Preface

In the highly volatile cryptocurrency market, there exists a type of crypto asset that remains as calm as a detached observer—it doesn’t chase rallies, doesn’t panic-sell, and rarely makes headlines. Yet, it is the underlying force that keeps the Web3 world functioning smoothly. That asset is the stablecoin. Unlike Bitcoin, which surges and crashes wildly, or meme coins that thrive on hype, stablecoins are somewhat like digital fiat on the blockchain—yet they are not legal tender. Often serving as an unavoidable bridge in transactions, they are rarely truly understood.

What is a Stablecoin?

As the name suggests, a stablecoin is a type of cryptocurrency with a relatively stable price. Its value is typically pegged to a fiat currency or asset, most commonly the U.S. dollar, meaning 1 stablecoin equals 1 dollar.

Why is this design important? Because in the crypto world—a 24/7, wildly fluctuating environment—there needs to be an anchor point where funds can park, assets can be stably exchanged, and prices can be uniformly benchmarked. Just as we use the U.S. dollar or other fiat currencies to price everything in the real world, stablecoins serve as the standard unit for trading, quoting, and settling in the Web3 space.

Why Are Stablecoins the Invisible Infrastructure of Web3?

Newcomers to the crypto space might not realize it, but many operations that don’t appear to involve stablecoins actually rely on their existence. For example:

• Trading any token on a DEX (decentralized exchange) usually involves using USDT or USDC as the trading pair.

• When users deposit assets into DeFi platforms to earn yields, many opt for stablecoins to mitigate volatility risks.

• DAOs often distribute salaries or airdrops to members denominated in stablecoins.

• NFT minting prices and GameFi entry fees are frequently priced in stablecoins.

In other words, stablecoins act as the “digital dollar” of the Web3 world—the lubricant that keeps the on-chain economy running smoothly.

What Are the Different Types of Stablecoins?

Not all stablecoins are the same. Their design mechanisms directly impact their stability, security, and risk profiles. Here are the three main types:

1. Fiat-Collateralized Stablecoins

These stablecoins are backed by reserves of real-world fiat currency or equivalent assets (e.g., U.S. Treasury bonds). Examples include:

• USDT (Tether)

• USDC (circle)

These stablecoins rely on trust—users/holders must believe that the issuing institution actually holds sufficient reserves to redeem each coin.

2. Crypto-Collateralized Stablecoins

These stablecoins are generated by over-collateralizing on-chain crypto assets (e.g., ETH). The most classic example is:

• DAI (MakerDAO)

Holders can lock ETH into the Maker protocol to mint a corresponding amount of DAI. This process is automated and relatively decentralized.

3. Algorithmic Stablecoins

These stablecoins are not backed by collateral but instead rely on smart contracts to control supply and demand to maintain price stability. Examples (some of which no longer exist):

• UST (Terra, now defunct)

• FRAX (hybrid algorithmic and collateralized model)

In simple terms, these stablecoins use “minting and burning” mechanisms to dynamically adjust market supply. However, confidence in this model was severely shaken after Terra’s collapse in 2022, making them more experimental at this stage.

Use Cases of Stablecoins

1. Hedging and Capital Anchorage

During periods of extreme market volatility, converting assets into stablecoins is the most straightforward hedging strategy. This allows users to park funds without needing to cash out into fiat currency.

2. On-chain Payments and Transfers

Stablecoins significantly enhance the practicality of on-chain payments by eliminating concerns about exchange rate fluctuations, long transfer times, and high transaction fees. For cross-border payments, in particular, USDC and USDT have become mainstream tools.

3. Foundational Asset for DeFi Operations

Stablecoins play a central role in DeFi activities such as staking, lending, yield farming, liquidity provision, and insurance. They enable users to compound returns without exposure to cryptocurrency price volatility.

Risks and Controversies of Stablecoins

Despite their name, stablecoins are not without risks:

1. Centralization and Censorship Risks of Fiat-Backed Stablecoins

USDT and USDC are operated by centralized entities, which means they can:

• Freeze specific wallet addresses

• Comply with regulatory censorship

• Conceal details about reserve holdings

These practices conflict with the decentralized and censorship-resistant principles of blockchain.

2. Liquidation Risks of Crypto-Collateralized Stablecoins

If the prices of ETH or BTC drop sharply, the value of collateral may fall below required thresholds, triggering mass liquidations and causing the stablecoin to lose its peg.

3. Trust Risks of Algorithmic Stablecoins

Once market confidence collapses (as seen with Terra’s UST), a death spiral can occur with no viable recovery mechanism.

The Future of Stablecoins

Stablecoins aren’t just useful within the crypto space—they’re already making inroads into mainstream financial systems.

• PayPal launched its PYUSD stablecoin

• Visa and Mastercard are testing stablecoin settlements

• An increasing number of emerging economies are accessing the US dollar through stablecoins

One day, we might buy coffee not with cash or Apple Pay, but by scanning a USDC wallet address to complete the payment. When people worldwide no longer need bank accounts or face fiat currency exchange restrictions to participate in the global economy—that future may very well be brought to us by stablecoins.

Conclusion

Stablecoins won’t become the vanguard of financial revolution like Bitcoin, nor will they make headlines with wild price surges like meme coins. Instead, stablecoins are like the air we breathe in the blockchain world—often unnoticed, but essential for everything to function properly.

For newcomers, understanding stablecoins is the first step into Web3. For seasoned crypto users, mastering their use is key to asset allocation and risk management. While stablecoins won’t make you rich overnight, understanding them will help you navigate the market with greater longevity and stability.