Stablecoins are today an important product of the evolving digital finance ecossystem. While most known cryptocurrencies such as Bitcoin and Ethereum can suffer with volatility, stablecoins are designed to maintain a steady value in the long term. This stability comes from its link with other types of assets and makes them attractive for various financial applications, including payments and remittances.
The adoption of stablecoins has accelerated in recent years. According to Statista researches, the market cap of the top 10 stablecoin reached a combined value of over $221 billion in March 2025. Financial institutions are now exploring their potential to streamline transactions and reduce costs. For instance, Fidelity Investments plans to launch its own stablecoin, in an effor to integrate digital assets into traditional financial services.
What is a Stablecoin?
Stablecoins are cryptocurrencies designed to sustain stable prices by linking its value to external assets. There are four main types of assets used to this purpose: fiat currencies, commodities, algorithms and other digital financial instruments.
Their primary goal is to reduce the high volatility associated with cryptocurrencies like Bitcoin and Ethereum. Unlike traditional cryptocurrencies, stablecoins offer price stability, which is essential for everyday transactions. Bitcoin, for instance, has experienced extreme price fluctuations lately, making it a complex currency for everyday payments.
Types of Stablecoins
Stablecoins use different mechanisms to maintain their value:
- Fiat-Collateralized: Backed by reserves of fiat currency, such as the US dollar, and held by custodians. Examples include Tether (USDT) and TrueUSD (TUSD).
- Commodity-Backed: Pegged to assets like gold, silver, or oil. Tether Gold (XAUt) is an example, backed by physical gold.
- Crypto-Collateralized: Backed by other cryptocurrencies, often overcollateralized to account for volatility. MakerDAO’s DAI stablecoin is an example.
- Algorithmic: Maintains stability through supply adjustments rather than asset reserves. These rely on programmed formulas, but their effectiveness is uncertain, as seen in the collapse of TerraUSD (UST) in 2022.
Contradictions and Regulation
However, stablecoin’s stability relies on proper collateralization, which requires verification from independent auditors. This is contradictory, since it introduces third-party oversight into a system originally designed to be decentralized. Some argue that stablecoins are unnecessary given the widespread use of fiat currencies, while others see them as a step toward a digital financial system independent of central banks.
Regulators worldwide are closely monitoring stablecoins due to their rapid growth and potential risks to financial stability. In the U.S., lawmakers have proposed that stablecoin issuers operate as regulated financial institutions, with new bills in 2024 aiming to establish clear oversight. Meanwhile, Europe’s Markets in Crypto Assets Regulation (MiCA) bans algorithmic stablecoins and mandates full asset backing with third-party custody. On a broader scale, the International Organization of Securities Commissions (IOSCO) recommends treating stablecoins as financial infrastructure, subjecting them to the same regulatory scrutiny as payment systems and clearinghouses.
