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8 min read Web3

Stablecoins: Crypto Backbone

Stablecoins: Crypto Backbone
Photo by Luke Stackpoole/Unsplash

Hey you!

Welcome back to "that's what she said", your biweekly dose of all things web3. As you might have noticed, I was gone for a little while, but I didn't forget about you. I took a small detour to Japan, inhaled an embarrassing amount of cherry blossom air, and now I'm back, recharged and ready to drop some knowledge.

Last time, we talked about Ethereum — the ICO gold rush, the DAO hack, the Merge, and the projects building on top of the network today (if you missed it, go read it, seriously).

Today, we're zooming out a bit and talking about one of the most quietly important corners of the crypto world: stablecoins.

Grab your matcha and let's yap!

🪙 Origin

Let's get back in time to 2017. Bitcoin hits $20,000, then crashes to $6,000 in a matter of weeks. Ethereum is minting millionaires on Monday and breaking hearts by Friday. Everyone is talking about crypto, but nobody can quite figure out how to actually use it for anything practical, because how do you price a cup of coffee in something that might be worth 40% less by the time you finish drinking it?

That was the core problem. Crypto had the technology, the decentralisation, the borderless transfers, but it was essentially unusable as money. Not because the rails were broken, but because the value sitting on top of those rails was all over the place. So, the industry knew it needed a fix, and stablecoins were that fix — or at least, the first serious attempt.

The concept actually predates the 2017 madness. Tether (USDT) launched back in 2014 with a simple, almost boring promise: one token, one dollar, always. It didn't get much attention at first, but as the 2017 bull market exploded and the need for a stable trading pair became obvious, Tether's volume went parabolic. Traders needed somewhere to park their profits without cashing out to a bank. Stablecoins were the answer.

By 2018, USDC entered the scene. By 2019, DAI — a decentralised alternative backed by crypto collateral rather than dollars in a bank — had carved out its own corner of the market. Each new entrant was proof that the category wasn't a fluke.

The numbers since then have been hard to argue with. By 2025, stablecoin transaction volume hit $33 trillion — up 72% year-over-year (more data is here). They now account for roughly 30% of all on-chain crypto transaction volume, and an even larger share of the total value moving through crypto markets. What started as a workaround for traders became the backbone of how value moves across the entire crypto ecosystem.

🧠 Definition

A stablecoin is a type of cryptocurrency whose value is pegged to something stable — usually a fiat currency like the US dollar, but sometimes gold or other assets. The whole point is that 1 coin = $1. Consistently.

To understand why that matters, you need to understand volatility. In finance, volatility is a measure of how much the price of something moves over time. High volatility means the price swings a lot — up, down, unpredictably, sometimes within hours. Low volatility means the price stays relatively flat and predictable. Bitcoin and Ethereum are famously volatile — a 10% price move in a single day isn't unusual. That makes them exciting as investments, but deeply impractical as everyday money.

Stablecoins solve exactly this, they are the low-volatility alternative. They bring the actual useful parts of crypto — instant transfers, no banks, no borders, programmable money — while leaving the price chaos behind.

One more thing worth saying clearly: a stablecoin is not the same as Bitcoin, and it's not trying to be. Bitcoin is scarce, decentralised, and designed to appreciate over time. A stablecoin is none of those things. You hold it because you need stable money that lives on a blockchain, not because you expect it to make you rich.

⚙️ How They Work

The most common model works roughly like this: a company decides to issue a stablecoin. For every coin they put into circulation, they hold the equivalent value somewhere safe. If they issue one million USDC, they're supposed to have one million dollars sitting in a bank account or invested in something equally solid, like short-term US government bonds. The coin is, in theory, always redeemable for the real thing.

This is called the reserve model, and it's what makes the math work. The coin has value because there's something real backing it. You're not trusting a price chart or a community's belief — you're trusting that when you hand the coin back, you get your dollar back.

The operational chain behind this has a few moving parts. First, the issuer mints the coins and manages the reserves. Then those coins are recorded on a blockchain. Finally, users interact with all of this through a digital wallet: an app or hardware device that holds the keys allowing you to actually move your coins.

