Bitcoin was envisioned as a borderless, decentralized alternative to fiat—a tamper-proof digital currency free from intermediaries and resistant to manipulation. Satoshi Nakamoto envisioned BTC as the medium of exchange for the modern, interconnected world.
However, while Bitcoin excelled as a technological breakthrough, its infrastructure could not keep up with the demands of modern commerce, where speed, scalability, and price stability are essential. Additionally, Bitcoin’s volatility positioned it more as a store of value, often likened to “digital gold,” rather than a practical currency for everyday use.
Similarly, altcoins like Ethereum expanded blockchain utility but remained too volatile for everyday use. A currency with stable, universally agreed-upon value was essential for payments, remittances, or commerce to thrive on the blockchain.
This gap gave rise to stablecoins.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency designed to maintain a consistent value. They typically do this by being pegged to a stable asset such as a fiat currency (e.g., the US Dollar), commodities like gold, or by utilizing algorithmic mechanisms to control supply and demand.
Stablecoins are explicitly designed to minimize price fluctuations while adhering to blockchain’s core ethos.
Traditional cryptocurrencies’ high price fluctuations made them impractical for everyday commerce. Stablecoins address this gap by providing a digital currency that holds steady value, making them ideal for:
- Payments and Remittances: Ensuring the amount sent retains its value upon receipt.
- DeFi and Blockchain Applications: Enabling borrowing, lending, and trading without the unpredictability of price swings.
- Global Accessibility: Offering an alternative to people in countries with unstable or inflation-prone fiat currencies.
While all stablecoins maintain their value pegged to a specific asset, the way they do it is different for different stablecoins.
Types Of Stablecoins
Broadly, there are four types of stablecoins based on the primary asset that is backing them:
- Fiat-collateralized stablecoins
- Crypto-collateralized stablecoins
- Commodity-collateralized stablecoins
- Algorithmic stablecoins
Note that many popular stablecoins, like USDT, are backed by more than one asset. The primary asset that is backing the stablecoin will dictate how the stablecoin is classified. In some cases, such stablecoins may also be referred to as “hybrid-collateralized stablecoins.”
Fiat-Collateralized Stablecoins
Fiat-collateralized stablecoins are backed by reserves of fiat currency, typically held in bank accounts or equivalent liquid assets. These reserves ensure that each stablecoin is redeemable at a 1:1 ratio for the underlying fiat currency, creating trust in its stability.
USDT (Tether) is the most well-known example, backed primarily by the US Dollar and managed by Tether Limited. Despite its popularity, Tether has faced scrutiny over transparency regarding its reserves. In contrast, Circle’s USDC (USD Coin) has emerged as a more transparent alternative, gaining traction for its regulatory compliance and regular audits.
PayPal recently entered the stablecoin market with PYUSD, aiming to leverage its massive user base for seamless payments and remittances within its ecosystem. This marks a significant step as traditional payment giants begin to integrate blockchain solutions into their operations.
Ripple, known for its focus on cross-border payments, recently introduced RLUSD, a new stablecoin pegged to the US Dollar. Ripple aims to position RLUSD as a key player in the remittance and enterprise payment markets.
Crypto-Collateralized Stablecoins
Unlike fiat-backed stablecoins, crypto-collateralized stablecoins use cryptocurrencies as reserves. These reserves are often over-collateralized to counteract cryptocurrencies' inherent volatility.
DAI, managed by Sky (formerly MakerDAO), is a prominent example. It’s backed by a basket of cryptocurrencies like Ethereum, allowing it to maintain stability through over-collateralization and decentralized governance.
Ethena, a newcomer in this space, recently launched USDe, a crypto-collateralized stablecoin designed for enhanced stability by integrating algorithmic mechanisms alongside collateral. Ethena merges the flexibility of crypto-backing with innovative stabilizing technologies like delta hedging.
Commodity-Collateralized Stablecoins
Commodity-backed stablecoins derive value from physical assets like gold, silver, or even real estate. These coins are attractive to users seeking stability tied to tangible assets rather than fiat or volatile cryptocurrencies.
PAX Gold (PAXG), issued by Paxos, is one such stablecoin. Each PAXG token represents one fine troy ounce of gold stored in professional vaults. This makes PAXG a stablecoin and a digitized representation of gold ownership, bridging traditional asset classes with blockchain.
Algorithmic Stablecoins
Algorithmic stablecoins rely on smart contracts and pre-set algorithms to maintain their peg, often without collateral. These systems dynamically adjust the supply of the stablecoin based on market demand to stabilize its value.
Historically, algorithmic stablecoins haven’t stood the test of time. While the collapse of TerraUSD (UST) highlighted risks in this category, it hasn’t deterred innovation. Newer entrants like USDe are integrating algorithmic mechanisms alongside collateralization to address past vulnerabilities and create more resilient stablecoins.
Stablecoins For Remittances
The world is in dire need of seamless and cost-effective cross-border payments.
Remittances, the funds transferred by migrants to their families in their home countries, represent a lifeline for millions worldwide. According to the World Bank, global remittance flows surpassed $900 billion in 2024, with developing countries like India and Mexico receiving the lion’s share.
Unfortunately, traditional remittance channels are fraught with challenges, including high fees, long processing times, and limited accessibility in rural areas.
Stablecoins can combine the borderless nature of cryptocurrencies with the stability of fiat currency to address many pain points associated with conventional remittance systems.
Huma Finance is at the forefront of using stablecoins for remittances and financial empowerment. Huma’s PayFi network can enable access to capital and credit for underserved populations by providing on-demand, USDC-based working capital loans to financial institutions facilitating remittances.
In 2023, Huma Finance partnered with Circle to use USDC's stability and reliability. By collaborating with Jia, Huma helps local entrepreneurs access credit based on their projected revenue.
Arf, a financial technology company, uses Huma’s infrastructure to offer faster and more transparent cross-border payments by tokenizing payment orders and using them as collateral for loans. Arf uses USDC to provide instant liquidity and reduce transaction delays.
The Future of Stablecoins in Payments and Beyond
Stablecoins have reshaped financial infrastructure, making digital payments faster, more reliable, and more accessible. Their role in cross-border transactions, corporate finance, and DeFi continues to expand, reducing inefficiencies that have long plagued traditional systems.
As adoption grows, the next evolution of stablecoins will be shaped by greater transparency, regulatory clarity, and new models that improve stability and usability. The shift toward instant, programmable money is already underway, and stablecoins are at its core—powering seamless transactions, unlocking new financial opportunities, and redefining the movement of value on a global scale.