What Are Stablecoins?
Volatility isn’t a flaw of the crypto market — it’s one of its defining traits. Yet this same volatility limits cryptocurrencies as a practical medium for everyday payments. Stablecoins were introduced to address this tension: preserving the digital nature of crypto while reducing price fluctuations.
In this context, it’s important to understand who issues stablecoins and do stablecoins change in value, as these factors define how effectively they maintain price stability. In this article, we explore what stablecoins are, how their value is maintained, and the role they play in the broader crypto market.
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What Is a Stablecoin in Crypto?
A stablecoin is, in simple terms, a cryptocurrency pegged to a stable asset such as a fiat currency (e.g., the US dollar) or a commodity like gold, which helps reduce volatility and maintain predictable value. It acts as a bridge between traditional finance and crypto markets, enabling users to transact in digital assets without exposure to sharp price swings.
Why Use Stablecoin?
Stablecoins function as “digital cash” within the crypto market, allowing users to quickly lock in profits, hedge against volatility, and move funds between exchanges without converting to fiat. This highlights how are stablecoins different from traditional assets: they combine the price stability of fiat with the speed, programmability, and global accessibility of blockchain-based assets. Because they are pegged to stable assets, traders retain a predictable unit of value without exposure to sharp price swings.
Beyond trading, stablecoins are widely used for payments, on-chain transfers, and DeFi activity — including lending, staking, and liquidity provision.
How Do Stablecoins Work?
There are five main types of stablecoins, classified by how their value is backed.
Fiat-Backed
These stablecoins are pegged to a fiat currency (most commonly the US dollar) and maintain this peg through reserves held by the issuer.
Reserves typically include:
- cash and bank deposits;
- short-term government bonds;
- other highly liquid financial instruments.
Each token represents a claim on the issuing entity and is designed to match the value of one unit of the underlying currency (e.g., 1 USD).
The mechanics of fiat-backed stablecoins can be viewed across two layers:
- Issuance and redemption (issuer level). A company issues new tokens upon receiving fiat funds from institutional participants. In the reverse process, tokens are redeemed (burned), and fiat is returned.
- Market circulation (primary use case). Most users buy and sell stablecoins on exchanges and do not interact directly with the issuer.
Therefore, in practice, this is not a direct “exchange of money for a digital dollar,” but rather trading in a token whose price is kept around $1 due to:
- the issuer’s reserves;
- market liquidity;
- arbitrage.
Examples of fiat-backed stablecoins:
Crypto-Backed
Unlike fiat-backed stablecoins, these stablecoins are secured by other crypto assets instead of traditional financial instruments. The collateral is locked in smart contracts, which enables the system to operate without the need for a centralized issuer.
This approach reduces reliance on a single company, but shifts the risks to the realm of code and market dynamics.
Due to the inherent volatility of cryptocurrencies, overcollateralization is required: the value of the collateral must exceed the value of the issued stablecoins. While this helps make the system more resilient to market fluctuations, it also increases its vulnerability to sharp market declines.
Issuance works through collateral: a user locks crypto assets (e.g., ETH) in a smart contract and receives stablecoins in return. The value of the collateral must exceed the amount issued (e.g., by 150% or more).
If the collateral value falls below a specified threshold, the position can be liquidated, and the collateral sold to cover the issued tokens. This mechanism ensures the system remains collateralized even during market downturns.
Examples:
- DAI — issued through the MakerDAO protocol and backed by a mix of crypto assets, including USDC.
- sUSD — issued within the Synthetix ecosystem, collateralized by a variety of crypto assets.
Algorithmic Stablecoins
These stablecoins are not directly backed by fiat or crypto assets. Instead, they aim to maintain a stable price through algorithmic supply management.
When the market price deviates from the target level (e.g., $1), the protocol automatically adjusts the token supply: increasing it when the price rises and decreasing it when it falls, in an attempt to bring the price back to the peg.
Unlike other stablecoin models, there is no “hard” collateral here. Therefore, the stability of the model depends on:
- Market participants’ trust
- Demand for the token
- The effective functioning of economic incentives
In practice, these systems are more vulnerable to drops in demand and can lose their peg, especially during periods of market volatility.
Examples:
- Ampleforth — uses an elastic supply model where the token balance in wallets automatically adjusts (rebases) based on market price.
- Empty Set Dollar — employs mechanisms to expand and contract supply through a system of incentives and debt instruments.
