What is a stablecoin? Definition and explanation

🔍 Introduction

Since the creation of Bitcoin in 2009, cryptocurrencies have reshaped global finance. They have introduced transparency, speed, and decentralization but also extreme volatility. Within hours, the value of assets like Bitcoin or Ethereum can fluctuate by several percentage points, making them difficult to use for everyday payments, savings, or business operations.

It is in this context that a new class of digital assets emerged: stablecoins. Their purpose is simple yet essential, to connect the world of cryptocurrencies with the stability of traditional currencies, such as the euro or the dollar.

These hybrid assets combine the best of both worlds: the stability of fiat money and the efficiency of blockchain technology, which enables instant and transparent transactions. Today, they play a central role in decentralized finance (DeFi), international transfers, and are increasingly used as everyday payment tools.

The goal of this article is to explain what a stablecoin is, how it works, and why it is becoming a cornerstone of the new digital economy, from online exchanges to tokenized real estate investment.

🏦 Definition: what is a stablecoin?

A stablecoin is a cryptocurrency designed to maintain a stable value over time. Unlike most crypto-assets such as Bitcoin or Ethereum whose prices fluctuate significantly with market speculation, a stablecoin is pegged to a reference asset, most often a fiat currency like the euro or the dollar.

The principle is simple: each stablecoin issued corresponds to a real unit of currency held in reserve. In other words, 1 stablecoin = 1 unit of the underlying currency.

One of the best-known stablecoins is USDC, issued by the American company Circle in partnership with Coinbase. Each USDC is intended to be worth exactly 1 U.S. dollar, and this parity is guaranteed by reserves held by the issuer. These reserves consist of bank deposits and, more importantly, short-term government debt instruments (such as U.S. Treasury bills), which are considered highly secure and liquid.

Similarly, European versions like EURC follow the same principle: 1 EURC = 1 euro, backed by reserves denominated in euros.

This “peg” mechanism ensures price stability while preserving the advantages of blockchain: instant transfers, transparency, traceability, and global accessibility, all without relying on traditional banking intermediaries.

⚙️ The different types of stablecoins

All stablecoins share the same goal, maintaining a stable value, but they achieve it in different ways. Depending on the nature of their reserves and how they operate, there are three main categories:

1. Fiat-collateralized stablecoins

These are the most common and easiest to understand. Each token is backed by a real reserve of traditional currency (euro, dollar, etc.) held by a company or financial institution.

The best-known examples include:

- USDT (Tether)

- USDC (Circle)

- EURC (Circle, pegged to the euro)

For every USDC in circulation, there is an equivalent amount of U.S. dollars held in reserve, in the form of bank deposits or short-term government securities.

Advantages: strong stability, high liquidity, broad adoption. Limitations: significant centralization and dependence on the issuer’s transparency and audits.

2. Crypto-collateralized stablecoins

These are backed not by fiat currency, but by other cryptocurrencies (such as ETH or BTC) locked in smart contracts.

The best-known example is DAI, issued by the MakerDAO protocol. To ensure stability, DAI is over-collateralized meaning that users must deposit more crypto value than the DAI they generate (for instance, €150 of ETH to mint €100 worth of DAI).

Advantages: full transparency (reserves are visible on-chain), no reliance on a central entity. Limitations: exposure to crypto volatility and liquidation risks if the collateral’s value drops too quickly.

3. Algorithmic stablecoins

These are not backed by any real reserves. Instead, their stability is maintained by algorithms that automatically adjust the supply and demand.

When the price exceeds the target value (e.g., $1), the algorithm mints more tokens to bring it down; when it falls below, it burns tokens to push the price back up.

The most famous and controversial example is TerraUSD (UST), whose collapse in 2022 exposed the fragility of this model.

Advantages: fully decentralized, no dependence on external reserves. Limitations: highly risky and unstable during market stress, as the system relies entirely on confidence and market equilibrium.

