Types of Stablecoins and What They Are Used For

The Rapid Rise of Stablecoins

Stablecoins - cryptocurrencies designed to maintain a stable value - have surged into mainstream finance over the past two years.

The stablecoin market saw substantial growth in 2024, as total supply increased by approximately 56%, from $150 billion to $234 billion over the observed period (May ‘24 – May ‘25). In some markets, stablecoins now account for more than half of all crypto transaction value as businesses and individuals seek the stability of digital dollars.

This growth is not only in cryptocurrency trading - it is increasingly driven by real-world use cases, which will be addressed in the following article.

How Stablecoins Work

Stablecoins are cryptocurrencies which have their value tied to another asset class, such as fiat currencies, real world assets (RWAs) or other crypto assets. Issuers typically maintain a reserve of stablecoin's underlying assets to keep its price stable.

In other words, the reserve is a safeguard, and when stablecoin is created or redeemed, the assets in the reserve are theoretically added or removed accordingly.

For example, a company might issue 1 million stablecoin tokens in exchange for $1 million held in cash or short-term Treasuries; holders can then redeem those tokens for the underlying fiat on demand, which keeps the price anchored at $1 through arbitrage.

Issuance and Redemption

Most stablecoins (fiat-backed or otherwise) are created (minted) when a user provides assets of equal value to the issuer or smart contract, and destroyed (burned) when a user redeems them.

In all cases, the credibility of a stablecoin’s peg comes down to trust in its collateral or mechanism.

Finance professionals examining stablecoins will consider questions like:

• Are the reserves verified and high-quality?
• Is there sufficient collateral margin?
• Is the peg mechanism robust under extreme market conditions?

The answers vary by stablecoin project. Thorough due diligence is important before using a stablecoin at scale.

Types of Stablecoins

• Fiat-backed stablecoins: They represent the most popular type of stablecoin, with 91% of their supply backed by cash reserves or short-term government securities. Examples include USDT (Tether) and USDC (USD Coin), which together dominate the market, holding about 90% of the market.
• Crypto-backed stablecoins: These stablecoins are backed by other crypto assets, such as ETH and staked assets. They account for 8.5% of the total supply, up from 7% last year. They are often over-secured, meaning that the value of the collateral is higher than the value of the stablecoins issued. An example is DAI.
• Algorithmic stablecoins: Their rate stability is maintained through algorithms and smart contracts, without direct collateral in reserves. Their market share is declining, reflecting reduced confidence after previous failures.
• Yield-bearing stablecoins: They represent an application of tokenized real world assets (RWAs). They offer holders the opportunity to earn interest without entering the world of volatile assets. They can be divided into two categories depending on the profit distribution mechanism:
  • Rebase: token balances adjust automatically, and rewards (accrued interest) are distributed in the form of additional tokens.
  • Non-rebase: The value of tokens increases as a result of staking or other DeFi profit-generating activities.
  Key players in this market include USDY, USDM and eUSD.

Examples Of Business Use Cases of Stablecoins

1. Payments & Transactions

Integration with national payment systems: USDC is integrated with national real-time payment systems in Brazil and Mexico, facilitating the movement of funds in local currencies.

Merchant payment acceptance: Partnerships with companies such as Stripe enable merchants to accept stablecoin payments (e.g. USDC) on various blockchains (Ethereum, Solana, Polygon).

Money Transfers (Remittances): MoneyGram uses a USDC-powered wallet for global remittance services. TRON with USDT is the dominant network for cross-border P2P remittances and payments, particularly in emerging markets and Latin America, working with El Dorado for this purpose.

Payments for Small and Medium Enterprises (SMEs): PayPal plans to introduce PYUSD as a bill payment option for SMEs, leveraging its vast network of merchants.

Everyday Shopping: Gnosis Pay (on the Gnosis Chain, tied to Ethereum) uses stablecoins, allowing users to make everyday purchases in Europe with their Visa card.

Financing and B2B Transactions: Cryptocurrency payments company Mesh has secured an $82 million Series B funding round, with most of the investment settled in PYUSD. Stablecoins are also being used by companies to move capital internationally.

2. Trading and Liquidity in Digital Asset Markets

Trading on Decentralized Exchanges (DEXs): Stablecoins (like USDC and USDT) are widely used to trade and exchange on-chain on platforms such as Uniswap on Ethereum and Aerodrome on Base. The original use of the Curve protocol was to enable stablecoin trading on the chain.

High Frequency Trading and Arbitrage: Low fees and high transaction speeds on blockchains like Solana and Base make stablecoins ideal for high frequency trading, MEV (Maximal Extractable Value) and arbitrage, often driven by trading bots on platforms like Phoenix (order book) on Solana or Farming MEV on Base.

Memecoin Trading: The increase in memecoin-related activity on blockchains such as Solana (e.g., Pump.Fun, $TRUMP) and Base (e.g., Virtuals, Clanker, Flaunch) has significantly increased stablecoin transfer volumes as traders need liquidity and instant settlement.

"Stablecoins are the clearest proof that blockchain works - at scale, in the real world, and with tangible benefits. Their all-time high usage isn’t a trend; it’s a reflection of real utility: fast, low-cost, 24/7 global payments that bridge traditional finance and Web3. This isn’t an experiment - it’s the foundation of a new financial infrastructure. Stablecoins are internet-native money, already competing with SWIFT and Visa. If blockchain has a killer app, this is it." - Łukasz Olender, Co-Founder of Degen House

Advantages of Stablecoins Over Traditional Payments

1. Faster Settlement: Payments with stablecoins settle nearly instantly (typically within a few minutes, after a blockchain confirmation) regardless of geography. In contrast, international bank wires often take multiple days to clear, especially if multiple correspondent banks are involved.
2. Lower Costs: Stablecoin transactions can be far cheaper than traditional payment fees. Blockchain network fees for transferring stablecoins are often just a few cents to a few dollars (depending on the network used), and many emerging blockchain networks keep fees extremely low (fractions of a penny on some chains). By comparison, a typical SWIFT wire or international ACH might cost $20–$50 in fees, and currency conversion can add extra 1–3% in hidden costs.
3. 24/7 Global Availability: Stablecoin networks never close - they operate 24 hours a day, 365 days a year. You can initiate and settle a payment on a Sunday midnight or on a public holiday. This also allows for more efficient management of funds (e.g., immediate transfer of funds or collateral in response to market events, regardless of time zones).
4. Higher capacity: In 2024, stablecoin transfer volumes more than doubled Visa's annual throughput and matched Mastercard's, demonstrating their potential to handle a huge number of transactions.

It’s worth noting that these advantages come with some trade-offs. Users must manage private keys or use reliable custodial services, and they face new types of risks (cybersecurity, regulatory changes, and reliance on the stablecoin issuer’s solvency).

Nonetheless, the efficiency gains are driving increased adoption of stablecoins in payment flows, as evidenced by initiatives from major payment companies and banks.

Summary

Stablecoins represent a fundamental improvement in how money can be stored and transferred. They offer practical solutions to longstanding pain points in payments and treasury management, which is why they have gained traction with both startups and large financial institutions. As the technology and oversight mature, stablecoins are poised to become an integral part of the financial infrastructure, blending the trust of traditional currency with the speed and programmability of modern digital networks.

In essence, stablecoins can be thought of as fast, inexpensive, internet-native dollars that complement or, in certain niches, even outperform the traditional payment infrastructure.

Finance professionals would do well to keep a close eye on this space, as stablecoins are shaping the future of payments and digital finance in real time.