The supply isn't fixed. If demand for a stablecoin goes up, the issuer mints more. If demand drops, coins are redeemed and taken out of circulation. The supply breathes with the market, but the price doesn't move because the peg holds it in place.

There's also a second approach — algorithmic stablecoins — which use software logic instead of reserves to manage supply. If the price dips, the algorithm reduces supply to push it back up; if the price rises, it mints more to bring it down. Think of it as a robot central bank. This model is more decentralised, but also riskier — when confidence wobbles, there's no hard asset to fall back on (more on the different types in the next article).

📊 Keeping the Price Steady

Saying a stablecoin is "pegged to the dollar" sounds simple. In practice, maintaining that peg is a constant, active process. There are three forces doing most of the work: redemption, arbitrage, and trust. They operate simultaneously, all the time, usually invisibly.

Redemption creates a price floor. If a stablecoin that's supposed to be worth $1 drops to $0.98 on the open market, traders will snap it up and redeem it with the issuer for the full $1 — instant profit. That buying pressure pulls the price back up. If it rises above $1, the issuer mints new coins at $1 and sells them, pushing the price back down. It's a loop that self-corrects.

Arbitrage is what keeps this honest across hundreds of different exchanges in real time. Traders and automated bots are constantly scanning for tiny price discrepancies — a stablecoin trading at $0.999 here, $1.001 there — and acting on them instantly. This continuous activity is why you'll often see a stablecoin quoted at $0.9998 or $1.0003. That's not the peg slipping; that's the market doing exactly what it's supposed to do, micro-correcting around the target.

Trust is the invisible anchor. Everything above only works if people believe the issuer actually has the reserves, that redemptions will be honoured, and that the system isn't going to collapse. The moment that trust cracks, the peg can slip dramatically.

Several factors shape how stable a stablecoin stays over time:

None of these factors work in isolation. A stablecoin with great reserves but no transparency is still vulnerable. One with perfect transparency but thin liquidity can still break under pressure.

💪 Importance

Stablecoins are currently used for two big things: trading and cross-border payments.

In crypto trading, stablecoins are the go-to "middle layer". When you want to exit a volatile position but stay in crypto, you move into stablecoins. When you want to jump into a new token, you start from stablecoins. They're the liquid, reliable unit of account that makes the whole market function.

On the payments side, stablecoins are genuinely useful for sending money internationally. Someone sending money to family in another country can do it instantly, in stablecoins, and it arrives as dollars on the other end.

Beyond that, stablecoins power a huge chunk of DeFi — lending, borrowing, yield-generating protocols all depend on them. They've also become tools for businesses handling international transactions or offering digital payment infrastructure.

🏦 Who Issues Stablecoins?

Before we get to the names, let's clarify the term. An emittent (or issuer) is the entity responsible for bringing a stablecoin into existence and, crucially, standing behind it. They're the ones making the promise that 1 coin equals $1. They mint new coins when demand goes up, take them out of circulation when demand drops, and maintain whatever reserves or mechanisms keep the peg intact. In the traditional financial world, this role belongs to central banks and governments. In the stablecoin world, it can be a company, a decentralised protocol, or something in between.

Here are the key players:

Key Takeaways

Final Thought

Stablecoins don't get the same hype as Bitcoin or the same philosophical drama as Ethereum. They're not supposed to. Their whole job is to be boring, reliable, and always worth exactly what they say they're worth.

And yet, quietly, they've become the thing that makes crypto actually usable: the trading layer, the payment rail, the savings vehicle for people whose local currency is anything but stable, the backbone of DeFi. Without stablecoins, most of what we call "the crypto ecosystem" doesn't function.

If you learnt something new today, pass it on. Share it with your community. Let's spread the knowledge and level up together.

That's a wrap, normies. Next time, we're going deeper into the types of stablecoins. Stay tuned!

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Ethereum, Part 2: From ICO Boom to Global Computer

Stablecoins: Crypto Backbone