Stablecoins — The Bridges Between Volatility and Value

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 issuer
• They mint 100 USDC/USDT for you
• That $100 sits in a bank vault somewhere
• You can redeem it anytime

Examples: USDT (Tether), USDC (Circle)

Pros:

• Simple to understand
• Highly reliable (backed by real dollars)
• Most widely adopted

Cons:

• Requires trust in the issuer
• Centralized (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 contract
• The 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 position
• This 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 understand
• Collateral 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 dynamically
• If the price goes above $1, more tokens are minted
• If the price goes below $1, tokens are burned
• The 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 Philippines
• Traditional wire transfer: 5–7 days, 3–5% fees = $10–15 lost
• Stablecoin transfer: 10 minutes, <1% fees = <$2 lost
• Result: 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 second
• DeFi protocols (Aave, Compound) use stablecoins as the “stable” side of trades
• Without 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 lifesaver
• A Venezuelan family can store their wealth in USDT instead of watching their Bolivar lose 50% value in weeks
• Stablecoins 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 BTC
• Stablecoins 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 Bitcoin
• Adoption: 80% of retail crypto users interact with stablecoins daily
• Real-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 stablecoins
• L2 scaling solutions depend entirely on stablecoins for liquidity

Tomorrow: Stablecoins might replace traditional banking for billions of people

Resources to Go Deeper:

1. Tether Transparency Report — How the largest stablecoin manages its reserves
2. DAI Whitepaper — Understanding how crypto-backed stability works
3. Stablecoin Index — Tracking market caps and pegs of different tokens
4. The Graph — Stablecoin Activity — Real-time on-chain data on stablecoin usage
5. YouTube: 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

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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.