While stablecoins might get lumped in with the rest of crypto, they aim to solve different problems by making it faster to send, easier to store, and simpler to move money across borders. But for a technology built on the promise of stability, there’s still plenty of confusion around how stablecoins work, what keeps them tied to a fiat currency, and how businesses can leverage this technology.
The use of stablecoins is on the rise, with adjusted transaction volume reaching $5.6 trillion USD in 2024, a year-over-year growth of 55%. Below, we’ll cover what stablecoins are, how they hold their value, and more.
What’s in this article?
- What are stablecoins?
- How are stablecoins different from other cryptocurrencies?
- How do stablecoins maintain a stable price?
- Types of stablecoins
- How does stablecoin pricing work?
- What factors affect stablecoin price stability?
- How businesses use stablecoins
- How Stripe Payments can help
What are stablecoins?
A stablecoin is a type of cryptocurrency that’s built to hold a steady price. The value is tied to a specific, real-world asset, such as the US dollar, which gives stablecoins their stability.
If a stablecoin is pegged to the dollar, that means 1 coin is designed to remain worth $1. Either a reserve of USD (or an equivalent asset) is maintained as collateral, or the system uses an algorithm that adjusts supply based on market demand to keep the price at $1. In both cases, stablecoins rely on some mix of design, reserves, and market behavior to keep their price from drifting.
Price fluctuations happen, and some designs have failed under stress. But in general, widely used stablecoins do what they promise: their value holds steady against a fiat currency. That reliability has made them one of the most widely used types of cryptocurrency, representing more than two-thirds of the cryptocurrency transactions recorded at the end of 2024.
How are stablecoins different from other cryptocurrencies?
Stablecoins don’t involve the same volatility or speculation as some other digital assets. They’re designed to hold steady, which is their main differentiator from other cryptocurrencies. Here’s a closer look at what sets them apart.
Price behavior
Many cryptocurrencies are known for their price swings, where a 10% move in a day might not be cause for concern. That makes them difficult to use for anything practical: the vast majority of businesses don’t want to get paid in a currency that might be worth 30% less the next week.
Stablecoins are designed to avoid that unpredictability. Those pegged to the US dollar are meant to stay within less than a penny of $1, so you can park money in them without watching the market.
Use in financial trading
Bitcoin is often compared to gold. It’s a store of value, a long-term bet, and a hedge against the broader system. Stablecoins, by contrast, are tools. You hold them because they behave like money: you can send them, save them, or use them in a contract without worrying about their value tanking overnight.
Stablecoins are often used as the middle layer of digital assets, as tokens to swap in and out of when trading other crypto, or something to hold when you want exposure to the dollar without dealing with a bank.
Connection to traditional finance
Stablecoins are often backed by traditional assets (e.g., actual dollars, treasuries, or equivalents) held by a company or custodian, which makes them more centralized than Bitcoin. For example, holding USDC means trusting its operator, Circle, to actually hold and manage the reserves. That adds a layer of risk, but it also allows for stability, scale, and real-world integrations.
With these tokens, you get the speed and accessibility of crypto paired with the stability of traditional currencies. They’re native to the crypto environment, but they speak the language of traditional finance.
Trust mechanics
In a typical crypto setup, trust is minimized or distributed—you trust the code, the protocol, and the math. With stablecoins (especially fiat-backed ones), you’re also trusting that an entity has the reserves it claims, that it will honor redemptions, and that its collateral isn’t locked up in risky loans or inaccessible banks. The usefulness of stablecoins depends on the design and the governance behind them, not just the technology.
How do stablecoins maintain a stable price?
Stablecoins are only useful if they’re stable. To pull that off, they rely on two main strategies. Let’s take a closer look.
Backed by reserves
This is the most common setup. A company issues stablecoins and holds an equivalent value in assets (such as US dollars, euros, gold, or other cryptocurrencies) in a bank or trust. Every $1 stablecoin is supposed to be backed by $1 in real assets.
The mechanism works like this:
If the stablecoin trades below $1, traders buy it on the cheap and redeem it with the issuer for the full dollar value.
If it trades above $1, the issuer mints new coins at $1 and sells them into the market.
That arbitrage loop pulls the price back to the peg. It works because users believe the issuer actually has the reserves and will honor redemptions. If that trust breaks down, the peg breaks, too.
This model depends on actual, liquid backing and transparent operations. When those hold, the peg also tends to hold. But when they don’t, things can get shaky. While most reserve-backed stablecoins hold their pegs closely, even a trusted coin can wobble if there’s news about reserve exposure.
Managed by algorithms
Instead of reserves, some stablecoins use software logic to control supply. These are known as algorithmic stablecoins. If the stablecoin drops below $1, the system reduces the supply, sometimes by letting users trade the stablecoin for a bond-like token they can redeem later. If the price rises above $1, the system mints more coins to push it back down.
The idea is to automatically balance supply and demand, similar to how a central bank adjusts interest rates. This reduces the need for a central custodian, but it only works if the market believes the system will work. When that belief wavers, algorithmic stablecoins can unravel.
