What is a Stablecoin?

A stablecoin is a type of cryptocurrency designed to minimize price volatility by pegging its value to a stable asset, such as a fiat currency (USD, EUR) or commodities (gold, oil). Unlike traditional cryptocurrencies like Bitcoin, whose values can fluctuate wildly, stablecoins provide consistency and reliability, making them an attractive option for everyday transactions, remittances, and as a store of value. They achieve this stability through various mechanisms, such as holding reserves in the underlying asset or using algorithmic controls to adjust the supply based on demand.

There are three main types of stablecoins:

Fiat-collateralized: Backed by reserves of fiat currencies (e.g., USDT, USDC).
Crypto-collateralized: Backed by other cryptocurrencies (e.g., DAI).
Algorithmic: Use algorithms to maintain their value by controlling supply (e.g., AMPL).

Use Cases of Stablecoins

Stablecoins are versatile and serve a wide range of purposes in the cryptocurrency ecosystem. Some of the most common use cases include:

Remittances: People can send stablecoins across borders with lower fees and faster transaction times compared to traditional financial systems.
Payments: Stablecoins can be used for everyday purchases due to their stable value, making them a reliable medium of exchange.
Lending with Stablecoins
DeFi platforms like Aave, Compound, and MakerDAO allow users to lend their stablecoins to earn interest. Here’s how the process works:
Lenders deposit stablecoins into liquidity pools on DeFi platforms. These pools are used to provide loans to borrowers.
In return, lenders earn interest, which is typically higher than traditional savings accounts. The interest rate varies based on supply and demand for borrowing on the platform.
Lenders can withdraw their stablecoins at any time, making it a flexible way to earn passive income.
Example: If you deposit USDC into Compound, you earn interest in the form of cUSDC tokens, which accrue interest over time. When you withdraw, the cUSDC tokens are converted back to USDC with the earned interest.
Borrowing with Stablecoins
Borrowing stablecoins on DeFi platforms is typically collateralized, meaning borrowers need to deposit assets (usually cryptocurrencies) as collateral to secure their loan.
Collateralization: Users deposit volatile assets like ETH or BTC as collateral and borrow stablecoins like USDT or DAI against it. The collateral helps ensure the loan is safe in case the value of the borrowed asset fluctuates.
Loan-to-Value (LTV) ratios: Platforms set LTV ratios (e.g., 75%), which dictate how much stablecoin can be borrowed against the deposited collateral. For instance, with an LTV of 75%, if you deposit $1,000 worth of ETH, you can borrow up to $750 worth of stablecoins.
Repayment: Borrowers must repay the borrowed stablecoins along with interest to reclaim their collateral. If the collateral’s value drops significantly, the position may be liquidated to protect the platform from risk.
Example: On MakerDAO, you can deposit ETH into the protocol and mint DAI, a stablecoin, against the deposited ETH. The collateral must remain above a specific threshold (usually 150% collateralization), or the system will liquidate the position to maintain the protocol’s stability.
Hedge Against Volatility: Investors often convert volatile cryptocurrencies into stablecoins to protect their portfolios from sudden market downturns without needing to convert to fiat.
Cross-border Trade: Stablecoins provide businesses with an easy, low-cost way to settle international transactions without being affected by exchange rate fluctuations.

Top Stablecoins

Stablecoin	Symbol	Supported Blockchains	Total Value (Market Cap)
Tether	USDT	Ethereum, Tron, Solana, BSC	$83.24 Billion
USD Coin	USDC	Ethereum, Solana, Avalanche	$25.57 Billion
Binance USD	BUSD	Binance Smart Chain (BSC)	$3.64 Billion
Dai	DAI	Ethereum, Polygon, BSC	$4.5 Billion
TrueUSD	TUSD	Ethereum, Tron, Avalanche	$3.23 Billion

These are some of the leading stablecoins in the market, offering high liquidity and multi-chain support. Their market capitalizations reflect their widespread adoption and use in various financial applications, especially within the decentralized finance sector.

Stablecoins provide a vital bridge between the world of crypto and traditional finance, enabling a more stable and functional ecosystem. Whether you’re transacting, investing, or engaging in DeFi, stablecoins offer both convenience and reliability.

Can payments not be achieved without Stable Coins ?

Payments can be made using native ETH or any other crypto asset without stablecoins.

The core requirement for a payment system on a blockchain is:

A method to transfer value between parties.
A ledger to record and verify those transfers (i.e., the blockchain itself).

✅ Payments Using Native ETH (or BTC, SOL, etc.)

Native tokens like ETH, BTC, or SOL can absolutely be used for payments:

The blockchain itself acts as the distributed ledger.
You simply send ETH from Wallet A to Wallet B, and the transaction is validated by the network.

This is already how many crypto-native systems work.

🧾 So Why Are Stablecoins Popular for Payments?

While technically unnecessary, stablecoins address two key practical issues:

Volatility
- ETH’s price can fluctuate wildly day to day.
- If you’re a merchant or payroll provider, receiving $100 worth of ETH today and it drops to $80 tomorrow is a real business risk.
- Stablecoins (like USDC, USDT) peg to the dollar (or another fiat currency), offering predictable value.
Unit of Account / Mental Accounting
- People and businesses think in fiat terms.
- Stablecoins let you send/receive “$100” rather than “0.032 ETH,” making it easier for pricing, invoicing, and accounting.

🔄 Native ETH + Volatility Hedges = Alternative Approach

Instead of stablecoins, some systems use:

Immediate conversion: Receive ETH but auto-convert to fiat or stablecoins via DEXs.
Synthetic hedging tools: Use derivatives to lock in a fiat value even if the underlying asset is ETH.

But these are more complex and introduce risk and friction.