Why has stablecoin become an indispensable tool in the cryptocurrency market?

The cryptocurrency market is known for its unpredictability. If Bitcoin (BTC) and Ether (ETH) can lose half their value in a single day, how can one make payments and preserve savings? This is where stablecoins come to the rescue — a digital asset that maintains a fixed price due to its peg to a stable underlying asset.

When a stablecoin becomes a necessity

Imagine a situation: the owner of a coffee shop accepts payments in BTC. Yesterday, one bitcoin was worth $40 000, and for that price, you could buy 8000 cups of coffee. Today, that same BTC has dropped to $20 000, and suddenly each cup of coffee costs twice as much. Such volatility makes business planning and pricing impossible.

Cryptocurrencies were originally designed as volatile instruments — this provided speculators with huge profit opportunities. However, for practical use in everyday payments or as a means of savings, an alternative was needed. This is how stablecoins emerged — tokens that combine the advantages of blockchain speed, transparency, and the absence of intermediaries with the price stability of fiat currencies.

How the stability of a stablecoin works

The key to understanding the stablecoin lies in its backing. To maintain the price at 1 dollar, developers use various mechanisms:

Fiat currency reserves

The simplest and most reliable way is to keep real money in the bank. Each issued stablecoin is fully backed by dollars, euros, or another fiat currency. When a user wants to exchange a stablecoin for fiat, they are simply sent the equivalent amount from the account. An example is TrueUSD (TUSD) — the first stablecoin that automated reserve verification through a special asset custody information mechanism (PoR) of the Chainlink network. Thanks to this, each user can independently verify that their TUSD is indeed backed by dollars.

Cryptographic assurance

A more complex option is to back the stablecoin with other cryptocurrencies. The problem is that cryptocurrencies themselves are volatile, so it is necessary to hold collateral in large excess. For example, to create 100 DAI tokens (stablecoin from MakerDAO, pegged to the dollar), it is necessary to pledge cryptocurrency worth $150. This excess (150% collateralization) protects against the risk if the value of the collateral decreases.

The entire process operates through smart contracts on the Ethereum blockchain. The user deposits cryptocurrency as collateral, receives DAI, can spend the tokens as desired, and subsequently return the collateral by repaying an equivalent amount of DAI. If the value of the collateral falls below a certain level, the system automatically liquidates it. Such a system is completely transparent and subject to auditing.

Algorithmic stabilization

The most exotic mechanism is when there is no explicit backing, and stability is maintained through algorithms. The system operates like autopilot: if the price of the stablecoin falls below one dollar, the algorithm reduces the number of coins in circulation ( through burning or staking). If the price rises above one dollar, new tokens are issued to lower the price. Such systems are rare and considered the most complex to manage; however, they allow for the absence of centralized reserves.

Why investors choose stablecoins

Stablecoins solve many practical problems that the cryptocurrency community faces:

1. Reliable store of value on the exchange

Most investors and traders constantly hold part of their portfolio in stablecoins. This allows them to react instantly to market movements — noticing the rising price of an interesting coin, and in just a few seconds switching from a stablecoin to that coin. Without stablecoins, it would be necessary to withdraw money at the speed of the banking system.

2. Portfolio Hedging

If you hold a cryptocurrency portfolio, allocating part of your funds to stablecoins is an effective way to reduce overall risk. In times of uncertainty, you can convert some assets into stablecoins, keeping money for a good purchase at low prices. This turns volatility from an enemy into an ally.

3. International transfers without borders

Stablecoins live on the blockchain. Tokens can be sent to any point in the world in minutes and at any time of the day. Traditional bank transfers take days and incur fees, while stablecoins allow you to avoid both problems.

4. Daily Payments

Gradually, large stablecoins (, especially TUSD and similar ones ), are beginning to be accepted as a means of payment in retail and in transactions between companies. Thanks to their peg to the dollar, users know the purchasing power of each token.

Why stablecoins are still risky

Despite the obvious advantages, these tools are associated with significant risks:

The peg does not hold all the time

The history of cryptocurrencies is full of examples of stablecoins that lost their peg. If the system is poorly designed or the issuer faces financial difficulties, the price can crash sharply. Major projects perform better, but there are no guarantees for anyone.

Lack of transparency

Not all issuers of fiat-backed stablecoins publish complete independent audits. Instead, they provide attestations from private companies appointed by the issuer themselves. The question arises: is the stated amount of money really held in reserves?

Centralization

Fiat-backed stablecoins require trust in the company that holds the reserves. This company is subject to financial regulation and may be subject to sanctions or legal proceedings. As a result, users lose funds.

Dependence on the community

Crypto-backed stablecoins are often managed by the community through voting. This means that a majority's erroneous decision can lead to a loss of funds. Users must either actively participate in governance or trust others.

Live Examples of Popular Stablecoins

DAI from MakerDAO

DAI is one of the most successful stablecoins backed by cryptocurrency. It operates on the Ethereum blockchain and is pegged to the dollar. It is governed by MakerDAO, where MKR token holders vote on important decisions. The system requires over-collateralization, usually 150%, and automatically liquidates collateral if the collateralization falls. DAI has shown that even without centralized reserves, a stablecoin can be created that maintains its peg to the dollar for ten years.

TUSD — independent choice

TrueUSD stands out as the first to implement software-based reserve verification. The reserves in dollars are stored off-chain; however, users can verify their existence in real-time through the PoR Chainlink mechanism. This makes TUSD more transparent than most competitors.

Regulatory attention to stablecoins is increasing

Stablecoins attract the attention of regulators worldwide. This is due to their unique role at the intersection of cryptocurrencies and fiat money. The ability to make instant payments with low fees makes them attractive for the financial system, but also potentially dangerous if they get out of control.

Some countries have already begun to regulate stablecoins alongside licensed payment systems. The issuance of new fiat-backed stablecoins may require approval from regulatory authorities. Overall, the trend is clear: stablecoins will remain on the regulators' radar, and their use will gradually be integrated into national financial systems.

What you need to know before using stablecoins

Stablecoins are a powerful tool, but not a miracle cure. Before investing money:

• Check what collateral mechanism the selected stablecoin uses.
• Check if an independent audit of the reserves is being conducted.
• Understand project management - who makes the key decisions
• Diversify your portfolio, don't keep everything in one stablecoin.
• Remember: a stablecoin remains a cryptocurrency and carries technical risks.

Stablecoins have become an integral part of the ecosystem. Without them, the cryptocurrency market would be much less functional. However, every user must understand that a peg to stability does not guarantee protection from losses. Conduct your own research, assess the risks of a specific project, and make informed decisions.