What is a stablecoin? The "anchor" of the crypto market

Are you often scared by crypto prices?

The daily fluctuations of major cryptocurrencies like Bitcoin and Ethereum can be exhausting. You might make a profit in the morning, only to be trapped by a dip in the evening. Want to pay with cryptocurrency? Merchants are also afraid—price volatility is too wild to set a proper price. At this point, stablecoins come to the rescue.

What exactly are stablecoins?

Simply put, stablecoins are a type of cryptocurrency “pegged” to a certain asset, aiming to keep their price steady. You can think of them as the “voltage stabilizer” in the crypto world—no matter how much the market fluctuates, they stay stable.

Stablecoins are usually pegged to three types of assets:

Fiat currencies (USD, EUR, etc.) — the most common

Crypto assets (like Ethereum) — backed by tokens on the blockchain

Commodities (gold, oil, etc.) — less common

The reason we need stablecoins is because cryptocurrencies can be too “reckless.” Users need a stable value standard for saving, transferring, and trading, rather than constantly worrying about price movements.

What are the mainstream stablecoins?

Fiat-backed stablecoins (USDT, USDC)— the “main force” in the market

USDT (Tether) is the most established stablecoin in the community, launched in 2014. Its basic principle is: for every USDT issued, there is 1 USD in cash or equivalent reserves backing it. This 1:1 backing makes USDT the most liquid trading pair on exchanges.

USDC (USD Coin) is a newer entrant, launched in 2018, claiming to be more transparent and compliant. It also follows the 1 USD = 1 USDC logic, but with differences in issuance mechanisms and reserve management. Both can be traded on exchanges like Gate, and users can choose based on preference.

The biggest advantage of these stablecoins is: they are backed by real assets, so the risk is relatively low. The downside is: they require trust in the issuing institutions and are not fully decentralized.

Crypto-asset-backed stablecoins (DAI)— “decentralized” contenders

DAI is a stablecoin issued by a DeFi protocol, operating quite differently. Want to generate 1 DAI? You need to lock up at least 1.5 ETH (or other supported crypto assets) as collateral.

This is the so-called “over-collateralization”—the collateral value must exceed the stablecoin’s value, so even if the price drops, the stablecoin won’t “run away.” For example, locking $1500 worth of ETH can generate up to 1000 DAI, leaving a 50% buffer.

Advantages: fully decentralized, no central authority risk. Disadvantages: collateral value fluctuations can lead to liquidations, so users must monitor ratios constantly.

Algorithmic stablecoins (UST)— lofty ideals, harsh realities

Algorithmic stablecoins take a different approach—they do not rely on real assets or crypto collateral but maintain their price through pure algorithms and market mechanisms.

UST is a representative of this type. It claims to be pegged to the dollar but has no real reserves. Its stability logic is: through arbitrage mechanisms, the market automatically adjusts supply to maintain the price.

It sounds impressive in theory, but the events of May 2022 changed everything—UST completely collapsed, falling from 1 USD to nearly zero. This “big experiment” taught the market that purely algorithmic stablecoins can fail in extreme market conditions, carrying huge risks. Nowadays, few dare to touch algorithmic stablecoins.

Why are stablecoins important?

Payment and settlement: Using USDT or USDC, merchants don’t have to worry about sudden price drops, making them more willing to accept, and users can feel secure.

Arbitrage tools: Traders use stablecoins to hedge risks. During market crashes, they can quickly convert to stablecoins to lock in assets.

Cross-chain transfers: Stablecoins can circulate across multiple blockchains (Ethereum, Solana, Polygon, etc.), much faster and cheaper than fiat transfers.

DeFi infrastructure: Lending, liquidity mining, and other DeFi activities rely heavily on stablecoins. Without stablecoins, DeFi can’t operate smoothly.

Which stablecoin should you choose?

There’s no absolute answer; it depends on your needs:

• Seeking safety? USDT and USDC are top choices, backed by real assets.
• Want transparency? USDC has stronger compliance and more detailed audits.
• Playing DeFi or lending? DAI offers a fully decentralized option, but you must accept collateral volatility risks.
• Algorithmic stablecoins? Currently not recommended. The failure of UST has already shown the risks involved.

The birth of stablecoins has solved one of the biggest pain points in the crypto world—price instability. They provide a “steady anchor” for the market and encourage more people to enter this space. Next time you see USDT, USDC, or DAI, you’ll understand the logic behind them.