Intermediate
Stablecoins & Digital Payments
Jun 10, 2026
7 min read
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Detailed Summary
Stablecoins are a type of cryptocurrency designed to maintain a stable value, usually pegged to a fiat currency such as USD or EUR. Depending on the underlying mechanism, this peg is achieved either through reserves, an algorithm, or redemption and creation.
Stablecoins are widely used for trading, remittances, and DeFi, but they still carry risks such as issuer risk, smart contract risk, and regulatory risk. Before using stablecoins, check their regulatory status, backing, and historic track record.
Key Takeaways
Stablecoins are cryptocurrencies designed to track the value of a reference asset, usually a fiat currency like the U.S. dollar.
There are four main types of stablecoins: fiat‑backed, crypto‑backed, commodity‑backed, and algorithmic.
Each design comes with different trade‑offs around centralization, capital efficiency, and depeg risk.
Stablecoins currently account for the largest share of the Real World Asset (RWA) market. RWAs refer to tokenized representations of off-chain assets like currencies, bonds, or commodities.
In total, we can distinguish between four categories of stablecoins:
fiat-backed
crypto-backed
commodity-backed
algorithmic
Each of these stablecoin types has a different set of risk trade-offs. This article covers all types of stablecoins, explains how they work, and highlights potential risks to help you use them safely.
What is a stablecoin?
Stablecoins combine the stability of fiat currencies with the benefits of cryptocurrency. Their main characteristic is that they are pegged to a reference asset, often the US dollar, but also other fiat currencies or even commodities.
Currently, US-denominated stablecoins such as USD Coin (USDC) still dominate stablecoin volumes, but more regional stablecoins are gaining traction.
Their low volatility makes stablecoins a popular choice for sending money to others, paying for services, or simply keeping funds on the sidelines until they are needed for other purposes.
Although all stablecoins aim to maintain their pegs, not all are built equally.
The main types of stablecoins
There are four overall types of stablecoins, differing in their backing mechanism and how they aim to maintain stability. Each carries different risks and is associated with different assets.
Fiat-backed stablecoins
This type is the most straightforward. Each issued stablecoin is backed by an equivalent amount in fiat currency held in the issuer’s custody. Redemption is then simply the burning of the stablecoin and returning cash to the holder. Examples of fiat-backed stablecoins include Circle (USDC) and PayPal USD (PYUSD).
Crypto-backed stablecoins
Crypto-backed stablecoins are usually heavily over-collateralized due to the volatility of the underlying assets. Such stablecoins are minted by locking cryptocurrency. For example, a trader might lock $2,000 worth of ETH as collateral to mint $1,000 worth of DAI. Of course, another way to obtain these coins is through simple swaps.
Commodity-backed stablecoins
As with the above, the biggest difference is the asset that is backing the stablecoins. Commodity-backed stablecoins use tokenized gold or other commodities to maintain their value. Examples of them include PAX Gold (PAXG) and Tether Gold (XAUT).
Algorithmic stablecoins
Algorithmic stablecoins are the only type in which no direct backing exists. Instead, they rely on market forces and an interplay of tokens to manage supply and stay at their peg.
Each stablecoin type carries different trade-offs. Fiat-backed stablecoins, while easy to understand, are more centralized because the issuer must manage all backing.
On the opposite end of the spectrum, algorithmic stablecoins, while decentralized, tend to be highly capital-efficient and more vulnerable to losing their peg.
Bybit EU does not publicly offer or promote any of the tokens listed above. Crypto assets are volatile and may not be suitable for all users.
How do stablecoins maintain their $1 peg?
Stablecoins work by designing mechanisms that ensure their value never deviates too far from their desired peg. Here’s how that works for different types of stablecoins:
fiat-backed: arbitrage keeps the price near the peg. Thanks to full reserves and the ability to redeem 1 stablecoin for the equivalent of $1 or another fiat currency, whenever the price deviates, market participants are quick to exploit the opportunity and close the gap.
crypto-backed: each coin is backed by overcollateralized loans. Whenever the price drifts, arbitrage and liquidations (selling of the underlying asset) help restore stability.
algorithmic: supply and incentives to nudge market participants to maintain the peg are all governed by code. Historically, this model has been prone to high volatility and de-pegs.
