Stablecoins Explained: Types, Use Cases, and Future Trends

Stablecoins over public blockchains have registered $9.7 trillion in transaction volume over the past three months alone. 

Barely a decade old, stablecoins have become crucial in the cryptocurrency ecosystem, providing stability in an otherwise volatile market. They’re a go-to solution for both novice investors and seasoned traders who want to keep their capital in the crypto ecosystem, as they minimize the risk of losing it to price swings. 

That’s not all. These fintech innovations are revolutionizing traditional banking by promoting frictionless cross-border payments, increasing transaction speed, and facilitating cheaper payments. 

But what exactly are they? Here, we dive into stablecoins, exploring everything from what they are to their role in crypto and traditional finance systems.

What Is Stablecoin?

A stablecoin is a digital currency pegged to another asset. While it falls under the digital asset category, like cryptocurrencies such as Ethereum (ETH) and Bitcoin (BTC), the two asset classes are inherently different. 

One major difference is that stablecoins derive value from other assets, while cryptocurrencies don’t. Stablecoins could be pegged to a fiat currency like the U.S. dollar and the Euro, a commodity like silver and gold, or even cryptocurrency reserves. However, to be pegged to a cryptocurrency asset reserve, the asset must be overcollateralized (more on this later). 

Another key difference between the two asset classes is their risk. While neither is 100% secure, stablecoins are safer than cryptocurrencies because they’re tied to real-life assets (or overcollateralized, if pegged to crypto). This is why traders and investors use them as a store of value in the crypto market. 

What Is the Primary Purpose of Stablecoins?

The primary purpose of stablecoins is to provide more stability in the often volatile cryptocurrency market. Because they’re typically linked to stable assets, like fiat currencies, they’re a more predictable and safer store of value and medium of exchange than standard cryptocurrencies. 

Why Stablecoins Are Gaining Widespread Adoption

Stablecoins are gaining a lot of attention from investors, as evidenced by their transaction volume over the past three months, as well as from governments and institutions. 

The European Union (EU) recently implemented the Markets in Crypto-Assets (MiCA) Regulation to provide regulatory clarity for stablecoins; the Bank of America (BAC) has shown interest in issuing its own stablecoin; and the U.S. is working toward providing clarity through proposals like Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act of 2025. 

Why the growing popularity and widespread adoption? Let’s break it down:

Price Stability

The crypto industry isn’t exactly known for its stability. Take Bitcoin, for example. It rose to an unprecedented level on January 20, 2025 ($109,225), fell below $74,500 on April 7, and rose to $95,400 toward the end of April.

While such price movements favor some investors, it’s impossible to predict which direction they’ll move in at any given moment. This is why investors are increasingly turning to stablecoins. 

They’re pegged to stable assets and can, therefore, maintain a more consistent value than cryptocurrencies. This makes them safer alternatives for everyday transactions and financial planning. 

Lower Transaction Costs

Stablecoins are also popular for their cost-effectiveness. They’re considerably cheaper than traditional banking and payment systems, especially for cross-border transfers and digital payments, because they eliminate intermediaries. 

Unlike traditional banking systems, where transactions have to go through issuing banks, card networks, and acquiring banks, each of which charges its own fees, stablecoins operate wholly on the blockchain. This can save senders and recipients a lot of money. 

Fast Settlement Times

Traditional bank transfers can take anywhere between a few hours and several days, depending on intermediaries’ operating hours and procedures. This can be inconvenient for traders, investors, and merchants, who value transaction speed, hence their preference for stablecoins in banking and payments.  

Blockchain technology never sleeps or takes a break. It facilitates near-instantaneous transactions 24/7, eliminating the need to wait days for payments to clear. This can improve efficiency for traders, businesses, and financial services. 

Global Accessibility

Despite developments in banking, 1.4 billion people across the globe are still unbanked, limiting their access to financial services. However, stablecoins are changing this. 

Since stablecoin transactions occur on the blockchain, people in areas without traditional banking infrastructure can still participate in financial markets — all they need is a smartphone and an internet connection. 

Stablecoins also enhance global accessibility by reducing individuals’ and institutions’ exposure to local currency volatility. They can complete payments without necessarily converting stablecoins to fiat currency, minimizing losses from the foreign exchange market. 

How Do Stablecoins Work? Understanding the Types

As mentioned, there are various types of stablecoins, some tied to fiat currencies, others to commodities, and others to cryptocurrency reserves. Here’s a look at how they work:

Fiat-Collateralized Stablecoins (e.g., USDT, USDC, BUSD)

Fiat-backed stablecoins are the most popular type. They’re tied in a 1:1 ratio to traditional currencies like the U.S. dollar and the Euro, typically deriving their value and stability from reserves held in regulated financial institutions. 

For example, USD Coin (USDC) gets its value and stability from U.S. dollars and cash equivalents like U.S. Treasury securities stored in facilities such as The Bank of New York Mellon. 

Crypto-Collateralized Stablecoins (e.g., DAI)

As their name suggests, these stablecoins are backed by reserves of other cryptocurrencies. However, unlike fiat-collateralized stablecoins, they don’t hold a 1:1 peg with underlying assets. 

