What Is a Stablecoin?

Stablecoins are a type of cryptocurrency (digital asset) designed to maintain price stability by being pegged to real-world assets such as the U.S. dollar or other fiat currencies. Unlike volatile cryptocurrencies like Bitcoin or Ethereum, stablecoins are designed to be steady in value, making them highly practical for payments, remittances, asset storage, investment, and digital financial services.

This post explains stablecoins in an easy and thorough way—covering their definition, key functions, types and collateral mechanisms, how price stability works, associated risks, and future prospects.


An image showing five major stablecoin logos side by side. From left to right: TerraUSD (UST), USD Coin (USDC), Tether (USDT), Binance USD (BUSD), and Dai (DAI). Each is represented as a round emblem in various colors such as blue, green, and yellow, set against a black background with visually prominent symbols.


Key Functions

1. Digital Payment Method

Most cryptocurrencies are too volatile for daily payments. Stablecoins, however, stay close to $1 in value, making them suitable for shopping, online transactions, and practical use cases.

2. Borderless Remittances

With stablecoins, you can send money anywhere in the world within minutes using just a smartphone. It's faster, cheaper, and more efficient than traditional bank wires.

3. Core Asset in DeFi (Decentralized Finance)*

In the DeFi ecosystem, stablecoins act as the base currency for lending, borrowing, or earning interest. For example, you can deposit USDC to earn interest, or use DAI (Decentralized Autonomous Issuance) as collateral to borrow other tokens.

4. Currency Substitute in High-Risk Economies

In countries facing high inflation or currency instability, people turn to stablecoins as digital dollars to protect their savings. Anyone with a smartphone can hold and transfer stable-value assets—without needing a bank account.

*DeFi (Decentralized Finance): A blockchain-based financial system that allows you to save, borrow, and invest without traditional banks. In DeFi platforms, stablecoins are used as collateral to earn interest or provide liquidity for rewards.


Types and Comparison of Stablecoins

Name (Abbreviation)

IssuerCollateral TypePegged AssetCharacteristicsStrengthsWeaknesses
USDT (Tether USD Token)Tether LimitedFiat-backedUSDMost widely usedHigh liquidityLow transparency
USDC
(USD Coin)		Circle & CoinbaseFiat-backedUSDRegulatory compliance, auditedHigh trustCentralized
BUSD
(Binance USD)		Binance + PaxosFiat-backedUSDNYDFS** approvedRegulatory baseDiscontinued in 2023
DAI (Decentralized Autonomous Issuance)MakerDAOCrypto-backedUSDFully decentralized, DAO-governedSmart contract automatedComplex, ETH price sensitive
FRAX (Frax Protocol USD)Frax FinanceHybridUSDPartial collateral + algorithmFlexible designExperimental, complex
TUSD (TrueUSD)TrustTokenFiat-backedUSDReal-time reserve reportsTransparentExchange-dependent
USDP
(Pax Dollar)		PaxosFiat-backedUSDRegulated by New York authoritiesVery safeLimited adoption
UST (TerraUSD)Terraform LabsAlgorithmicUSDPegged via LUNA, collapsedRapid expansionSystem failure (2022)

**NYDFS (New York State Department of Financial Services): The financial regulatory authority of New York State. It supervises banks, insurers, fintechs, and crypto firms—handling licensing, fraud prevention, AML/CFT compliance, and consumer protection.


Classification by Collateral Mechanism

Stablecoins use different types of collateral to maintain price stability:

1. Fiat-Collateralized

  • Backed by actual cash (USD, EUR, JPY) held in bank accounts.
  • Examples: USDT, USDC, BUSD, TUSD, USDP
  • Pros: High stability, regulatory friendly
  • Cons: Centralized, bank dependency, audit concerns

2. Crypto-Collateralized

  • Backed by crypto assets like ETH or WBTC, overcollateralized to reduce volatility risks.
  • Example: DAI
  • Pros: Decentralized, smart contract-based
  • Cons: Complex, collateral value volatility

3. Algorithmic / Hybrid

  • Use algorithms to adjust supply and demand or mix partial collateral with algorithmic stabilization.
  • Examples: UST (collapsed), FRAX
  • Pros: Highly scalable, low capital lockup
  • Cons: Trust-based, risk of collapse


Are Stablecoins Really Always Worth $1?

