What Are Stablecoins and How Do They Work? A Beginner's Guide

What Is a Stablecoin?

A stablecoin is a digital asset designed to maintain a stable value — typically pegged 1:1 to a fiat currency like the US dollar. Think of it as a digital dollar that lives on a blockchain instead of in a bank account.

Unlike Bitcoin or Ethereum, whose prices can swing 10% in a day, stablecoins are engineered to hold their peg. One USDC is meant to always be worth one US dollar. One USDT is meant to always be worth one US dollar. This stability is what makes them useful for payments, treasury management, and cross-border money movement.

Stablecoins combine the programmability and speed of blockchain infrastructure with the familiarity and stability of traditional currency. They settle in seconds rather than days. They move across borders without correspondent banking chains. And they operate 24/7, not just during banking hours.

“We're in this really interesting point in the stable coin ecosystem where it's clear that stable coins are a thing. They're not going away. There's consensus that there's value.”

— Cuy Sheffield, Head of Crypto at Visa (Ep 13: The Stablecoin Wars)

How Stablecoins Maintain Their Peg

The most common stablecoins are fiat-backed — meaning the issuer holds real-world reserves (cash, US Treasuries, and other liquid assets) equal to or exceeding the total supply of stablecoins in circulation. For every digital dollar issued, there should be a real dollar (or equivalent) sitting in reserve.

This is verified through regular attestations — independent accounting reports that confirm the reserves match the circulating supply. Circle, the issuer of USDC, publishes monthly attestations from a major accounting firm. Tether, the issuer of USDT, publishes quarterly attestation reports.

The mechanism is straightforward: if you hold 1,000 USDC, you can redeem it with Circle for $1,000 in US dollars. This redeemability is what anchors the price. Market makers arbitrage any deviations — if USDC trades at $0.99, they buy it and redeem for $1.00, pocketing the difference and pushing the price back to peg.

Other stablecoin designs exist — algorithmic stablecoins, crypto-collateralised stablecoins — but fiat-backed stablecoins dominate the market. They are the ones attracting institutional attention and regulatory frameworks.

The Major Stablecoins

The stablecoin market has grown from roughly $165 billion to over $200 billion in total supply, and it continues to accelerate. Four names dominate the conversation:

• USDT (Tether) — The largest stablecoin by market cap, widely used across emerging markets and centralised exchanges. Issued by Tether, headquartered in the British Virgin Islands.
• USDC (Circle) — The second-largest, and generally considered the most transparent and compliance-focused. Issued by Circle, a US-based company. Widely used in DeFi protocols and institutional applications.
• PYUSD (PayPal) — PayPal's stablecoin, launched in 2023. Significant because it represents the first major fintech company issuing its own stablecoin, bringing the concept to hundreds of millions of existing PayPal users.
• USDG (Paxos / Global Dollar Network) — A newer entrant backed by Paxos and a consortium of companies including Robinhood, Kraken, and Anchorage Digital. Designed to share economics with distribution partners.

Each stablecoin has different trade-offs around transparency, regulatory positioning, network availability, and the business model of its issuer. The competitive dynamics between them are shaping the future of digital payments.

Three Models for Stablecoin Transactions

Not all stablecoin payments look the same. Understanding the different interaction models is essential for anyone building or evaluating stablecoin-based products.

“There are really three distinct models that we're seeing in the market based upon how senders and recipients are interacting with stable coins in a transaction.”

— Cuy Sheffield, Head of Crypto at Visa (Ep 5: State of Play in 2024)

Model 1: Crypto-to-Crypto

Both the sender and recipient hold and transact in stablecoins. This is the simplest model — a user sends USDC from one wallet to another. No bank accounts are involved. This is how most DeFi activity and crypto-native payments work today.

Model 2: Fiat-to-Crypto (or Crypto-to-Fiat)

One side of the transaction uses traditional currency, and the other uses stablecoins. A business might accept USDC but convert it to dollars in their bank account immediately. Or a consumer might pay in dollars from their bank, with the payment settling in USDC on the other end. On-ramps and off-ramps handle the conversion.

