Stablecoins have grown to fill the gap between traditional fiat currencies and cryptocurrencies. This article will explore how they “peg” their value to other more stable assets and, therefore, allow investors to utilise blockchain technology while also avoiding the notorious price volatility.
Stablecoins, cryptocurrencies that “peg” their value to a more secure asset such as the US dollar aim to combine the advantages of
It’s an interesting proposition, but investors need to establish whether stablecoins offer the best, or indeed the worst, of both worlds. In this guide, you’ll learn how stablecoins maintain their peg to more secure assets and what to consider before investing, including potential regulation and security developments.
What Are Stablecoins and How Do They Work?
Stablecoins are a type of cryptocurrency which are pegged to other more stable assets such as the US dollar. The asset they are pegged to is not necessarily a fiat currency and can include gold or other financial assets including other
The purpose of pegging is to try to reduce price swings. That can allow users to make blockchain-based transactions while retaining a degree of stability. That added stability gives stablecoins greater potential to facilitate the process of making payments, saving, investing, or any other activity where an asset is to be used as a means of exchange or store of value.
Tip: Some stablecoins “peg” using
The Three Main Types of Stablecoins Explained
There are three main types of stablecoin: fiat-backed, crypto-backed, and algorithmic stablecoins. Each approach adopts a different way to try to ensure their coins’ relative price stability.
How fiat-backed stablecoins work
The stablecoin USDC is dollar backed and designed to maintain parity value with the US dollar. To do this, US dollars are held in reserves in banks so that holders of the crypto can have a degree of confidence that 1 USDC is the same value as 1 US dollar.
How crypto-backed stablecoins work
The term “crypto-backed” refers to coins such as DAI that are pegged to other cryptocurrencies. In the case of DAI, the intention is to maintain a 1:1 peg with the US dollar, but it uses cryptoassets as
How algorithmic stablecoins work
Algorithmic stablecoins maintain their peg, for example, to the US dollar, through the use of
Case Study: Algorithmic stablecoin adjustments
An algorithmic stablecoin is pegged to the US dollar at a 1:1 ratio.
- Following a news report, there is increased investor interest in the stablecoin.
- Additional buying pressure results in the stablecoin trading at a price higher than $1.
- The blockchain protocol mints additional tokens.
- Additional supply of the stablecoin reduces its price and restores parity to the US dollar.
Each model seeks to keep value close to its peg while serving different needs. The table below gives a breakdown of the different approaches taken to achieve pegging and the pros and cons of the different methods.
| Type of Stablecoin | Backing | Example | Strengths | Weaknesses |
|---|---|---|---|---|
| Fiat-backed | Fiat reserves | USDT, USDC | Simple, relatable | Centralised control |
| Crypto-backed | Cryptoassets | DAI | Decentralised | Price volatility of collateral |
| Algorithmic | Supply algorithms | FRAX | Scalable | Depegging risk |
Top Stablecoins by Market Cap
In October 2025, the largest fiat-backed, crypto-backed, and algorithmic stablecoins were Tether (USDT), Ethena USDe, and USDD. Their market caps were $181bn, $12bn, and $0.5bn, respectively.
As interest in stablecoins has grown, so has their market capitalisation. The market cap reflects demand for coins which can rise and fall according to market conditions, with potential reasons for a market cap rise including increased demand for collateral in
Tip: You can keep up to date with crypto market cap values by visiting the eToro crypto market page.
Benefits and Risks of Investing in Stablecoins
Stablecoins may have been designed to have lower price
- Being pegged to an asset such as the USD offers stability
- Fast global transfers
- Access to DeFi and digital dollars
- Low volatility might aid overall portfolio diversification
- Transparency on collateralisation varies
- Regulatory uncertainty
- Risk of depegging
- Lower yield potential
The crypto sector is notoriously risky, but an argument is building that for beginners, stablecoins might be considered a relatively less risky way to enter the crypto markets. Their main draw being the way that they use blockchain technology to carry out transactions, invest, or save, but have pegging systems designed to reduce price volatility.
While there is potential to use stablecoins as a means of exchange, in the same way as with fiat currencies, stablecoins still represent a form of investment. It is, therefore, important to remember that all investments carry an element of risk and the chance of losing all of your capital.
How To Get Started With Stablecoin Investing
You can buy stablecoins on major trading platforms, but there is a need to always check local regulations and platform safety before investing. On eToro, the process involves:
- Creating an account
- Verifying your identity
- Purchasing coins
Regulatory Outlook
Regulation around stablecoins is tightening as regulators recognise the growing role they play in global finance. For investors, this means that there is an ever-changing landscape they need to keep up to date with.
The cross-border nature of blockchain networks adds an additional layer of complexity and can result in there being grey areas about which regulatory body has authority over a stablecoin holding. And in some regions and countries, such as the UAE, there may be more than one regulatory authority and those organisations can potentially take differing views on the legal status of stablecoins.
Final thoughts
Stablecoins offer a way to take advantage of the neat functionality features of cryptocurrencies without extreme price volatility making it hard to carry out transactions or keep track of the value of your assets.
They have the potential to redefine the global finance landscape, but all investing involves an element of risk and thorough research should be carried out before committing capital.
Visit the eToro Academy to learn more about crypto investments.
FAQs
- Are payments made using stablecoins faster than traditional payments?
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Typically, yes. This is because stablecoins use Internet-based blockchain technology, which can settle in seconds or minutes, whereas traditional payments use intermediaries to report the processing of transactions. The time advantage of stablecoins is greater for international payments where the network of intermediaries which any payment has to work through is more extended.
- What does “product-market fit” mean in terms of stablecoins?
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The term product-market fit refers to the extent a product or service meets a demand. In terms of stablecoins, the case for there being a strengthening product-market fit is borne out by an increasing number of people using stablecoins to make transactions or store their wealth.
- Are stablecoins safe?
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Stablecoins are not without their risks. Possibly the greatest risk is that a coin can lose its pegging. The level of security they offer largely depends on the quality and liquidity of their reserves, the nature of the asset they are pegged to, the pegging system they use, and the transparency of their issuers.
- Will stablecoins replace fiat currencies?
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The idea of stablecoins replacing fiat currencies appears a long way off, particularly as the underlying premise of many of the most popular coins is that their value stems from being pegged to the US dollar. Saying that, there could be localised situations where concern about the integrity of a particular currency causes a rush into the perceived safety of stablecoins, in a similar way to which financial crises have historically led to investors buying safe-haven assets such as gold or stronger currencies.
- Do stablecoins pay interest?
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Most stablecoins do not pay interest directly to coin holders. Any interest earned on the collateral they hold to secure the peg is typically kept in the capital reserves. There are alternative ways to earn a return on stablecoins through methods such as lending them on decentralised finance (DeFi) platforms or by using services that offer “rewards.”
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.