With both strategies, stablecoins maintain a stable price through:
Incentives and arbitrage: When the price drifts, there’s a financial reason to pull it back, either by redeeming or minting coins.
Market access: Stablecoins are traded on major exchanges with high liquidity, which makes it easy for those incentives to play out in real time.
Trust in the system: Whether you’re relying on reserves or code, stability depends on whether users believe the system will work tomorrow.
Types of stablecoins
All stablecoins share the same goal, but the way they achieve it varies. Some rely on cash in a bank, some use crypto as collateral, and others self-regulate through automated algorithms. The mechanism behind each stablecoin matters because it affects how reliable (or risky) it is as an asset. Here’s how the different types of stablecoins work.
Fiat-backed stablecoins
This is the simplest model. For every stablecoin issued, the issuer holds a matching amount of traditional currency (usually US dollars or euros) in reserve. That reserve might sit in a bank or be invested in short-term treasuries. For example, USDC and USDT are backed by $1 in fiat for every 1 token. Those holding tokens can, in theory, trade their coins back for real dollars.
This model works as long as:
The reserves are real, safe, and liquid
The issuer operates transparently (ideally with audits or attestations)
Users feel confident that they’ll be able to redeem the token at face value
Fiat-backed coins are popular for a reason—the concept is simple to understand, and they tend to hold their pegs well. But they rely on trust in the entity managing the reserves, which brings regulatory and operating considerations into play.
Commodity-backed stablecoins
Instead of fiat, some stablecoins are pegged to physical assets such as gold or oil. These are often used by investors who want exposure to a commodity, but in token form. For example, PAX Gold (PAXG) and Tether Gold (XAUt) are each backed by one ounce of gold per token. Token holders can redeem for the physical asset, depending on the issuer.
The trade-off here is stability versus predictability. Commodity-backed coins very likely won’t experience wild swings, but they do move with the price of the asset. As a result, you’ll get far less volatility than other types of crypto, but you also won’t get true price fixity.
Crypto-collateralized stablecoins
These stablecoins are backed by other cryptocurrencies instead of fiat. That might seem counterintuitive given crypto’s volatility, but the solution is overcollateralization—you put in more value than you take out. For example, a user might put in $150 of crypto assets to receive $100 in a stablecoin. DAI users lock up crypto collateral in a smart contract, which mints stablecoins as overcollateralized debt with an adjustable interest rate.
The system monitors prices in real time. If the value of the collateral falls too far, it liquidates the cryptocurrency to maintain solvency. This type of token can be more censorship-resistant, but it’s also harder to regulate and understand.
Algorithmic stablecoins
With algorithmic coins, the idea is to stay pegged without holding any actual backing. Instead, they use programmed incentives and dynamic supply controls to balance the price. If the price drops, the system removes tokens from circulation. If the price rises, it mints more. Some use a dual-token model, where one is the stablecoin and the other absorbs volatility.
This only works as long as users believe it will work. If confidence drops, there’s no reserve to fall back on, which has led to high-profile collapses such as TerraUSD. Algorithmic designs are still being tested and regulated, and the technology hasn’t yet proven itself at scale and under pressure.
How does stablecoin pricing work?
Stablecoins usually aim for a 1:1 peg. But unlike a fixed sticker price, that $1 value is constantly being tested in the open market. So what actually keeps the price pinned where it’s supposed to be? It comes down to three main forces: redemption, arbitrage, and trust. We’ll look at each of them below.
Redemption creates the price floor
With fiat-backed stablecoins such as USDC or USDT, the issuer usually allows redemptions at face value. That means you can exchange 1 token for $1, no matter what the token is trading at on the open market. This creates a price floor:
If the token drops to $0.98, traders buy the dip and redeem it for $1.
If it rises above $1, the issuer can mint new coins at the peg and sell them for a profit.
With both mechanisms, the price is pulled back toward $1. The tighter and more accessible the redemption loop is, the more stable the price.
Algorithmic stablecoins use programmed incentives instead of redeeming for dollars:
When the price drops, they reduce supply (e.g., offer bond tokens that users can redeem later).
When the price rises, they increase supply (i.e., mint more tokens).
The idea is to mimic the levers of a central bank without relying on one. However, if market confidence plummets, there’s no hard asset to backstop the price.
Arbitrage keeps the market honest
In practice, most stablecoin pricing happens on crypto exchanges. Traders, bots, and market makers monitor for tiny deviations from the peg and act fast when they spot one. That constant activity does two things:
It closes the gap between the stablecoin’s market price and its redemption value.
It adds liquidity so no one trade can swing the price too far in either direction.
This is why you’ll often see stablecoins hovering at $0.9998 or $1.0003—that’s the market doing its job in real time.
Trust is the invisible anchor
Ultimately, all of this only works if users believe the system works. If they trust the reserves are real, the smart contracts are secure, and redemptions will be honored, the price holds. But if there’s doubt about reserves, regulation, or solvency, that trust can slip—and the price can drift.
What factors affect stablecoin price stability?