Instead, they’re over-collateralized — their reserves are higher in value than their market values — to mitigate the volatility of crypto coins. Further, they use smart-contract-based mechanisms to automatically buy and sell tokens, eliminating the need for intermediaries. 

For example, DAI, a stablecoin backed by assets like ETH, leverages smart contracts in the MakerDAO protocol. The stablecoin maintains relative stability, regardless of its underlying cryptocurrencies’ price movements, because its smart contracts require users to deposit collateral before they start minting DAI. 

Algorithmic Stablecoins (e.g., UST before collapse)

Unlike collateralized stablecoins, algorithmic coins derive their value solely from programmed mechanisms. These mechanisms adjust stablecoin supply based on demand to maintain stability. 

For example, the Ampleforth (AMPL) protocol adjusts its coin supply to maintain a 1:1 price parity with the U.S. dollar. If the stablecoin’s price exceeds $1, its protocol increases the AMPL token supply to bring its price to par with the dollar. 

It’s worth noting, however, that such stablecoins have difficulty maintaining long-term stability because they rely heavily on market confidence. 

Take TerraUSD (UST), for example. The stablecoin retained its $1 peg through a mint-and-burn relationship with the cryptocurrency LUNA. 

However, it failed to maintain a mint-and-burn balance when users rushed to burn UST and mint LUNA, resulting in a LUNA-flooded market. The cryptocurrency’s prices fell drastically, causing investors to lose confidence in both the crypto asset and its token. 

Commodity-Backed Stablecoins (e.g., PAX Gold)

Commodity-backed stablecoins derive value from tangible assets like gold, silver, and oil. For example, PAX Gold (PAXG) gets its value from gold reserves, with each token tied to a troy ounce of gold secured in a vault in London. 

These stablecoins offer a crypto-based way to invest in physical commodities, giving investors the benefits of actual commodity ownership without physically owning them. 

The Top Use Cases for Stablecoins

Like their cryptocurrency counterparts, stablecoins are incredibly versatile, with use cases ranging from enabling cross-border payments to expanding financial access. Here’s a deeper look at their extensive applications:

Executing Efficient Cross-Border Payments and Remittances

Stablecoins eliminate the need for intermediaries and bypass currency conversion processes and costs. This enables fast, low-cost international payments and remittances, enhancing investors’ and businesses’ liquidity. 

So, they are a top alternative to traditional banking systems, particularly among investors and merchants who frequently engage in cross-border transactions. 

DeFi (Decentralized Finance) Applications

Stablecoins facilitate DeFi transactions, typically serving as collateral in lending and borrowing protocols. They also act as stable mediums in staking and liquidity provision. 

This can promote an efficient DeFi ecosystem while mitigating volatility exposure. 

Trading and Hedging

With the volatility of the crypto market, stablecoins are a “safe haven” for traders. They allow them to exit positions without converting to fiat, promoting seamless trade executions. 

These assets also facilitate risk management and hedging by offering a more predictable and stable value than other cryptocurrencies — traders can convert their cryptocurrency holdings into stablecoins during market uncertainty to lock in gains and reduce their exposure to price volatility. 

Ecommerce and Merchant Solutions

Over 15,000 merchants currently accept Bitcoin payments, highlighting the growing popularity of cryptocurrencies beyond the trading space. However, many are still wary of them because of their volatility. 

For such businesses, stablecoins are a better alternative. They enable them to accept crypto payments without exposing them to price fluctuations, meeting modern crypto owners’ needs without compromising their profits. 

Stablecoins are also becoming popular among ecommerce store owners and merchants because they have lower transaction fees and facilitate faster settlements compared to traditional payment methods.

Supporting Financial Inclusion

Anyone with a smartphone and internet connection can access and transact with stablecoins, even without traditional banking infrastructure, like a bank account — all they need is a crypto wallet, which they can get remotely. 

As such, stablecoins have become one of the go-to solutions for unbanked and underbanked populations looking for financial access. They allow them to save, make payments, and lend funds, just like they would in traditional systems — but more efficiently and cost-effectively. 

Tokenized Assets and Securities Settlement

Real-world assets (RWA) like stocks, bonds, and real estate are making their way to the digital asset market through tokenization. Stablecoins serve as their on-chain payment rail, promoting quick transactions.

If investors want to buy tokenized bonds, for example, they can do so with coins like Tether (USDT) and USDC, eliminating the need for fiat conversions and multiple intermediaries in transactions. 

Power Your Digital Asset Infrastructure with AlphaPoint

Stablecoins minimize the volatility associated with cryptocurrencies and facilitate quicker and cheaper cross-border transfers and digital payments. This makes them indispensable in the modern financial system.

As more countries work toward creating clear stablecoin regulatory frameworks, these digital assets could become even more widespread, attracting both retail and institutional investors. If you play your cards right, this could mean higher transaction volumes on your platform and new revenue streams. 

With AlphaPoint, you can easily take advantage of the growing adoption of stablecoins. We offer scalable white-label technology, allowing you to enter the stablecoin market quicker. Our advisory team can also help you navigate the evolving stablecoin regulatory environment. 

Schedule a demo with AlphaPoint to see how we can help you launch your digital asset platform!