Stablecoins: Unpacking their role and impact in the crypto market

Stablecoins, crypto assets pegged to established traditional assets such as the US dollar, have become a crucial infrastructure layer in the crypto industry. They enable trading, payments and decentralized finance (DeFi) activity without the volatility that defines most other cryptocurrencies. 

The stablecoin market has grown into a multibillion-dollar segment, with total supply measured in the hundreds of billions of dollars. In this article, we provide a practical guide on how stablecoins work, why they matter for everyday crypto participants — and what risks you need to account for before relying on them.

Key Takeaways:

• Stablecoins are crypto assets that maintain price stability by pegging to an external reference asset, most commonly the US dollar. Mechanisms range from custodial fiat reserves to algorithmic supply adjustment.

• Core use cases for stablecoin include trading and liquidity management, cross-border payments and DeFi protocols. Stablecoins function as the stability anchor for on-chain financial strategies and operations.

• Key risks of stablecoins include depegging events, reserve transparency issues and a rapidly evolving regulatory environment.

Why are stablecoins used?

High volatility is a well-documented feature of most cryptocurrencies. The world’s premier crypto asset, Bitcoin (BTC), can swing by double-digit percentages within hours, making it impractical for transactions when price certainty matters. Virtually any other cryptocurrency without a fixed peg is even more volatile than Bitcoin.

Stablecoins address volatility by pegging to an external reference, usually the US dollar, so that each unit keeps predictable value, despite market fluctuations.

Stablecoins typically aim for a 1:1 peg with fiat currencies, with USD-pegged types dominating the niche. Some stablecoins are pegged to the euro or other currencies.

Within blockchain ecosystems, stablecoins function as the cash layer, acting simultaneously as a unit of account, medium of exchange and store of value when using a volatile asset would introduce unacceptable risk. Unlike traditional bank transfers, stablecoin transactions can settle within minutes across borders without intermediary approval. Actual speed depends upon the underlying blockchain being used.

Stablecoins vs. CBDCs

Stablecoins are different from another digital asset commonly confused with them: central bank digital currencies (CBDCs). Unlike CBDCs, stablecoins are issued by private entities, not governments, which gives them speed and flexibility, but also exposes you to the unique risks related to the issuing company or asset custodian. Regulatory frameworks are increasingly treating stablecoins as regulated financial instruments, with reserve requirements, redemption rights and issuer oversight. In fact, oversight is now the subject of formal legislation across multiple jurisdictions.

How stablecoins maintain their peg

The mechanism behind a stablecoin's peg matters more than its stated dollar value, since not all peg designs hold equally under market stress.

The model of fiat-backed custodial reserves is dominant in terms of supply. Issuers hold equivalent fiat or cash-equivalent assets, such as Treasury bills, in reserve, allowing you to redeem tokens 1:1 for dollars. USDT (Tether) and USDC (USDC) are the two largest examples utilizing this model. Reserve composition is critical here, as short-duration US Treasuries carry a different risk profile than commercial paper or illiquid assets — even when both technically count as backing.

Crypto-backed (overcollateralized) stablecoins require locking crypto collateral that exceeds the worth of the stablecoins minted. If collateral value drops, positions are automatically liquidated to protect the peg. DAI/USDS from Sky Protocol (formerly MakerDAO) is the primary example, requiring collateralization of close to 150% or more. This buffer provides margin to withstand adverse market events without losing the peg.

Commodity-backed stablecoins are pegged to physical assets, such as gold, rather than fiat currency. For example, Pax Gold (PAXG), backed 1:1 by gold stored in London vaults, is a major example of a commodity-backed stablecoin. This category holds a smaller share of the total stablecoin market, but is growing among participants who want on-chain commodity exposure without the volatility of cryptocurrency.

Algorithmic (supply-adjustment) models attempt to maintain the peg without holding reserves, relying on smart contracts that expand or contract token supply in response to a dynamic algorithm. While eloquent on paper, this approach was largely discredited after the Terra/UST collapse in May 2022, a catastrophic event for the entire industry that wiped out over $40 billion in value in a few days. This failure demonstrated that supply-adjustment mechanisms without hard collateral are structurally fragile.

Synthetic/delta-neutral models represent a newer approach. For instance, USDe from Ethena Labs uses hedged crypto positions — spot long combined with a short perpetual futures position — to maintain peg stability without fiat reserves. These models carry unique risk profiles tied to funding rate environments, a vulnerability that was exposed in October 2025 when USDe temporarily traded as low as $0.65 on some exchanges during a market-wide liquidation event.

Across all stablecoin models, the arbitrage mechanism is what keeps prices anchored under normal conditions. When a stablecoin trades below $1, institutional arbitrageurs buy at a discount and redeem at par; when it trades above $1, new supply is minted and sold. The mechanism breaks down precisely when it's needed the most — namely, when those arbitrageurs become capital-constrained or risk-averse during stressful periods in the market.

What are stablecoins used for?

The utility of stablecoins extends well beyond avoiding volatility. They’re the functional currency of crypto-native finance and, increasingly, of institutional settlement, too.