In practice, only the first two categories, fiat and crypto-collateralized stablecoins have proven reliable at scale.

🌐 Why stablecoins have become essential to the crypto ecosystem

Stablecoins now hold a central place in the cryptocurrency landscape. They address one of the market’s biggest challenges: the lack of price stability. While most digital assets experience extreme volatility, stablecoins provide a reliable benchmark and a consistent store of value that enables the broader crypto economy to function smoothly.

They first serve to reduce volatility. By being pegged to a traditional currency, they allow users to store, transfer, or trade value without exposure to market swings. Many investors use them as a temporary safe haven to secure profits or wait for favorable market conditions. Businesses, too, rely on them to integrate blockchain payments without risking revenue fluctuations.

Stablecoins also act as a bridge between crypto and traditional finance. They make it easy to convert euros or dollars into digital assets and vice versa without relying on banks or costly intermediaries. Cross-border transactions become nearly instantaneous, low-cost, and fully traceable thanks to blockchain transparency.

Within decentralized finance (DeFi), stablecoins have become a cornerstone. They enable lending, borrowing, investing, and yield generation all within the blockchain ecosystem. Their stability ensures reliable yield calculations and reduces exposure to market volatility. Without them, DeFi would be far more complex and risky to use.

Finally, stablecoins are emerging as a foundation for modern digital payments. Available 24/7, they allow anyone to send money worldwide in seconds with minimal fees. Fast, accessible, and programmable, they represent the next generation of global payments where blockchain makes value transfer as easy as sending an instant message.

⚠️ Limits and risks of stablecoins

Despite their growing popularity, stablecoins are not without risks. Their apparent stability depends on mechanisms and actors that can introduce vulnerabilities of their own.

The first issue is centralization. Major stablecoins like USDC (Circle) or USDT (Tether) depend on private companies that control the reserves backing their tokens. These issuers can freeze or block specific accounts in cases of fraud suspicion or regulatory orders, partially contradicting the decentralized ethos of blockchain.

Then comes the question of reserve transparency. Not all issuers publish regular audits or detailed breakdowns of their assets. If reserves are illiquid or of poor quality, the peg between the stablecoin and its reference currency could weaken.

A major risk is the “depeg” when a stablecoin temporarily or permanently loses its 1:1 parity. This can occur during market panic, poor reserve management, or doubts about the issuer’s solvency. Even established stablecoins have experienced slight deviations, proving that the peg is never absolutely guaranteed.

Regulation, however, is evolving rapidly. In Europe, the MiCA (Markets in Crypto-Assets) framework now governs stablecoin issuance, enforcing reserve transparency and strict operational standards. In the United States, the GENIUS Act (passed in 2025) has introduced a clear federal framework for “payment stablecoins,” requiring 1:1 reserves, regular audits, and stronger oversight of issuers.

Together, MiCA and the GENIUS Act mark a major step forward, laying the foundations for long-term stability and greater user confidence. These frameworks usher in a new era of maturity for stablecoins, one where their central role in digital finance is supported by robust, transparent regulation.

📌 Conclusion

Stablecoins have become a cornerstone of the new digital economy. By combining stability, speed, and transparency, they bridge the gap between the volatile world of crypto and the regulated world of traditional finance. Their widespread adoption marks a turning point: for the first time, value can move across the internet as effortlessly as sending a message or an email.

These hybrid assets embody the convergence of technology and trust. Backed by real reserves and governed by solid regulatory frameworks like MiCA in Europe and the GENIUS Act in the U.S., they are paving the way for a more fluid, inclusive, and global financial system.

In the near future, their use will extend far beyond crypto trading. Buying real estate, receiving rental income, or transferring funds internationally could all be done directly in stablecoins simply, without banks, and in real time.

What once seemed like a vision of the future is now becoming reality, the next step in the evolution of Web3 finance.

🔗 Start investing in tokenized real estate from just €10 with Shelters!