Beginner’s Guide to Stablecoins, and How They Work

Get the full lowdown on stablecoins like USDT and USDC, how they work, how to purchase them, the risks, and regulatory clarity.

What Are Stablecoins?

Stablecoins are cryptocurrencies that have their price pegged to a specific asset, such as the United States dollar, euro, or gold. 

The crypto market is known for its volatility, which makes many digital assets unfavourable for everyday transactions. Stablecoins help counter this by maintaining a consistent value, typically $1 USD.

For example, Tether (USDT), USD Coin (USDC), and Dai (DAI) are popular stablecoins that aim to remain equal to $1. Their issuers maintain stability through reserves, over-collateralisation, or algorithmic mechanisms.

Unlike traditional cryptocurrencies, stablecoins are purpose-built to bridge crypto and fiat, functioning as a medium of exchange and a unit of account within the crypto economy.

How Do Stablecoins Work?

There are several models used to maintain a stablecoin’s peg:

1. Fiat-Collateralised (Fully Backed)

These stablecoins are backed 1:1 by fiat currency reserves. For every token issued, an equivalent amount of fiat (e.g., USD) is held in custody. Examples include USDT, USDC, and PYUSD.

Arbitrage plays a role in keeping the peg. If a stablecoin trades below $1, traders can buy it and redeem it for $1 worth of fiat, realigning the price.

2. Crypto-Collateralised (Overcollateralised)

These are backed by cryptocurrencies instead of fiat. Because crypto assets are volatile, they are overcollateralised to absorb price swings. DAI is the most notable example.

Today, DAI is largely backed by real-world assets and Ether (ETH), evolving beyond earlier reliance on USDC and USDP.

3. Commodity-Backed

These stablecoins are pegged to assets like gold or oil. For instance, Tether Gold (XAUT) is backed by physical gold and offers an on-chain way to hold commodity exposure.

4. Algorithmic or Synthetic

These stablecoins use smart contract logic to control supply based on market demand. They do not hold reserves but instead incentivise arbitrage to maintain the peg. While the ‘death spiral’ of TerraUSD served as a cautionary tale, newer models such as GHO or sUSDe incorporate staking or hybrid collateral to reduce risk.

Benefits and Limitations of Stablecoins

What Are Stablecoins Used For?

One of the primary uses for a stablecoin is to facilitate trades and swaps on crypto exchanges. Instead of buying BTC directly with fiat, traders have the option of exchanging their fiat for a stablecoin. Following that, they’ll use the stablecoin to execute a trade for another cryptocurrency.

Besides that, stablecoins also power a range of real-world applications:

• DeFi: Used as collateral in lending platforms, or as base assets in liquidity pools.
  
• Cross-border remittances: Platforms like Grab and Visa have explored stablecoins like USDC for near-instant money transfers.
  
• Payments: Stablecoins like PYUSD and RLUSD are increasingly accepted in e-commerce and fintech apps.
  
• Asset tokenisation: Serve as stable settlement layers for tokenised stocks, bonds, or real estate.

Are Stablecoins Safe?

Stablecoins aim for stability, but ‘safety’ depends on how they’re designed and governed. Risks to consider and questions to ask include:

• Collateral transparency: Are reserves regularly audited and publicly disclosed?
• Redemption risk: Can users reliably redeem 1:1 in times of stress?
• Blacklisting risk: Centralised issuers can freeze funds tied to sanctioned or suspicious wallets.
• Algorithmic failure: Uncollateralised or poorly governed systems risk collapse during market stress.

To protect yourself, follow crypto best practices: always perform the classic crypto advice of do-your-own-research (DYOR), assess the issuer’s credibility, and consider diversifying across stablecoin types.

State of Stablecoin Regulations

Regulatory frameworks for stablecoins have matured rapidly in recent years.

• In the US, the landmark passing of the GENIUS Act (2024) established a licensing regime for fiat-backed stablecoin issuers, mandating full reserve backing and monthly attestations.
  
• The EU’s MiCA legislation came into force in 2024, creating clear rules for e-money tokens like EURC and USD1.
  
• In Asia, jurisdictions like Hong Kong and Singapore are piloting stablecoin frameworks to support compliant issuance and integration into digital banking.
  
• Institutions like PayPal, Visa, and Circle have embraced regulated stablecoin issuance, signalling broad acceptance.

While global harmonisation will continue to see shifts, the direction is clear: Transparent, well-audited stablecoins are increasingly seen as pillars of the future financial system, and the numbers even show it.

As of 2025, the total stablecoin market cap surpassed $250 billion, a remarkable rise from approximately $20 billion in 2020. That accounts for nearly 10 % of all US physical currency in circulation.

Case Study: USD1 by Crypto.com

USD1 is a fiat-backed stablecoin issued by 1S1C, designed to maintain a 1:1 peg with the US dollar. It is redeemable at par value and complies with the EU’s MiCA framework.

USD1 operates across Ethereum, Cronos, and Cronos zkEVM networks, and can be accessed via the Crypto.com App, Exchange, and Onchain platform.

Key features:

• Instant settlement and low-cost transfers (as low as $0.01)
• Redeemable 1:1 for USD or equivalent assets
• Use cases include trading, payments, DeFi, and remittances

More details are available in the USD1 white paper.

How to Buy Stablecoins on Crypto.com

Buying stablecoins like USDT, USDC and DAI is straightforward with the Crypto.com App. Users can use supported fiat currencies like USD, EUR, and GBP.

Below is a step-by-step guide to getting started:

1. Download the Crypto.com App, available on the Apple App Store and Google Play.
   
2. Complete the sign-up process. On-screen prompts are at hand to guide users.
   
3. Funds deposited using bank transfers will usually clear within one to three business days. For faster access, users can also fund their account using Apple Pay or a debit/credit card. Please note that processing times and availability may vary depending on card issuer and other factors.
   
4. Once the funds are cleared, users can start buying stablecoins, along with large-cap assets like Bitcoin (BTC) and Ethereum (ETH), plus an extensive collection of altcoins and meme coins.

For those new to crypto, take a look at Crypto.com University and Help Centre to learn more about buying stablecoins and other cryptocurrencies.

Conclusion

Stablecoins have become a cornerstone of the digital asset ecosystem, bridging the gap between traditional finance and decentralised infrastructure. Whether used for trading, payments, savings, or cross-border transfers, they offer the speed and flexibility of crypto with the familiarity of fiat.

But not all stablecoins are created equal. Their stability depends on what backs them, how they’re governed, and the transparency of their operations. As regulation catches up and adoption expands across payment networks, fintechs, and DeFi platforms, stablecoins are shifting from a crypto-native convenience into a foundational layer for global finance.

As always, understanding the mechanism, issuer, and risk profile behind any stablecoin is essential, because even stability comes with trade-offs.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

In addition, the Crypto.com Exchange is distinct from the Crypto.com Main App, and the availability of products and services on the Crypto.com Exchange is subject to jurisdictional limits. Before accessing the Crypto.com Exchange, please refer to the following link and ensure that you are not in any geo-restricted jurisdictions. 

Although the term ‘stablecoin’ is commonly used, there is no guarantee that the asset will maintain a stable value in relation to the value of the reference asset when traded on secondary markets or that the reserve of assets, if there is one, will be adequate to satisfy all redemptions.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.