What is a stablecoin and how does it work?

A stablecoin is a type of cryptocurrency designed to maintain a stable value, usually pegged to a fiat currency like the U.S. dollar.

Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, whose prices fluctuate constantly, stablecoins aim to reduce volatility—making them useful for payments, savings, and everyday financial operations.

In this article, we explain what stablecoins are, how they work, the main types that exist, and why they play a central role in the digital economy.

What is a stablecoin?

A stablecoin is a digital currency designed to keep its price stable by being pegged to a reference asset. Most commonly, that asset is a fiat currency like the US dollar, but stablecoins can also be backed by physical assets such as gold, other cryptoassets, or governed by algorithmic mechanisms.

Put simply, a stablecoin is a digital asset created to minimize the price volatility that defines most cryptocurrencies.

Because of this, stablecoins are often referred to as stable digital currencies. They typically run on blockchain networks like Ethereum and rely on smart contracts—self-executing pieces of code that automate issuance, transfers, and supply management.

What are stablecoins used for?

Stablecoins make it possible to use digital money without the extreme volatility typically associated with cryptocurrencies. Their main use cases include:

Saving with price stability

They allow users to store value in a digital currency linked to the US dollar or other reference assets, reducing exposure to sudden market swings.

Sending money and remittances

Stablecoins enable fast, cross-border transfers with fewer intermediaries and lower costs compared to traditional remittance systems.

Making international payments

They work as a digital alternative to bank money, especially useful for cross-border and international payments.

Hedging against inflation

In economies affected by high inflation, stablecoins can help preserve purchasing power by protecting savings from local currency devaluation.

Operating within the crypto and DeFi ecosystem

Stablecoins are a core building block of decentralized finance (DeFi), powering applications such as lending, payments, and digital savings.

Because of this versatility, stablecoins are now widely used by individuals, businesses, fintech companies, and financial institutions.

Many of these use cases can be accessed through digital wallets like Kontigo, which simplify access to stablecoins and allow users to manage them from a single app.

How do stablecoins work?

How a stablecoin works depends on the type of backing it uses, but most follow a similar structure:

Stablecoins are issued through smart contracts on a blockchain.Their value is pegged to a reference asset, such as the US dollar.The system adjusts supply to keep the exchange rate stable.Users can send, store, or use them as a medium of exchange.

Because they run on blockchain technology, stablecoin transactions are transparent, verifiable, and do not rely on traditional banking intermediaries. This allows for faster, more efficient payments and transfers across borders.

Types of stablecoins

Generally the types of stablecoins are determined based on their backing asset. The main categories are:

Fiat-backed stablecoins

These stablecoins are pegged to a fiat currency, most commonly the US dollar. They are generally the most widely used due to their simplicity, liquidity, and large market capitalization.

Crypto-backed stablecoins

These are backed by other cryptocurrencies and rely on smart contracts and overcollateralization mechanisms to manage market volatility. By holding more value in collateral than the stablecoins issued, the system helps absorb price fluctuations.

Algorithmic stablecoins

Algorithmic stablecoins are not directly backed by fiat or physical assets. Instead, they aim to maintain price stability through algorithms that dynamically adjust supply and demand.

Examples of Popular Stablecoins

Some of the most widely used stablecoins in the market include:

• USDC (USD Coin): Issued in the United States and widely used for payments and decentralized finance (DeFi).
• USDT (Tether): One of the most adopted stablecoins globally, with high trading volume and broad market usage.
• DAI: A decentralized stablecoin backed by cryptoassets.
• PAX Gold: A stablecoin backed by gold, a physical commodity.

Each of these stablecoins is designed around a different type of backing and serves distinct needs within the crypto ecosystem.

Stablecoins vs. Other Forms of Money

Stablecoins vs. volatile cryptocurrencies

Unlike Bitcoin and other volatile cryptocurrencies, stablecoins are designed to maintain stable prices rather than experience large value swings. This makes them more practical for everyday use and particularly appealing to savers, migrants, freelancers, and businesses.

Stablecoins vs. traditional money

Although stablecoins are pegged to the US dollar or other fiat currencies, they are not bank money. They operate outside the traditional banking system and do not require direct involvement from central banks.

Are Stablecoins Safe?

Stablecoins are generally considered safe, but like any digital asset, they come with risks that should be understood before using them.

Key factors to evaluate include:

• The transparency and strength of the assets backing the stablecoin
• The regulatory framework under which the issuer operates
• The underlying technology, including the blockchain and smart contracts used
• The type of digital wallet used to store and manage the assets

For this reason, it’s important to rely on trusted platforms and digital wallets such as Kontigo, which use MPC (Multi-Party Computation) technology for key management, along with strong operational practices and a user-friendly experience. This approach helps reduce risks related to custody and everyday use of stablecoins.

For a deeper perspective, you can explore the report published by the Bank for International Settlements (BIS) on stablecoin risks and regulation.

Regulation and Legal Framework for Stablecoins

The regulatory landscape for stablecoins varies by country:

In the United States, specific regulatory frameworks are currently being developed. In Europe, initiatives such as MiCA (Markets in Crypto-Assets) aim to regulate cryptoassets, including stablecoins. In many other countries, stablecoin use is permitted under broader digital asset regulations.

Before using stablecoins, it’s advisable to review local regulations and understand the role of financial and regulatory institutions in your jurisdiction.

Stablecoins frequently asked questions

Is a stablecoin a cryptocurrency?

Yes. A stablecoin is a type of cryptocurrency designed to maintain a stable value by being pegged to a reference asset, most commonly the US dollar.

Can a stablecoin lose its peg?

Yes. In exceptional situations, a stablecoin can temporarily lose its peg to the reference asset—a phenomenon known as a depeg. This risk is higher for algorithmic stablecoins and lower for those backed by liquid, transparent reserves.

What is the most widely used stablecoin?

Today, USDT and USDC are among the most widely used stablecoins globally, thanks to their liquidity and broad adoption across payments, transfers, and digital financial applications.

Can stablecoins be used for international payments?

Yes. Stablecoins are widely used for international and cross-border payments, as they enable faster transfers with fewer intermediaries than traditional financial systems.

Do I need crypto knowledge to use stablecoins?

Not necessarily. Many modern digital wallets simplify stablecoin usage, allowing users to send, store, and manage them intuitively without advanced technical knowledge.

Where are stablecoins stored?

Stablecoins are stored in digital wallets, which can take the form of mobile apps, web platforms, or hardware devices. Choosing a reliable wallet is key to security and ease of use. Platforms like Kontigo, used by over one million users, are designed to make stablecoin management simple and secure.

Why Are Stablecoins So Important Today?

Stablecoins combine the stability of fiat money with the efficiency of blockchain technology. They offer a practical way to save, send money, make international payments, and participate in the crypto ecosystem without being exposed to extreme price volatility.

Understanding how stablecoins work and what they’re used for is a key step toward using digital money in a more informed and secure way.

If you’re ready to take the next step and use stablecoins in your everyday life, download the app on iOS or Android and start using USDC directly from your phone. Access a simple, secure way to save, send money, and make digital payments—without the complexity traditionally associated with crypto.