Note that commodity-backed stablecoins follow the same process as fiat-backed ones.
What are stablecoins used for?
Stablecoins are mainly used whenever traders want a stable value while also benefiting from the features of cryptocurrency, such as full control, 24/7 transfers, and low fees. Common use cases for stablecoins include:
Parking value between different crypto trades
Sending funds across borders
Making payments for goods and services
Using them for lending, supplying liquidity, or to earn yield in decentralized finance (DeFi)
Relying on them as an alternative to local currency in high-inflation economies
What are the main risks of stablecoins?
While stablecoins are designed to maintain their peg, they’re not risk-free. Before allocating larger portions of your portfolio to stablecoins, you should carefully consider what could go wrong.
The main risks with stablecoins are:
Depeg risk: when the stablecoin’s price suddenly does not trade close to its peg anymore. An infamous example of a depeg was the collapse of Terra USD (UST). Yet, even USDC at one point traded below the $1 mark for a short period of time in 2023.
Issuer risk: applies to all stablecoins issued by a centralized party where there is no full transparency on the reserves. On top of that, any failure of the issuer could be catastrophic to the stablecoin.
Smart contract and oracle risk: whenever part of the infrastructure relies on smart contracts or oracles there’s a risk of potential vulnerabilities and exploits
Regulatory risk: rules can change. For example, since the implementation of MiCAR in the European Union, certain stablecoins may no longer be available on some regulated exchanges.
Are stablecoins safe?
Generally, well‑designed stablecoins tend to show lower price volatility than many other cryptocurrencies. However, they still carry risks, and how suitable they are for you depends on their design, reserves, and how you store them. There is a stark contrast between a well‑collateralized fiat‑backed stablecoin issued by a company that offers full reserve transparency and an experimental algorithmic coin you know little about.
Things to look out for in stablecoins include:
Transparent and regular reserve reports and audits by external third parties
Historic track record of keeping peg even during turbulent times
Regulatory status and legality in your region
How to get stablecoins?
If you want to obtain stablecoins, you have multiple options. One of the simplest ways is to buy them through centralized exchanges, such as Bybit, or swap into them on decentralized exchanges (DEXs). Stablecoins are also widely available in DeFi, allowing you to swap other cryptocurrencies for them on DEXs.
Lastly, if clients or employers support it, you can receive your salary/compensation in stablecoins.
The bottom line
Stablecoins serve an important function in the crypto market by offering a stable value asset that maintains the benefits of cryptocurrencies. To date, fiat-backed stablecoins dominate the market, whereas algorithmic stablecoins have not managed to establish a larger market share. Despite their high capital inefficiency, crypto-backed stablecoins do enjoy popularity with traders looking to leverage their positions.
Each choice of stablecoin comes with its own set of trade-offs. Before you decide to use or hold a stablecoin, consider which trade-offs you’re comfortable with and don’t neglect the best practices of staying safe.
Which stablecoin you choose to use should be guided by your goals and risk tolerance.
FAQ
What are stablecoins in simple terms? Stablecoins are a category of cryptocurrencies designed to maintain a stable value.
What are the main types of stablecoins? The main types of stablecoins are fiat-backed, crypto-backed, commodity-backed and algorithmic coins.
What are examples of stablecoins? Stablecoins examples are USDC, DAI, and crvUSD.
Are stablecoins safe? Stablecoins’ safety depends on their design, the issuer's reliability, and the security of custody.
How did some stablecoins fall below $1? Algorithmic stablecoins have historically been prone to depegs as their value is governed solely by code and market forces. The most infamous recent stablecoin collapse, UST, was triggered by large withdrawals from the ecosystem and a loss of confidence in its design, which relied heavily on attracting new deposits with high yields.
Investing in crypto‑assets is associated with risks, including high volatility and the potential loss of capital. Inform yourself thoroughly about the risks before making an investment decision. The information provided in this article is strictly for educational and informational purposes and should not be construed as financial or investment advice.