What Is a Stablecoin? (2025 Guide to Types, Risks, and Best Uses)
Updated October 2025
Stablecoins aim to keep a steady price, usually one US dollar, so traders can move money across exchanges, earn yield, or settle payments without the wild swings of crypto. In 2025, regulations and disclosures have improved, but not all stablecoins are created equal. This guide explains how they work, where things go wrong, and how to pick and use them safely.
Why stablecoins exist
Crypto is volatile. Stablecoins solve a simple problem: move value quickly on blockchain rails while keeping price stable. Exchanges quote many pairs in stablecoins, DeFi protocols use them for collateral and liquidity, and people send them across borders at any hour with low fees.
Regulators now distinguish between payment style e-money tokens and crypto collateralized designs. In the EU, MiCA introduces reserve, disclosure, and governance requirements for major fiat pegged coins. In the US, guidance is fragmented across the SEC and CFTC, with state money transmitter rules and bank partnerships filling gaps. For a global view, see the BIS overview on design and risk here.
How stablecoins hold the peg
- Reserves and redemption: A centralized issuer holds cash and short term Treasuries. Authorized users can redeem one coin for one dollar, which anchors price near one dollar on exchanges.
- Crypto over collateral: Smart contracts lock more collateral than coins issued and use liquidation mechanics to keep the peg.
- Algorithmic controls: Supply expands or contracts via incentives. These can work in calm conditions but have failed under stress.
Stablecoin types with examples
1) Fiat collateralized, centralized
Issued by a company that holds dollars and Treasuries in custody. Examples include USDT, USDC, PYUSD, and FDUSD. Peg quality depends on reserve safety and practical redemption.
2) Crypto collateralized, decentralized
Issued by smart contracts against crypto collateral with over collateralization and liquidations. DAI is the leading design. Peg quality depends on collateral mix, risk parameters, and oracles.
3) Commodity collateralized
Pegged to assets like gold. Useful if you want gold price exposure rather than dollar stability.
4) Algorithmic
Use market incentives and seigniorage. Historically prone to reflexive unwinds in stress. Not recommended for savings.
USDT vs USDC vs DAI vs PYUSD – comparison
| Token | Issuer / Model | Reserves | Blockchains | Typical Use | Pros | Cons |
|---|---|---|---|---|---|---|
| USDT | Tether, centralized | Cash and short term Treasuries, attested | Tron, Ethereum, many L2s | High liquidity, exchange settlements | Largest liquidity, wide listings | Transparency debates, blacklist controls |
| USDC | Circle, centralized | Cash and Treasuries, monthly attestations | Ethereum, Solana, Base, more | Payments and fintech integrations | Strong reporting, bank grade partners | Exposure to banking and payment rails |
| DAI | MakerDAO, crypto collateral | Over collateralized crypto plus RWAs | Ethereum and L2s | DeFi collateral and lending | Decentralized issuance, transparent vaults | Oracle and liquidation risk, policy complexity |
| PYUSD | PayPal, centralized | Cash and Treasuries, attestations | Ethereum | Retail payments and P2P in PayPal and Venmo | Brand familiarity, consumer grade UX | Limited chains, KYC gated |
Tip: For transfers between exchanges, liquidity often matters more than ideology. For DeFi strategies, on chain transparency and collateral mechanics help reduce counterparty risk.
How to choose a stablecoin in 2025
- Payments and fintech rails: USDC and PYUSD integrate well with consumer and merchant workflows. We observed smoother fiat on and off ramps when sending invoices or moving to neobanks that support these rails.
- Exchange liquidity and arbitrage: USDT remains dominant on many centralized venues. In practice this shortens settlement times and reduces slippage during volatile windows.
- DeFi and composability: DAI integrates broadly with lending and yield protocols. On chain telemetry makes collateral and liquidations visible in real time.
- Multi chain transfers: Favor the version that matches your destination chain to avoid bridge fees. See our guide to cross chain bridge fees.
Reviews & transparency snapshots
Below are concise, experience based notes summarizing what we look for in day to day use. We verify reserve disclosures on official pages and monitor peg behavior during high volume events. Buttons link to issuer transparency resources for quick checks.
What we observed: on large centralized exchanges USDT pairs often have the deepest books. Peg stability tracked within typical bands during high volume events when redemptions were active. Traders should be aware of issuer blacklist powers and rely on self custody for longer holds.
- Largest market liquidity
- Many chains and venues
- Fast exchange settlements
- Attestations instead of full audits
- Centralized freeze controls
What we observed: USDC integrations with payment partners simplified invoice flows and on ramp steps. Monthly reports are easy to verify. During stress events, on chain liquidity was thinner on some smaller venues, so choose your chain and platform with care.
- Clear disclosures and reporting
- Strong fintech integrations
- Good fiat on and off ramp support
- Exposure to banking and payment rails
- Liquidity varies by venue
What we observed: live collateral ratios and vault liquidations are visible on chain which improves situational awareness for DeFi users. Policy changes can shift yields and stability fees, so active users should monitor governance updates.
- Decentralized issuance
- Composability across DeFi
- On chain telemetry
- Oracle and liquidation risk
- Governance complexity
What we observed: P2P transfers in PayPal and Venmo are straightforward which makes PYUSD attractive for small business invoices and expense sharing. Chain support is narrower, so plan routes before moving to DeFi venues.
- Familiar brand and UX
- Smooth consumer flows
- Limited chain coverage
- KYC gating
How to buy, move, and store stablecoins safely
- Pick a coin by use case: USDC or PYUSD for payments, USDT for exchange liquidity, DAI for DeFi composability.
- Use a reputable on ramp: In the US start on a regulated exchange, then move to a wallet you control. Our beginner crypto guide walks through KYC and first transfers.
- Confirm the network: ERC-20, TRC-20, Solana, or Base. Send a small test first to avoid mismatches and avoid unnecessary bridge fees. See our notes on bridge costs.
- Prefer self custody for larger balances: Use a hardware wallet and record recovery phrases offline. See our roundup of best crypto wallets and our head to head Ledger vs Trezor comparison.
- Track taxes: Many jurisdictions treat swaps and redemptions as taxable events. Read our crypto tax laws guide and pick software from our tax software comparison.
Key risks to understand
- Reserve risk: Are reserves cash and T bills with daily liquidity. How frequent are attestations or audits.
- Banking and rails risk: Bank outages and chain halts can slow redemptions or transfers.
- Blacklist and censorship: Centralized issuers can freeze addresses. Read policies before using custodial addresses.
- Oracle or liquidation risk in DeFi: DAI and similar designs depend on timely oracles and robust liquidation buffers.
- Regulatory change: MiCA and jurisdictional rules can shift circulation and reporting requirements.
For a high level supervisory view, the BIS paper on stablecoin design and risk remains a useful reference here.
FAQ
Are stablecoins really stable
They aim to be. Pegs can slip in stressed markets. Liquidity, reserves, and access to redemption drive resilience.
Which stablecoin is safest
None are risk free. For fiat backed coins look for frequent reserve reports and reputable custodians. For DeFi, assess collateral ratios, oracle design, and liquidation depth.
Do stablecoins pay interest
On centralized platforms yields come from T bill returns or lending. In DeFi yields come from lending and liquidity pools. Higher yield usually means higher risk.
Further reading