Model 3: Fiat-to-Fiat (with Crypto in the Middle)

This is the model generating the most excitement in traditional finance. Both the sender and recipient deal entirely in fiat currency — dollars, euros, pesos. But behind the scenes, stablecoins handle the actual movement of value. The end users may never know that crypto is involved.

“USDC here serves as a transit layer.”

— Austin Campbell, MD, Zero Knowledge Consulting (Ep 13: The Stablecoin Wars)

This “transit layer” concept is powerful. It means businesses can benefit from the speed, cost, and global reach of blockchain settlement without requiring their customers to understand or interact with crypto at all. The stablecoin becomes invisible infrastructure — like TCP/IP is invisible when you browse the web.

Why Businesses Care

Traditional cross-border payments are slow, expensive, and opaque. A wire transfer from the US to Southeast Asia can take 3–5 business days, cost $25–$50 in fees, and involve multiple correspondent banks, each taking a cut and adding latency.

Stablecoins compress that to minutes and pennies. The value proposition breaks down into three pillars:

• Faster settlement — Transactions clear in seconds to minutes, not days. No waiting on batch processing or banking hours.
• Lower costs — Blockchain transaction fees are a fraction of traditional wire fees. Removing intermediaries from the chain removes their margins.
• Global reach — Anyone with an internet connection and a wallet can receive stablecoins. No need for a bank account in the destination country. No need for a correspondent banking relationship.

“Bridge is a global money movement platform built with stable coins that makes moving funds, particularly funds across borders a lot easier.”

— Zach Abrams, CEO, Bridge (Ep 5: State of Play in 2024)

Companies like Bridge (acquired by Stripe for over $1 billion) are building the infrastructure that lets businesses plug stablecoins into their existing payment flows without re-architecting their operations.

Why This Matters for Traditional Finance

Stablecoins are no longer a crypto sideshow. They are becoming core financial infrastructure. The total stablecoin supply has surpassed $200 billion. Monthly transaction volumes regularly exceed $1 trillion. And the regulatory landscape is formalising rapidly, with stablecoin legislation advancing in the US, EU, and across Asia.

“It all goes back to the banks they are, whether you like it or not. That is the infrastructure today of how money moves. When they adopt stable coins, when they adopt tokens, deposits, when they adopt digital assets and blockchain, that is where mainstream will see its main adoption curve.”

— Ran Goldi, SVP Payments, Fireblocks (Ep 27: The $2 Trillion Stablecoin Opportunity)

Banks are the backbone of global money movement. When they start issuing their own stablecoins or integrating existing ones into their payment rails, the scale shifts dramatically. This is already happening — major banks are piloting tokenised deposits and stablecoin-based settlement.

Even the Federal Reserve has acknowledged the trajectory. As quoted on the show, Fed Chair Jerome Powell has stated that stablecoins are “a product, a digital product that could actually have fairly wide appeal and should contain consumer protections of the typical sorts and transparency.” Coming from the chair of the Federal Reserve, that signals a clear shift in how policymakers view this technology.

For finance professionals in traditional institutions, the question is no longer whether stablecoins will matter. It is how quickly your organisation will build the capability to use them — and whether you will be ahead of or behind the curve when that infrastructure becomes standard.

The Bottom Line

Stablecoins are digital dollars that live on blockchains. They combine the stability of fiat currency with the speed, programmability, and global accessibility of crypto infrastructure. Backed by real reserves and verified through attestations, the leading stablecoins have established themselves as reliable rails for moving value.

The market is growing. The regulation is coming. The banks are entering. And the use cases — from cross-border payments to treasury management to the invisible “transit layer” powering fiat-to-fiat transactions — are expanding rapidly.

Whether you are a payments executive evaluating new rails, a treasury manager looking at settlement efficiency, or a fintech builder designing the next generation of financial products, stablecoins are infrastructure you need to understand.