Stablecoins
Stablecoins are a special class of crypto tokens designed to maintain a stable value relative to a predefined reference asset, most commonly a government-issued currency such as the US dollar. Unlike cryptocurrencies such as Bitcoin or Ethereum, stablecoins are not intended for price appreciation or speculative investment, but rather for price stability.
The emergence of stablecoins was a response to one of the key challenges of cryptocurrencies — high volatility. Significant price fluctuations hinder the use of cryptocurrencies as a medium of exchange, a unit of account, and a reliable store of value. Stablecoins mitigate this problem and provide a convenient settlement instrument within the crypto economy.
Economic nature of stablecoins
From an economic perspective, stablecoins perform functions similar to those of traditional fiat currencies, but within a digital and decentralized environment. Their primary purposes include:
- providing a stable unit of account within blockchains,
- reducing currency risk in crypto-asset operations,
- forming a liquidity foundation for decentralized finance protocols,
- enabling fast cross-border payments without banks.
In essence, stablecoins act as a bridge between the traditional financial system and the crypto economy, allowing users to move efficiently between volatile crypto-assets and stable settlement units without converting into fiat money.
It is important to distinguish stablecoins from cryptocurrencies: stablecoins are tokens issued on top of existing blockchains and do not provide the fundamental operation of the network itself. Their price stability is maintained through dedicated economic and technical mechanisms.
Main models of stablecoins
Depending on the mechanism used to maintain price stability, two fundamental models of stablecoins can be distinguished:
- collateralized stablecoins,
- algorithmic stablecoins.
These models differ significantly in their economic structure, resilience, and risk profile. As of 2026, algorithmic stablecoins have largely disappeared from institutional practice: they are rarely used in large financial systems, are typically excluded from licensing in regulated jurisdictions, and are generally regarded by regulators as experimental and high-risk instruments.
Collateralized stablecoins
Collateralized stablecoins maintain stability through reserve assets, whose value corresponds to the total supply of issued tokens. Each token is backed by an equivalent value in fiat currency or crypto-assets.
The main types of collateralized stablecoins include:
-
Fiat-backed — supported by reserves in government-issued currencies (USD, EUR, etc.).
Examples: USDT, USDC. -
Crypto-backed — collateralized by cryptocurrency reserves, usually with overcollateralization.
Example: DAI.
The issuer mints stablecoins only when sufficient reserves are available. When tokens are redeemed, the reverse operation occurs: assets are returned to the holder and the tokens are burned. This mechanism maintains the price peg to the base currency.
Advantages:
- high price stability,
- relative predictability,
- widespread adoption and high liquidity.
Limitations and risks:
- reliance on trust in the issuer,
- risk of insufficient reserve transparency,
- regulatory pressure,
- custodial risks associated with asset storage.
Algorithmic stablecoins
Algorithmic stablecoins maintain stability without direct reserve backing. Their price is regulated automatically by smart contracts that manage token issuance and burning, influencing market equilibrium between supply and demand.
If the stablecoin price rises above the target value, the protocol increases token supply. If the price falls, supply is reduced. This mechanism aims to restore equilibrium.
Stability in this model relies primarily on market expectations, trust, and liquidity, rather than material collateral, making the system particularly vulnerable to confidence crises and sharp demand shocks.
Advantages:
- no need for centralized reserves,
- potentially higher decentralization,
- theoretical scalability.
Limitations and risks:
- high vulnerability to panic dynamics,
- dependence on liquidity,
- significant probability of systemic failures.
Negative depeg events
One of the most significant risks for stablecoins is depegging — a situation in which a token loses its intended price anchor.
The most prominent example of systemic failure is the collapse of the algorithmic stablecoin UST in 2022 within the Terra ecosystem. A sharp loss of confidence and rapid liquidity outflows caused the token’s price to collapse, effectively destroying the entire Terra ecosystem and resulting in multi-billion-dollar investor losses.
This case clearly demonstrated:
- the fragility of algorithmic models,
- their vulnerability to panic-driven dynamics,
- the presence of significant systemic risk.
Even collateralized models are not immune to temporary distortions. In March 2023, the stablecoin **USDC temporarily lost its peg to the US dollar due to problems affecting banks holding its reserves, particularly Silicon Valley Bank.
This episode confirmed that even collateralized stablecoins carry inherent financial and institutional risks.
Comparison of stablecoin models
| Criterion | Collateralized | Algorithmic |
|---|---|---|
| Source of stability | Asset reserves | Algorithms and market mechanisms |
| Resilience | High | Low–medium |
| Risks | Custodial, regulatory | Systemic, market-driven |
| Transparency | Depends on issuer | Depends on protocol |
| Examples | USDT, USDC, DAI | UST |
Role of stablecoins in the crypto economy
In today’s crypto economy, stablecoins play a system-forming role:
- they serve as the primary settlement unit on crypto exchanges,
- provide liquidity foundations for DeFi protocols,
- enable lending, staking, and derivatives markets,
- facilitate fast and low-cost cross-border transfers.
By transaction volume, stablecoins consistently rank among the largest crypto-assets, underscoring their central role in digital financial infrastructure.
Key takeaways
Stablecoins represent a fundamental component of the crypto economy, providing price stability, liquidity, and functional connectivity across blockchains.
However, stabilization mechanisms differ substantially in their reliability: collateralized models demonstrate significantly higher resilience, while algorithmic designs remain experimental and entail elevated risk.
Understanding the economic nature, stabilization mechanisms, and limitations of stablecoins is essential for informed use of crypto-assets and for analyzing decentralized financial systems.