Trading and liquidity management is where most stablecoin volume originates. Stablecoins are among the most widely used quote assets across both centralized exchanges and decentralized liquidity pools. When you take profit on a position, or want to hold flat during uncertainty, moving into a stablecoin lets you stay on-chain without the friction of off-ramping to fiat. Bybit spot and derivatives markets use USDT as the primary settlement currency, with USDC and DAI available for select instruments.

Payments and cross-border transfers are growing rapidly. Stablecoin transactions can settle within minutes on chains such as Solana (SOL) or Tron (TRX), often at a fraction of the cost of traditional international wire transfers. For exactly this reason, freelancers who are receiving cross-border payments, remittance corridors and B2B settlements between companies in different jurisdictions are all pulling volume away from legacy rails.

DeFi infrastructure is where stablecoins are most structurally embedded. They underpin lending markets, such as Aave (AAVE) and Compound (COMP); serve as the stable side of nearly every liquidity pool; and act as the settlement currency for perpetual futures positions. Without them, DeFi protocols would have no stable unit of account for denominating rates or calculating collateral ratios.

Dollar access in restricted markets is critically important for jurisdictions with capital controls or rapidly depreciating local currencies, particularly across parts of Latin America, Africa and Southeast Asia. In all of these regions, stablecoins function as a dollar proxy that requires no US bank account and bypasses local currency risk entirely.

Collateral and institutional settlement are other critical use cases. Stablecoins are used as margin collateral on derivatives platforms and, increasingly, as settlement currency between institutions — a trend formalized when Visa launched USDC settlement in the US, enabling institutional partners to settle VisaNet obligations on the Solana blockchain, seven days a week.

Key stablecoin risks

What a stablecoin is pegged to matters less than what happens to that peg when conditions deteriorate.

Depegging risk is common, affecting even major issuers. For example, USDT fell below $0.90 on some platforms in October 2018 amid reserve concerns. Also, USDC dropped to $0.87 in March 2023 after exposure to the Silicon Valley Bank (SVB) collapse triggered exchange redemption freezes until federal regulators intervened.

USDe's October 2025 depegging — when its value briefly hit $0.65 during mass liquidations — highlights the issue of limited retail redemption with issuers. Only qualified institutions can redeem directly with issuers like Tether or Circle. If an issuer were to become insolvent or face legal action, redemptions could be halted altogether.

Reserve and transparency risks the probability of depegging. Reserve assets and attestation quality differ by issuer. Always verify third-party reserve reports, rather than assuming that "fully backed" means backed by assets of equivalent quality.

Issuer and custody risk affect centralized issuers. For instance, Tether and Circle have frozen addresses in response to legal requests. Issuer insolvency or reserve failures, as Circle experienced with the Silicon Valley Bank, can delay redemptions, even if the underlying assets technically exist.

Regulatory risk is accelerating. The EU's MiCAR regime now imposes reserve quality, disclosure and supervision requirements on stablecoin issuers. Meanwhile, in the US, the GENIUS Act sets baseline standards for reserve backing and redemption obligations. Changes in any major jurisdiction can restrict stablecoin use or force issuer restructuring with little warning.

Smart contract risk arises whenever a stablecoin interacts with on-chain infrastructure, such as bridges, exchanges or DeFi lending protocols. An exploit in any connected protocol can result in loss — even if the stablecoin's reserves are sound.

Liquidity risk disproportionately affects smaller or newer stablecoins. Thin order books make large positions difficult to exit at par — particularly during periods of volatility, when the arbitrage mechanism that provides price support is least reliable.

Stablecoins and the future of crypto finance

Stablecoins are becoming critical operational infrastructure for traditional financial institutions.

The clearest signal of TradFi convergence is Visa's expansion of USDC settlement in the US. Visa now enables settling VisaNet obligations directly in USDC over the Solana blockchain, with seven-day availability and improved treasury liquidity management. PayPal's PYUSD and Stripe's stablecoin payment infrastructure are moving in the same direction, as payment networks integrate stablecoin rails to improve settlement efficiency. This TradFi convergence also extends to crypto platforms — Bybit’s TradFi and xStocks are classic examples of products that give crypto-native participants on-chain exposure to traditional financial instruments.

Regulatory frameworks are also maturing alongside market infrastructure. MiCAR is now in force across Europe. In the US, the GENIUS Act has established baseline reserve and redemption standards, though implementation details continue to evolve. The direction across jurisdictions is consistent, and stablecoin issuance is moving toward a regulated financial instrument model.

On-chain stablecoin transfer volume has reached trillions of dollars annually, though this figure isn't directly comparable to card network consumer payment volume. Exchange flows, DeFi movements and internal protocol transfers inflate the raw number. More meaningful as signals are the confident growth in stablecoin-based institutional settlement, cross-border B2B flows and DeFi liquidity provisioning. These developments are deepening stablecoins’ footprint in the traditional finance system. 

By now, these assets are no longer viewed solely as trading tools or on/off-ramping solutions; they are quickly becoming a critical bridge between the worlds of crypto and traditional finance.

The bottom line

Stablecoins have moved from a trading convenience to core infrastructure across both crypto and traditional payment systems. At the same time, their risks are real. Depegging events, issuer failure, reserve opacity and regulatory shifts have caused material losses for retail holders who didn’t account for them. Before relying on any stablecoin, understand what’s backing it, who controls redemption access and what regulatory framework governs the issuer. When factors like these matter, they tend to matter suddenly.

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