If that issuer:

• Becomes insolvent
• Fails to maintain proper reserves
• Faces legal or operational trouble

...it could impact your ability to redeem your stablecoins or lead to a loss in confidence. The same risk applies to third-party custodians, such as banks or financial partners. If they face problems, like bankruptcy, asset freezes, or hacks, user funds could be affected.

Depegging Risk

Stablecoins are built to stay at a fixed price, but this peg can break. If too many people try to redeem their tokens at once or if the issuer’s reserves are questioned, the value of a stablecoin can drop below its target. This is known as “depegging.”

For example, in March 2023, USDC briefly fell below one dollar after concerns about its exposure to Silicon Valley Bank. It later recovered, but the event showed that even large stablecoins can be vulnerable.

Transparency and Trust Issues

Some stablecoin issuers publish regular audits and reserve data, which helps build trust. Others do not, or they release unclear or inconsistent information. Without transparency, it is difficult to know whether a stablecoin is truly backed 1:1 as claimed.

Tether (USDT), one of the largest stablecoins, has faced scrutiny over its reserve practices in the past, which highlights the need for clear, reliable data when choosing a stablecoin.

Technical and Operational Risks

Algorithmic stablecoins are particularly risky because they rely on software and smart contracts rather than real-world backing. If the algorithm fails, is exploited, or cannot handle rapid market changes, the stablecoin can collapse completely.

The most well-known example is TerraUSD (UST), which lost its peg in 2022 and caused billions in losses across the crypto space.

Centralisation Concerns

While crypto is often celebrated for being decentralised, many stablecoins are run by private companies. This means:

• They may have the ability to freeze user funds if required by law
• Users must trust the issuer to act responsibly
• Access to the stablecoin can be restricted, reducing its openness

For users who value permissionless, decentralised finance, this centralisation can be a drawback.

The Growing Role of Stablecoins

Stablecoins are becoming one of the most impactful innovations in the world of cryptocurrency. Often referred to as “crypto’s killer app”, these digital tokens combine steady value with the power of blockchain, unlocking a wide range of real-world and digital uses.

A Bridge Between Traditional Money and Cryptocurrency

Stablecoins make it easier for everyday people and businesses to step into the world of crypto without having to worry about price swings. Because their value is tied to something stable, they feel more familiar and practical than highly volatile cryptocurrencies.

This makes them the perfect “on-ramp” to digital assets, helping users move between the traditional financial system and the crypto world with ease.

Essential for Trading and Market Stability

Stablecoins play a huge role in crypto markets. Most trading pairs on exchanges involve a stablecoin rather than regular money. That means if you are buying Bitcoin or Ethereum, you are likely doing it with USDT, USDC, or a similar coin.

They also help traders move funds quickly between assets without going back to fiat. In futures and derivatives markets, stablecoins are now more commonly used than Bitcoin itself for margin. This shift is driven by their stable pricing and easy accounting.

Powering DeFi and Blockchain Innovation

Stablecoins are the fuel behind many of the biggest DeFi platforms. They are used as collateral for loans, as liquidity for trading, and as a stable store of value when earning yield.

This is one reason why DeFi has grown so quickly in recent years. In fact, analysts expect the total value locked (TVL) in DeFi platforms to jump to more than $330 billion by 2030 - with stablecoins playing a key part in that growth.

Financial Access for the Unbanked

In many parts of the world, people still struggle to access basic financial services. In some countries, local currencies lose value quickly due to inflation. In others, banking infrastructure is limited or unreliable.

Stablecoins offer a practical alternative. Anyone with a mobile phone and internet can use stablecoins to store value, make payments, and send money abroad - without needing a bank. They are especially helpful for sending remittances, where people often pay high fees using traditional providers.

A Global Medium of Exchange

Whether it is for trading crypto, using DeFi apps, making cross-border payments, or simply holding a more stable form of digital money, stablecoins are becoming central to how people use crypto. Their global reach, combined with predictable value, makes them useful in both advanced markets and emerging economies.

Closing Thoughts

Stablecoins have quickly become one of the most practical and widely used innovations in the world of cryptocurrency. By combining the predictability of traditional money with the flexibility and speed of blockchain, they offer a powerful solution to some of crypto’s biggest challenges—especially its volatility.

For everyday users, stablecoins make it easier to send money across borders, access DeFi services, or simply hold digital value without worrying about price swings. For traders and developers, they provide essential liquidity and a stable base for innovation. And for people in regions with limited access to banking or unstable local currencies, they can offer a reliable and affordable financial alternative.

As adoption gains momentum, stablecoins are no longer just an alternative, they’re poised to revolutionise the world of finance. They could redefine how payments work, how money is stored and transferred, and how financial products are designed and delivered. Whether you're beginning your crypto journey or already active in the space, understanding stablecoins is essential - they are fast becoming the bridge between conventional finance and a more efficient, inclusive, and programmable future.

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