Ever tried paying for lunch with Bitcoin only to realize by dessert you could’ve bought the whole restaurant? That’s the crypto problem: prices swing faster than your mood on a Monday morning.
Stablecoins were invented as the antidote. They’re the Zen masters of crypto: calm, steady, and (mostly) immune to drama. The magic is that one stablecoin usually equals one dollar, like a digital twin of the cash in your pocket.
But here’s the twist: not all stablecoins play by the same rules. The fun part is figuring out which type fits your needs and which ones to avoid—so let’s dig in!
What is a stablecoin?
Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to an asset, often a national currency such as the U.S. dollar.
In practice, one stablecoin token is typically intended to equal a fixed amount of the reference asset (for example, 1 stablecoin = 1 US dollar).
Key properties & objectives of stablecoins
Stablecoins were created to combine the stability of traditional currencies with the innovations of cryptocurrency.
- Price stability: The primary objective is to avoid volatility. Stablecoins aim to stay at a steady price (e.g. $1) day-to-day. This makes them reliable for you to hold or use without worrying about sudden losses in value. By holding stable value, they can function as a stable medium of exchange and store of value.
- Asset backing or mechanism: Every stablecoin uses some form of backing or algorithm to maintain its peg. Some hold reserves of real assets (such as dollars or gold) in a bank, while others use crypto collateral or algorithms to manage the coin’s supply. This backing provides trust that the stablecoin can be redeemed for something of equivalent value, anchoring its price.
- Liquidity and accessibility: Stablecoins are designed to be easily tradable and available 24/7 on blockchain networks. You can send or receive stablecoins globally at any time, making them useful for payments and remittances. Their stability and liquidity allow them to be readily exchanged for goods, services, or other currencies.
- Transparency and trust: To keep users’ confidence, many stablecoins emphasize transparency about their reserves or mechanisms. For example, fiat-backed coins may undergo regular audits to prove they have the assets they claim. The goal is to assure you that the stablecoin is legitimately backed and will hold its value.
- Integration in DeFi and finance: Stablecoins serve as a foundational building block in crypto. Their stable value lets you use them in lending, borrowing, or buying things without the complexity of fluctuating prices. In other words, stablecoins bring the certainty of fiat money into crypto applications, enabling things such as decentralized loans.
Main types of stablecoins
Stablecoins come in a few major types based on how they are backed or how their value is stabilized.
Fiat-collateralized stablecoins
Fiat-collateralized stablecoins are backed by traditional fiat currency reserves held off-chain (e.g. in bank accounts). For every stablecoin issued, an equivalent amount of fiat currency (such as USD, EUR, etc.) is kept in reserve as collateral. This simple structure means that each coin is redeemable for a fixed amount of the fiat money, typically at a 1:1 ratio. For example, a stablecoin pegged to the US dollar will hold $1 (or assets worth $1) in reserve for each 1 token in circulation.
Because of this full backing, the value stays steady: if the price deviates, arbitrageurs can buy or sell the coin and exchange it for the fiat reserve, pushing the price back to the peg. Trust in the issuer is important here—users rely on the issuer to honestly hold the reserves and allow redemption. Reputable issuers use audits and regulations to bolster trust, so that you can feel confident the coins are truly backed.
Examples: Tether (USDT) and USD Coin (USDC) are two of the most popular fiat-backed stablecoins, both pegged to the US dollar.
Crypto-collateralized stablecoins
Crypto-collateralized stablecoins are backed by other cryptocurrencies rather than fiat. In this model, users lock up crypto assets (such as Bitcoin, Ether, etc.) in a smart contract as collateral to issue a certain amount of stablecoins.
Because crypto prices can be volatile, these stablecoins are typically over-collateralized—meaning the collateral value exceeds the stablecoins issued, providing a buffer against price swings. For instance, a system might require $150 worth of Ether to mint $100 of a crypto-backed stablecoin, ensuring even if Ether’s price drops, the stablecoin remains fully backed. If the collateral value falls too much (due to a crypto market dip), the protocol can trigger liquidation of the collateral to maintain solvency.
Users of crypto-backed stablecoins have more autonomy: you can open a collateralized position yourself to mint new stablecoins, without a central issuer. However, the trade-off is complexity and the need to monitor collateral ratios.
Examples: Sky’s USDS is a well-known crypto-collateralized stablecoin pegged to $1. Users deposit assets such as ETH (and other approved crypto) into Sky’s vaults to generate USDS.
Algorithmic stablecoins
Algorithmic stablecoins forego holding equivalent value in reserve assets; instead, they use financial algorithms and game theory to keep the price stable.
Pure algorithmic stablecoins have no traditional collateral, their value is supported by automated expansion or contraction of the coin supply, and sometimes by interlinked tokens that absorb volatility. Essentially, an algorithmic stablecoin system acts like a central bank, minting or burning tokens based on market conditions.
Examples: A prominent example was TerraUSD (UST), which was an algorithmic stablecoin pegged to $1 through a mechanism with its sister token LUNA. Users could always swap 1 UST for $1 worth of LUNA, and vice versa, which was intended to correct any price deviations. For a while UST maintained its peg, but in May 2022 it collapsed dramatically. This event showed the inherent risk in algorithmic stablecoins: if market confidence falters, the feedback mechanism can break down.
Buying stablecoins with Phantom
If a stablecoin is available on Solana, Ethereum, Base, Polygon, or Sui, you can purchase it directly on Phantom.
Here’s how to get started:
- Fund your Phantom wallet: Make sure you have tokens in your wallet that you can use for the swap. If you haven't funded your Phantom wallet just yet, here’s an onboarding guide.
- Open Phantom: Launch your Phantom wallet and tap the “Swap” tile.
- Select tokens: Choose which token you’d like to swap and the stablecoin you want to receive.
- Enter the amount: Type in how much you want to swap, then confirm and sign the transactions.
- Receive your stablecoin: Once the swap is successful, the stablecoin funds will appear in your Phantom wallet alongside your other tokens.
FAQs
Disclaimer: This guide is strictly for educational purposes only and doesn’t constitute financial or legal advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