Commodity-Backed Stablecoins
These stablecoins are backed by physical assets, such as gold or other commodities, and represent a claim to a specific amount of that asset held by the issuer or a custodian. Tokens are issued against existing reserves, and upon redemption, can be exchanged for the underlying asset or its cash equivalent. However, most users trade them on the market, with their price closely following the value of the corresponding commodity.
Examples:
- Paxos Gold
- Tether Gold
Hybrid-Backed Stablecoins
Hybrid stablecoins combine partial collateral in the form of fiat currencies or other crypto assets with algorithmic mechanisms that help maintain price stability and manage supply. This model blends the benefits of both reserve-backed and algorithmic approaches, offering a more flexible and resilient system.
Examples:
- mStable USD — a token that merges several stablecoins (e.g., USD Coin, Tether, Dai) into a single asset with rebalancing and liquidity management mechanisms.
- Neutrino USD — an algorithmically-backed stablecoin that uses crypto collateral and stabilization mechanisms through smart contracts within the Waves ecosystem.
Advantages and Disadvantages of Stablecoins
Stablecoin Advantages
The key advantage of stablecoins is their predictable pricing, which is crucial in a volatile market. Pros include transaction speed and flexibility: fees and confirmation times vary depending on the network used (whether it’s Ethereum, Tron, or Solana). As a result, stablecoins serve as a convenient tool for quickly moving capital between exchanges and locking in profits without needing to convert to fiat.
Risks of Stablecoins
The main disadvantage of stablecoins is the trust-based model. The reliability of the asset is determined by the issuer and the quality of their reserves, not just the code, leading to risks of centralization and a lack of transparency.
Additional concerns include regulatory pressure, the risk of depegging, and liquidity issues during market crises. In some cases, issuers may intervene in fund circulation, including freezing addresses.
Stablecoin Regulation
The legal framework for stablecoins remains fragmented and continues to evolve across jurisdictions. In regions such as the EU, under the Markets in Crypto-Assets Regulation (MiCA), issuers are now subject to requirements around licensing, disclosure, reserve composition, and risk management.
So, what is a regulatory risk associated with stablecoins? The key risk lies in the uncertainty of the regulatory environment: tightening rules, trading restrictions, or even bans on certain stablecoin models can directly impact their liquidity, accessibility, and overall market role.
At the same time, are stablecoins protected by the government? In most cases, no. Stablecoins generally do not offer protections comparable to bank deposit insurance. If an issuer faces issues such as insufficient reserves or insolvency, users have no guaranteed compensation. Their rights depend on the token’s issuance terms and the applicable legal framework, making careful legal evaluation essential.
Ways to Use Stablecoins on WhiteBIT
Let’s explore the key ways to use stablecoins on the platform.
Trading
USDT serves as the primary unit of account in all trading modes—spot, margin, and futures. It is used to open positions, calculate profits, and manage risk. In futures trading, it is also used as margin.
Crypto Lending
Stablecoins can be deposited into a crypto lending with a fixed yield. Users select the term and rate, with interest accrued in the same currency as the deposit.
Crypto Borrow
Through the “crypto borrow” product, users can obtain liquidity by pledging crypto assets while maintaining their open positions. Borrowing is conducted in stablecoins.
WhiteBIT Nova
When using the Nova card to pay for goods and services, stablecoins are automatically converted, allowing them to be used for everyday transactions.
Convert
With the “Convert” feature, users can instantly convert assets using stablecoins at the current market rate, without needing to use the order book.
QuickSend
QuickSend allows users to quickly send stablecoins to other users via email, ID, or phone number, eliminating the need to enter a wallet address.
Codes
Using codes, funds are transferred in a digital format that recipients can activate on the platform. This simplifies transfers and enhances flexibility.
WB Voucher
The WB Voucher service enables users to create and distribute vouchers with stablecoins for transfers, gifts, or mass payments.
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Conclusion
Stablecoins have long transcended their role as mere “crypto-dollars for trading.” Today, they function as a foundational layer of liquidity, a settlement instrument, and a bridge between traditional finance and digital assets. However, their stability is not guaranteed—it relies on specific mechanisms and comes with inherent risks. Understanding these factors is crucial for using stablecoins effectively, not just as a convenient tool, but as part of a well-informed market strategy. This article is for informational purposes only and does not constitute investment or trading advice.
