Stablecoins: what they are, how they work, and use cases

Cryptocurrencies have changed the way people and businesses move money, but the high volatility of assets such as Bitcoin and Ether is often seen as a limitation. This environment drove the emergence of stablecoins, a more predictable alternative for certain types of transactions.

By combining the efficiency of blockchain technology with the stability of fiat currencies or other reference assets, stablecoins have become an important part of the digital economy.

In this article, you'll learn what stablecoins are, how they maintain their value, the main types, their use cases and risks, and some of the most relevant stablecoins in use today.

What Are Stablecoins?

Stablecoins are cryptocurrencies designed to maintain a stable value over time. Unlike assets such as BTC and ETH, whose prices fluctuate based on market supply and demand, stablecoins are tied to a reference asset, known as collateral or backing.

This backing can take different forms, including fiat currencies such as the U.S. dollar, Brazilian real, or euro; commodities such as gold; other cryptocurrencies; or algorithmic mechanisms that adjust supply and demand.

The goal is to provide a digital asset with lower volatility that can be used for payments, trading, and settlement with greater predictability. This combination of stability and the efficiency of digital transactions has made stablecoins one of the most relevant applications of blockchain technology in financial markets.

How Do Stablecoins Maintain Their Value?

Although different models exist, all stablecoins share the same goal: keeping the token's value as close as possible to the asset it is pegged to. Each model uses a different mechanism to maintain that peg.

Fiat-Backed Stablecoins

This is the most common type of stablecoin. Each token issued is backed by an equivalent reserve of fiat currency or fiat-denominated assets, helping maintain its peg to the reference currency.

USDT, USDC, EURC, and BRZ are examples of fiat-backed stablecoins widely used for payments, trading, and financial infrastructure.

Crypto-Backed Stablecoins

In this model, the token is backed by other digital assets deposited as collateral. Because these assets are also subject to price volatility, these stablecoins typically require collateral worth more than the value of the tokens issued. This helps reduce the risk of losing the peg.

DAI, issued by the Sky protocol (formerly MakerDAO), is the main example.

Algorithmic Stablecoins

Instead of relying on reserves, this model uses algorithms to automatically adjust token supply in an attempt to maintain price stability.

Despite its innovative approach, this type of stablecoin has demonstrated vulnerabilities in practice.

According to an analysis by the Federal Reserve Bank of Richmond, TerraUSD (UST) became the third-largest stablecoin by market capitalization before losing its dollar peg in May 2022, contributing to a decline in the adoption of this model.

Main Use Cases for Stablecoins

Stablecoins play an important role in digital asset market infrastructure. Their combination of stability and liquidity makes them suitable for a range of financial operations.

Payments

Stablecoins enable value to be transferred over blockchain networks with fast settlement and continuous availability, 24 hours a day, seven days a week.

Cross-Border Payments

Businesses use stablecoins to simplify transfers between countries, reduce reliance on intermediaries, and make transaction costs more predictable.

Digital Asset Trading

A significant portion of trading activity on exchanges uses stablecoins as an intermediary asset for buying, selling, and exchanging digital assets.

Decentralized Finance (DeFi)

Stablecoins are widely used in lending protocols, staking, liquidity pools, and other applications built on smart contracts.

Hedging Against Volatility

During periods of increased market volatility, investors may convert part of their holdings into stablecoins to preserve value without leaving the blockchain ecosystem.

Benefits of Stablecoins

The growing adoption of stablecoins is driven by a combination of benefits for businesses and users:

• Greater value predictability

• Faster settlement

• Continuous availability, 24/7

• Global reach

• Integration with blockchain-based applications and infrastructure

• Fewer intermediaries in cross-border transfers

• Programmability through smart contracts, enabling automated processes

These characteristics have made stablecoins an important infrastructure layer for payments, settlement, and other digital financial operations, driving adoption across different markets.

Risks of Stablecoins

Although stablecoins are designed to reduce volatility, they still involve risks that should be considered:

• The quality and transparency of the reserves backing the token

• Regulatory changes

• The security of asset custody

• Counterparty risk associated with the issuer

• Technological vulnerabilities, particularly in smart contracts

Before using a stablecoin, businesses should evaluate who issues it, how its backing mechanism works, and what auditing, transparency, and governance mechanisms support its reliability.

Leading Stablecoins in the Market

Dozens of stablecoins are currently in circulation, but a relatively small number account for most of the market's liquidity and adoption.

According to DeFiLlama data compiled by Transak, USDT remains the largest stablecoin by market capitalization, with approximately 59% market share, followed by USDC at around 24%. Together, these two dollar-pegged tokens account for more than 80% of the sector's liquidity.

BRZ: The Stablecoin Pegged to the Brazilian Real

While most stablecoins are pegged to the U.S. dollar, BRZ was developed to digitally represent the Brazilian real.

Issued by Transfero, BRZ enables businesses and users to move funds on blockchain networks while maintaining exposure to the local currency. This makes it useful for payments, settlement, digital asset trading, and access to the DeFi ecosystem.

The token is available on more than 16 blockchain networks, expanding its interoperability with exchanges, digital wallets, and decentralized applications.

Read also: What Is BRZ? Learn About the Stablecoin Pegged to the Brazilian Real.

The Role of Stablecoins in Modernizing Financial Infrastructure

Stablecoins backed by transparent, audited, and redeemable reserves tend to provide greater confidence for businesses and users, particularly in large-scale financial operations.

In recent years, stablecoins have evolved beyond being tools primarily used in cryptocurrency markets to become an important layer of digital financial infrastructure. By combining predictable value with blockchain efficiency, they enable cross-border payments, settlement, digital asset trading, and decentralized applications.

As businesses and financial institutions continue to adopt digital assets, stablecoins are likely to play an increasingly important role in the modernization of global finance.