A stablecoin is a type of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the US dollar (1:1). Unlike Bitcoin or Ethereum — which can gain or lose 10–20% of their value in a single day — stablecoins provide price stability, making them essential infrastructure for crypto trading, DeFi, and everyday payments without needing to convert back to traditional banking.
There are three main types of stablecoins: Fiat-backed (most common) — each token is backed 1:1 by USD held in reserve by a centralised issuer. Examples: USDT (Tether), USDC (Circle), BUSD. These are audited (or should be) to verify reserves; Crypto-backed — backed by overcollateralised crypto assets. Example: DAI (backed by ETH and other crypto, managed by MakerDAO); and Algorithmic — use algorithmic mechanisms to maintain the peg without full collateral. These carry the highest risk — TerraUSD (UST) was an algorithmic stablecoin that collapsed catastrophically in May 2022.
Stablecoins are the backbone of crypto trading: traders park profits in stablecoins during bear markets, use them for DeFi lending and yield farming, and transfer value globally at low cost without fiat conversion.
Example: After selling Bitcoin at $65,000, a trader converts profits to USDC to avoid market volatility while waiting for the next opportunity. Their $65,000 in USDC earns 5% APY on a lending platform while they wait.
Learn more: Coinbase — What Is a Stablecoin?
