How Do Stablecoins Work?

At their core, stablecoins maintain price stability by being pegged to an underlying asset. The most common peg is to the US dollar (1 USDC = 1 USD), but it could also be to gold, the euro, or a basket of assets.

Below are three main types of stablecoins:

Fiat-Backed Stablecoins

These are backed 1:1 by traditional currencies held in reserves. For example, if 1 million USDC tokens exist, there’s $1 million held in bank accounts. This makes them the most trusted and transparent type for global payments.

Crypto-Backed Stablecoins

These types of stablecoins are backed by other forms of cryptocurrencies, like Ethereum, and are held in smart contracts. They maintain stability through over-collateralization — meaning they’re backed by assets worth more than their circulating value.

Algorithmic Stablecoins

These rely on algorithms and smart contracts to manage supply and demand automatically. However, they carry a higher risk and are less commonly used for payments.

In short, stablecoins combine the trust of fiat money with the speed and efficiency of blockchain — offering the best of both worlds.

Why Stablecoins Have Grown in Popularity?

Stablecoins weren’t just a passing crypto trend; their growth has been exponential. Here’s why they’ve become so popular worldwide:

Volatility of Traditional Cryptocurrencies

Bitcoin and Ethereum may be a major transformation, but their price volatility makes them impractical for payments. Stablecoins solve that by staying pegged to real-world currencies.

Adoption by Fintechs and Payment Platforms

Global payment apps, remittance companies, and even banks are integrating stablecoin transfers to enable instant settlements and reduce costs.

Faster, Cheaper Cross-Border Transactions

Sending money internationally via banks or SWIFT can take 3–5 days with high FX fees. Stablecoins allow near-instant transfers at a fraction of the cost.

Trust and Transparency

Leading stablecoins like USDC are fully audited, showing proof of reserves. This builds trust among users, regulators, and businesses.

Seamless Integration into Digital Finance

From e-commerce to SaaS billing, stablecoins are now being used for business settlements, freelance payments, and treasury operations across the globe.

Source: McKinsey & Company

Types of Stablecoins Explained

All stablecoins share the same goals, but the way they achieve them varies. Some of the stablecoins rely on cash in the bank, some of the stablecoin relies on cryptocurrency as collateral, and some are regulated through a regulated algorithm.

1. Fiat-Backed Stablecoins

These are the most common types, directly backed by reserves of fiat currencies. For every token issued, there’s an equivalent amount held in cash or short-term securities.
Examples: USDC, USDT, BUSD
Best for: Businesses, exporters, freelancers, and global remittances

2. Crypto-Backed Stablecoins

These stablecoins are backed by cryptocurrencies like Ethereum instead of Fiat. While decentralized, they are less stable during market fluctuations. For example, a user might put $200 in a crypto asset to receive $150 in a stablecoin.

Example: DAI users lock up crypto collateral in a smart contract, which mints stablecoins as over-collateralized debt with an interest rate.

3. Algorithmic Stablecoins

These use code-based supply adjustments instead of reserves. They can be innovative but risky, as seen in past collapses of poorly designed models.

Safest Choice for Cross-Border Payments: Fiat-backed stablecoins (like USDC or USDT) — due to their transparency and global liquidity.

Factors That Affect Stablecoin Price Stability

Even though stablecoins are designed to maintain a fixed value (usually $1), several factors can cause minor fluctuations or temporary imbalances. Understanding these factors helps explain how stablecoins function — and why some are more reliable than others.

Quality of Reserve Assets

The biggest factor influencing stability is what backs the stablecoin.

• Fiat-backed stablecoins like USDC or USDT are typically backed by cash or short-term U.S. government securities.

• If these reserves are fully transparent and audited, the coin maintains its peg strongly.

• If reserves are risky or unclear, market confidence drops, leading to price instability.

Market Liquidity

Stablecoins rely on active trading across exchanges.

• When liquidity is high, price fluctuations are minimal.

• When liquidity dries up (especially in bear markets), small imbalances can temporarily move the price away from $1.

Redemption and Issuance Mechanisms

A strong redemption process — allowing users to convert stablecoins back into fiat at any time — keeps prices stable.
If redemptions are delayed or restricted, confidence weakens and prices can fall below their peg.

Algorithmic Adjustments (for Non-Fiat Stablecoins)

Some stablecoins use algorithms to expand or contract supply automatically.
If these algorithms fail to react quickly to market changes (as seen in failed models like TerraUSD), the stablecoin can lose its peg entirely.

Regulatory and Market Confidence

Regulatory clarity increases user trust. When a stablecoin operates under recognized legal frameworks and publishes regular audits, confidence grows, which in turn supports price stability.

External Market Conditions

During times of global economic uncertainty or crypto market crashes, even stablecoins can experience temporary volatility as users move funds rapidly between assets. However, fiat-backed coins usually recover quickly due to redemption guarantees.

FAQs About Stablecoins  

1. What makes stablecoins different from regular cryptocurrencies?
Stablecoins are pegged to stable assets (like USD), ensuring consistent value — unlike Bitcoin or Ethereum, whose prices fluctuate.

2. Are stablecoins safe to use for international payments?
Yes, especially when using regulated stablecoins like USDC or USDT via trusted platforms. They are widely used by global businesses and freelancers.

3. How are stablecoins regulated in India and globally?
India currently allows holding stablecoins indirectly through crypto platforms, but clear regulation is still evolving. Globally, the U.S. and EU are establishing frameworks for transparency and audits.

4. Will stablecoins replace traditional banking systems?
Not entirely. But stablecoins will complement them. Stablecoins can power faster global transfers while banks focus on compliance and local services.

Conclusion: The Infinity Perspective

At Infinity, we believe that the future of cross-border payments lies in transparency, speed, and trust — all of which stablecoins make possible.

Our mission is to simplify global money movement for freelancers, startups, and exporters, eliminating traditional barriers like high FX markups, long settlement times, and unclear fees.

By combining the power of modern fintech infrastructure with regulated global partnerships, Infinity is building a payment ecosystem that helps businesses send, receive, and manage money globally — with zero friction and full confidence.

Infinity isn’t just keeping up with the future of payments — we’re helping shape it.

Sign up with Infinity today!