What Is a Stablecoin?

November 19, 2025

Summary:

Stablecoins are cryptocurrencies designed to hold a steady value because they are linked to real-world assets such as the U.S. dollar or the Japanese yen. This allows them to function more like digital cash than speculative tokens.
They enable fast, low-cost international payments, settling in seconds instead of days and avoiding high banking fees. Their use is growing in regions facing inflation or currency shortages.

When most of us think of cryptocurrencies, we think of digital tokens with skyrocketing values. Those soaring values, however, have a clear downside. Few people will buy anything with a cryptocoin if they believe it will be worth more in the future.

Think of it this way: In 2010, a Florida man used 10,000 bitcoin to pay for pizza. At the time, the transaction was worth about $41. But 15 years later, 10,000 bitcoins would be worth more than $1 billion.

That’s where stablecoins enter the picture. Stablecoins are a form of cryptocurrency whose value is pegged to another asset, like the U.S. dollar, the euro or the Brazilian real. The result is that they can be used as a form of payment.

“Stablecoins were created to address the high volatility of traditional cryptocurrencies,“ said IEEE Member Gabriel Gomes de Oliveira. “This hinders their use as a means of exchange and a secure store of value. The goal of stablecoins is to combine the security and effectiveness of blockchain technology with the value stability of traditional assets.”

And, if you are wondering, Oliveira has used stablecoins to make purchases.

What Makes Stablecoins Stable?

Just because the backers of a stablecoin say it is stable doesn’t make it so. People trade regular money all the time to profit from small price changes, and the same can happen with digital coins.

To prevent that, stablecoins have what are known as stability mechanisms.

Imagine, for example, a stablecoin pegged to the U.S. dollar. You can buy it for $1 and redeem it for the same amount. But if it started trading for $1.02, traders could see an opportunity for profit: buy from the stablecoin backers at $1, sell for $1.02, and pocket the difference.

In practice, no one will pay more than $1 for a coin they can always get for $1, and no one will sell for less when they can redeem it for that amount.

That type of mechanism is referred to as a fiat-backed system, meaning it’s supported by reserves of regular money. The coin stays stable as long as its backers have enough reserves to redeem every coin in circulation.

Some stablecoins use a different approach. Algorithmic coins rely on computer programs that automatically buy or sell coins to keep prices steady. These systems can get complex quickly and have proven riskier in practice. And some may use other assets as collateral, like the price of gold, government bonds or even other cryptocurrencies.

How Stablecoin Transactions Work

Stablecoins live on blockchains, just like the investment-grade cryptocurrencies. To send one, you use a digital wallet and sign the transaction with your private key. The network’s validators check that you have the funds and then record the transaction permanently on the blockchain.

“Most stablecoins follow token standards, which ensures they’re compatible with exchanges and wallets across the crypto ecosystem,” Olveira said.

Why People Use Stablecoins

Moving money across borders with traditional banks is slow and expensive. Transfers can take days and eat up as much as 10% in fees. A stablecoin payment, on the other hand, can go through in seconds for almost nothing. In Kenya, for example, some payment services use stablecoins to move money instantly between countries, helping people send and receive funds as easily as if they were domestic transfers.

According to an article in IEEE Computer Magazine, stablecoins are also gaining traction in countries where local currencies experience rapid depreciation. In parts of Latin America and Africa, they’ve become a safe place to store savings and a practical way to make everyday purchases in “digital dollars” when access to real U.S. currency is limited.

And it’s not just individuals. Businesses are starting to use stablecoins to move funds faster and manage cash more efficiently. For global companies, they can make payments across time zones and borders without waiting for banks to open or for transfers to clear.

Stablecoins Aren’t Risk-Free

No financial system is perfectly safe, and stablecoins are no different. A major concern is trust. Some issuers have faced criticism that they haven’t been fully transparent about the size of their reserves. Without public audits, people have to take their word for it.

Governments are stepping in. In Europe and the U.S., new laws already require issuers to have full reserves. But the laws in Europe are extremely complex. Regulations in the U.S. that actually enforce the laws haven’t been finalized.

Dive Deeper: IEEE Computer Magazine covers the social impact and technical challenges of computing. Recent issues include articles on data center sustainability, the development of responsible AI, and other topics. Check it out.