Stablecoins are designed to maintain a 1:1 peg with fiat currencies, but in real-world markets, minor deviations occur due to demand-supply imbalances, liquidity, and issuance/redemption delays.

Stablecoin Typical Market Price Range

  • USDT: $0.998 ~ $1.002
  • USDC: $0.999 ~ $1.001
  • DAI: $0.995 ~ $1.005
  • UST (pre-collapse): $0.90 ~ $1.10 → eventual collapse

Conclusion

The “$1 peg” is a target, not a guarantee. In practice, stablecoins generally stay within ±0.5% of $1, which is considered acceptable. However, loss of trust can cause a full peg breakdown, as in the case of UST (2022)***.

***UST Incident (2022): An algorithmic stablecoin, UST (TerraUSD) attempted to maintain its peg to the U.S. dollar via a burn/mint mechanism with its sister coin LUNA. In May 2022, massive withdrawals and structural flaws triggered a collapse in UST’s value, wiping out over $40 billion in market capitalization and shattering trust in algorithmic stablecoins worldwide.


Key Issues of Stablecoins

1. Lack of Transparency

Some issuers are slow or reluctant to disclose actual reserve assets. USDT has long faced criticism for opaque accounting.

2. Centralization Risks

Fiat-backed coins rely on banks and issuers. If the issuer collapses or gets shut down, user funds could be affected.

3. Unstable Algorithms

UST’s collapse proved that algorithmic stabilization can fail catastrophically without robust market confidence.

4. Regulatory Gaps

Legal definitions of stablecoins vary by country, creating uncertainty in consumer protection and investor rights.

5. CBDC Competition

As central banks develop their own digital currencies (CBDCs), some governments may limit or ban private stablecoins.


Future Outlook: Toward Regulation and Trust

1. Only Regulated Stablecoins Will Survive

  • Coins like USDC and USDP that undergo audits, comply with laws, and hold licenses will be the ones to persist.
  • The Giancarlo Proposal**** is one such regulatory framework from the U.S.

****Giancarlo Proposal: Officially the Stablecoin Innovation and Protection Act, this U.S. policy draft—led by former CFTC Chairman Christopher Giancarlo—aims to establish a regulatory foundation for stablecoins.

Key Points:
1. Recognizes stablecoins as financial infrastructure
2. Requires real-time reserve reporting and third-party audits
3. Encourages innovation without overregulation
4. Allows coexistence with CBDCs (digital dollar)
5. Supports U.S. dollar dominance through digital adoption

2. Coexistence or Competition with CBDCs

CBDCs are state-issued, while stablecoins are privately issued. While CBDCs offer government trust, stablecoins offer speed, flexibility, and innovation.

3. Becoming Core Currencies in DeFi and Web3*****

Stablecoins will remain indispensable in DeFi, acting as collateral, yield tools, and base assets across Web3 ecosystems.

*****Web3: Web3 refers to the next evolution of the internet: a decentralized, blockchain-powered web where users not only read and write, but also own their data and assets.

  • Web1 (1990s~): Read-only internet. e.g. Yahoo directory
  • Web2 (2000s~): Read & write, centralized platforms. e.g. Facebook, YouTube, Instagram
  • Web3 (2018~): Read, write, own – decentralized e.g. Ethereum, NFTs, DeFi, DAOs

Key Principles of Web3:

  • Blockchain-based data (no single server control)
  • Decentralization (community governance, not Big Tech)
  • Digital ownership (e.g., NFTs, tokens)
  • DeFi (Finance without banks)
  • DAOs (Decentralized Autonomous Organizations that govern via smart contracts and community votes)

4. Digital Dollar Role in Developing Countries

In inflation-plagued economies, stablecoins function as digital safe havens, replacing local currencies.

5. Rise of Local-Currency Stablecoins

Region-specific stablecoins like KRWb (Korean won), JPYC (Japanese yen), and EURS (Euro) are emerging to serve cross-border payments and local DeFi use.