Stablecoins are designed to stay steady, but that stability doesn’t just happen. It’s the result of multiple factors working together, and when one of them falters, the peg can slip. Here’s what holds things in place and what can shake them.
Reserve quality and transparency
If a stablecoin claims to be backed 1:1 by real-world assets, the big question is: backed by what, exactly? Can users see it? Cash and short-term treasuries are considered strong collateral, while riskier assets (such as corporate paper or crypto) introduce more uncertainty. Public audits or attestations can help; without them, confidence can start to erode.
Regulation and legal clarity
The more clearly a stablecoin fits into a regulatory framework, the more durable it tends to be. Supportive policies (such as requiring high-quality reserves or defining issuer obligations) can stabilize the category. Legal crackdowns or uncertainty (particularly around redemption rights) can shake consumer trust and cause the price to drift.
Governments are moving quickly to define how stablecoins should work. Those rules will shape what survives and how stable these coins stay in practice.
Market confidence and track record
Even the best-designed system can wobble if confidence dips. Stablecoins depend on a kind of collective agreement: this is worth what it says it’s worth. That belief is built over time. Coins that have weathered shocks and honored redemptions earn credibility, while newer or less transparent coins might be more vulnerable to sudden shifts in public opinion.
If traders sense hesitation, they can move fast—redeeming, selling, or avoiding the coin altogether. When that happens at scale, stability takes a hit.
Liquidity and adoption
A well-used, highly liquid stablecoin is easier to keep stable. There are simply more traders and more exchanges, and there’s more capital stepping in when the price moves. Deep liquidity makes it harder for any single event to distort the peg, and widespread adoption means more participants have a stake in keeping the value steady.
Thinly traded stablecoins or niche projects don’t have the same safeguards. If one big holder suddenly dumps tokens, the market might not absorb the move quickly enough to hold the peg.
Technical reliability
If redemptions are paused, smart contracts break, or blockchains get congested, stablecoin mechanisms can stall. A smart contract bug or hack could freeze funds or mint illegitimate tokens, or a clogged blockchain could delay arbitrage and let the price drift.
These are edge cases, but they matter. Stability is both financial and technical. The more battle-tested the infrastructure is, the more likely the peg will hold under pressure.
How businesses use stablecoins
Stablecoins were once mostly a trading tool. Now, they’re infrastructure for payments. Businesses now use them to move money, hold value, and reach customers in ways that weren’t possible (or affordable) with traditional rails. Here’s where stablecoins are showing up as part of business operations.
Cross-border payments
International payments are slow, expensive, and can be unreliable—especially for smaller businesses or countries with limited banking access. But stablecoins move 24/7, settle in minutes, and don’t require correspondent banks. A US company can pay a freelancer in Argentina in USDC, and the funds arrive almost instantly—without wire fees or the need for currency conversion.
Stripe supports dollar-denominated stablecoin balances in 101 countries, even where local infrastructure isn’t built for fast or cost-effective payments.
Treasury protection in high-inflation economies
In countries facing currency devaluation, holding cash in local currency is risky. Stablecoins give businesses a way to store value in digital dollars without a US bank account, providing a workaround to navigate fragile banking systems. For example, a startup in Turkey can convert incoming revenue to USDC to preserve its spending power. Similarly, a retailer in Nigeria can keep part of its float in a stablecoin and convert only what’s needed into naira. Bridge, a Stripe company, enables businesses to easily and securely hold stablecoins at scale.
Paying remote workers and contractors
With global teams, payroll can get complicated fast. But with stablecoins, payments can go directly to digital wallets. Contractors don’t need to wait days for a wire or depend on a local intermediary bank, and the payment arrives in a currency they actually want to hold. There are platforms now built entirely around stablecoin payroll. But even beyond those tools, companies are using stablecoins as a modern, reliable option for remote compensation.
Ecommerce and settlement
Some online businesses accept stablecoins directly from customers, especially in countries where credit cards aren’t common or foreign exchange (FX) fees are prohibitively high. It’s often cheaper and faster for businesses, and it gives customers access if they don’t have a local account that supports international payments. In many cases, stablecoin-based payment cards or application programming interfaces (APIs) let customers spend their crypto while the business receives a fiat-equivalent payout.
Reaching the unbanked and underbanked
In markets where people don’t have reliable access to traditional financial institutions, stablecoins provide an alternative. A digital wallet can let users receive, store, and spend stablecoins without opening a bank account. Small businesses can transact digitally in stable-value currency without needing point-of-sale (POS) infrastructure. Some fintechs use stablecoin integrations to support these users behind the scenes and allow end customers to operate in USD even if their local currency is unstable or tightly controlled.
How Stripe Payments can help
Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world. Businesses can accept stablecoin payments that settle as fiat in their Stripe balance.
Stripe Payments can help you:
- Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to more than 125 payment methods, and Link—a wallet built by Stripe.
- Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across more than 135 currencies.
- Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.
- Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.
- Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% uptime and industry-leading reliability.
Learn more about how Stripe Payments can power your online and in-person payments, or get started today.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.