Stablecoins
Stablecoins — The Bridges Between Volatility and Value
The “Coffee” Problem
Imagine walking into a cafe to buy a $5 latte with Bitcoin. By the time you reach the counter, your $5 worth of BTC is suddenly worth $4.50. You’re short on change, and the barista is confused.
This is the “Volatility Problem.” For Web3 to actually work for normal humans, we need a way to store value on-chain that doesn’t swing wildly like a rollercoaster. Enter: Stablecoins. This is Day 17/60 Days of Web3.
Simple Explanation: The Digital Dollar
Stablecoins are simply tokens that are “pegged” to the value of a stable asset, usually the US Dollar. They give you the speed and borderless nature of crypto without the price heart attacks.
Think of them as the Bridges between the Old World and the New World. You use them to enter the crypto ecosystem (on-ramping), hide from market crashes (hedging), and participate in the financial applications we’ve learned about in the last two weeks.
The Three Main Types (How they keep the peg):
1. Fiat-Backed (The Vault)
These are the most common. For every $1 token issued, a real $1 is kept in a bank account.
How it works:
You deposit $100 into a stablecoin issuerThey mint 100 USDC/USDT for youThat $100 sits in a bank vault somewhereYou can redeem it anytime
Examples: USDT (Tether), USDC (Circle)
Pros:
Simple to understandHighly reliable (backed by real dollars)Most widely adopted
Cons:
Requires trust in the issuerCentralized (a company controls the vault)Subject to regulatory pressure
2. Crypto-Collateralized (The Over-Borrower)
These are backed by other crypto assets like Ethereum. Because ETH is volatile, these are usually “over-collateralized” — meaning you might need to deposit $150 worth of ETH to mint $100 worth of the stablecoin.
How it works:
You lock 1.5 ETH (worth ~$4,500) into a smart contractThe contract mints 3,000 DAI for you (1 DAI = $1)If ETH drops and your collateral falls below the threshold, the contract auto-liquidates your positionThis ensures DAI always has enough collateral backing it
Example: DAI (MakerDAO)
Pros:
Truly decentralized (no company controls the collateral)Transparent (you can verify collateral on-chain)Censorship-resistant (no central authority)
Cons:
Requires over-collateralization (inefficient capital use)Complex to understandCollateral risk (if ETH crashes, you might get liquidated)
3. Algorithmic (The Code)
These use complex math and supply-and-demand code to maintain value. They don’t have collateral sitting in a vault.
How it works:
The algorithm adjusts supply dynamicallyIf the price goes above $1, more tokens are mintedIf the price goes below $1, tokens are burnedThe theory: market forces push it back to $1
Example: Terra (UST) — This one failed spectacularly in 2022
Pros:
Capital efficient (no collateral needed)Purely on-chain
Cons:
High-risk (relies entirely on algorithm)Easy to break (a big sell-off can spiral)Most have failed or are under scrutiny
Why It Matters: The Real-World Context
Stablecoins aren’t just for traders. They are currently the biggest use-case for blockchain globally:
1. Remittances: Send Money Home Cheaply
A migrant worker in the US wants to send $200 home to their family in the PhilippinesTraditional wire transfer: 5–7 days, 3–5% fees = $10–15 lostStablecoin transfer: 10 minutes, <1% fees = <$2 lostResult: Billions move through stablecoins for remittances annually
2. DeFi Liquidity: The Backbone of Crypto Finance
You can’t have a reliable lending market if the collateral price changes every secondDeFi protocols (Aave, Compound) use stablecoins as the “stable” side of tradesWithout USDC/USDT/DAI, DeFi would collapse
3. Hyperinflation Protection: When Your Currency Dies
In countries with failing local currencies (Venezuela, Argentina, Zimbabwe), holding digital dollars is a lifesaverA Venezuelan family can store their wealth in USDT instead of watching their Bolivar lose 50% value in weeksStablecoins have become a refugee tool for financial stability
4. On-Ramp & Off-Ramp: The Gateway to Crypto
You can’t buy Bitcoin with your bank account directly (in many countries)But you CAN buy USDC, then swap USDC for BTCStablecoins are the bridge between fiat and crypto
The Statistics That Matter
Market Cap: $150+ billion in stablecoins (and growing)Daily Volume: More stablecoin volume than BitcoinAdoption: 80% of retail crypto users interact with stablecoins dailyReal-world impact: Remittance corridors saving billions in fees
My Learning Journey
Coming from a technical writing background for Tether, I’ve seen firsthand how important trust and transparency are in this sector. At first, I thought stablecoins were “boring” compared to NFTs or DAOs. But I’ve realized: You cannot build a city (Web3) without a stable currency.
It’s the invisible engine that makes everything else possible.
When you use DeFi, you’re using stablecoins. When you send money across borders, you’re using stablecoins. When countries with hyperinflation protect their savings, they’re using stablecoins.
Stablecoins aren’t sexy. But they’re essential.
The Evolution: What’s Changing
Yesterday: Stablecoins were just “fake dollars on blockchain”
Today: They’re becoming real infrastructure
Governments are researching CBDCs (Central Bank Digital Currencies)Real-world assets (RWAs) are being tokenized and priced in stablecoinsL2 scaling solutions depend entirely on stablecoins for liquidity
Tomorrow: Stablecoins might replace traditional banking for billions of people
Resources to Go Deeper:
Tether Transparency Report — How the largest stablecoin manages its reservesDAI Whitepaper — Understanding how crypto-backed stability worksStablecoin Index — Tracking market caps and pegs of different tokensThe Graph — Stablecoin Activity — Real-time on-chain data on stablecoin usageYouTube: Three different types of Stablecoin by Coin Gecko
In this series:
Day 15: Ethereum vs Solana
Day 16: DAOs Explained: How Decentralized Organizations Actually Work
Day 17 (Today) : Stablecoins
Follow me on Twitter for latest updates.
Join Web3 for Humans for active discussions.
Stablecoins — The Bridges Between Volatility and Value was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.