Conclusion

Stablecoins have evolved into the foundational digital infrastructure for the global economy, bridging the gap between traditional finance and decentralized ecosystems. While their potential is enormous, regulatory clarity, trust, and technical soundness will determine which stablecoins endure and scale in the years ahead.


Comments

Post a Comment

Popular posts from this blog

Mere Christianity (C.S. Lewis) - 01

Image
  Preface By the time I had read 166 pages—roughly 48.8% of the total 340 pages—I already felt an urgent need to pause. Even while continuing with the rest, I felt compelled to start organizing what I had read so far. Throughout the book, C.S. Lewis’s insights often burst forth unexpectedly, leaving me in awe, accompanied by fleeting reflections. Before those highly volatile fragments disappeared, I felt the need to preserve them as much as possible. That sense of urgency constantly urged me on, for Lewis’s message was powerful and invigorating. Was this man really once an atheist? It wasn’t until his early thirties that he converted to theism. In the latter half of his 65-year life , he made significant contributions as a Christian apologist, writer, and essayist. He was a storyteller who, having spent the first half of his life in his own world and the second in God’s, “understood God with reason, and felt and expressed Him through imagination.” While reading Mere Christianity, e...
Read more

Birth Rate?

Image
Videos glorifying the joys and fun of raising babies are everywhere. While the intent may be to boost the birth rate, they seem to lack seriousness and sensitivity, which is disappointing. Even when adopting a pet, one must consider whether they have the means and mindset to care for it, and whether they can take full responsibility to the end. Then how much more thought and care should be given when welcoming a human life? The babies who bring such joy and laughter will grow into children, teenagers, and eventually adults. Yet these videos promote only brief moments of happiness, with no regard for the many challenges of living as a child, adolescent, or adult in today’s deeply troubled society. I can’t help but ask: “How many children have you actually raised?” Before promoting childbirth, we must first analyze and improve the reasons behind the steep decline in birth rates. The “next generation” is not just a private matter for families—it’s a collective responsibility of society. I...
Read more

Could I Be a Narcissist?

Image
1. Who Is a Narcissist? A narcissist is someone who exhibits an excessive attachment to and overvaluation of themselves. They tend to prioritize their sense of superiority, desire for recognition, and need for control over the emotions of others. The deeper the relationship, the more confusion and emotional harm they may cause. 2. The Root of Narcissism – The Myth of Narcissus The word "narcissist" originates from the Greek myth of Narcissus . He was so beautiful that many fell in love with him, yet he accepted no one's affection. As punishment from the gods, he became enamored with his own reflection in a pool of water. The problem? It was a love that could never be fulfilled. Unable to look away from himself, he eventually withered away and died or, in some versions, was transformed into a daffodil ( narcissus ) blooming by the water.  Despite variations in the ending, all stories share the same truth: He became so consumed by himself that he ultimately lost who he ...
Read more

An Ant's Everest Exploration

Image
What shall we call ourselves? “Man is the measure of all things.” —Protagoras the Sophist— Are we truly the measure of all things, as he claimed? Here, we have captured what can be seen between one meter above the ground and a space one billion light years away. Let us humbly reflect on the size of the “we” we speak of now, and on what the existence of “we” truly means. Just as an ant takes a step to climb Mount Everest, let us too set off into the vast universe with the small power of science.   
Read more

Yunchan Lim's Performance at Van Cliburn 2022

Image
  I’ve lost count of how many times I’ve watched these performances by now. To be honest, I was never someone deeply immersed in classical music—not in the past, and not even now. But ever since I encountered this pianist’s performance, something in me began to shift. Even when the pieces weren’t immediately moving or familiar to me, I found myself overcome with emotion, shedding tears more than once while listening to music I once thought inaccessible. And I know—this emotion I feel is, in part, shaped by the visual stimulation of the videos, by the contagious admiration expressed by others, and even by my own self-image, swept up in that shared appreciation. Yet despite all that, his playing—so natural and expressive, so clearly flawless even to someone like me—is undeniably extraordinary. The power and passion, the response from the orchestra and the audience… it’s impossible not to recognize the greatness of these performances. Many of the works he plays are among the most icon...
Read more