Crypto is exciting, no doubt. But let’s be real, sometimes it feels like riding a rollercoaster blindfolded. One moment you’re up, the next you’re screaming into the abyss.
Enter stablecoins: your seatbelt on this wild ride. By pegging their value to something stable, like the U.S. dollar, they give you peace of mind. You can still enjoy the thrill of fast, global, 24/7 money—but without the nausea of 40% swings in a single afternoon.
We've piqued your interest? Read on and dive deeper into the world of stablecoins!
How is a stablecoin defined?
A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to a reference asset (for example, 1 token = $1).
Stablecoins bridge the gap between traditional money and crypto, giving you the advantages of digital currency (fast, global transactions) without the wild price swings.
What are the different types of stablecoins?
Stablecoins can be grouped by how they maintain their price stability.
The main types of stablecoins include fiat-backed, crypto-backed, and algorithmic stablecoins:
- Fiat-backed stablecoins: These are backed by fiat currency. Each stablecoin token corresponds to one unit of fiat in reserve. For example, USDT and USDC hold large reserves of dollars (and short-term treasuries or cash equivalents) to secure their value. PayPal USD (PYUSD), launched by PayPal in 2023, is another USD-backed stablecoin issued by a regulated trust company (Paxos) with 100% cash and treasury reserves. Similarly, First Digital USD (FDUSD) is a Hong Kong-based USD-pegged coin fully backed by fiat reserves. Fiat-backed stablecoins are straightforward—you trust that for every token in circulation, there is $1 (or the equivalent asset) kept in a bank or custodian. They rely on the issuer’s honesty and transparency (often with audits or attestations) to maintain confidence. The upside: they are usually very stable as long as the reserves are truly there. The downside: you are trusting a central entity (introducing counterparty risk, which we discuss later).
- Crypto-backed stablecoins: These stablecoins use cryptocurrency as collateral instead of cash. They are often overcollateralized to absorb crypto’s volatility. This means the stablecoin system holds more value in crypto assets than the stablecoins it issues (e.g. $2 worth of crypto for every $1 of stablecoin) to ensure the peg even if crypto prices drop. A prime example is MakerDAO’s DAI, which has recently been rebranded as USDS under the Maker protocol’s new Sky initiative. USDS is pegged to $1 but backed by deposits of Ether and other crypto; if you want to generate USDS, you lock up crypto worth significantly more than the amount of USDS you receive. Crypto-backed stablecoins are usually decentralized, governed by algorithms and smart contracts rather than a company. The benefit: you don’t rely on a bank, so even if you don’t have access to traditional finance, you can still mint stable value using crypto. The drawback: they can be capital-inefficient (requiring lots of collateral) and can face stress if crypto markets crash (users might need to add collateral or get liquidated).
- Algorithmic stablecoins: These stablecoins aren’t fully backed by reserves; instead, they use algorithms to manage the token’s supply and maintain the peg. An algorithmic stablecoin may be partially collateralized or totally uncollateralized, adjusting its circulation via a linked token or formula. The idea is that if the price deviates, the algorithm will mint or burn tokens (or use other incentives) to push it back to $1. In practice, purely algorithmic designs have proven very risky, as the failure of TerraUSD (UST) has shown. Some newer stablecoins are hybrids, using algorithmic techniques plus collateral. For instance, Ethena’s USDe is a “synthetic dollar” that is fully backed by a mix of crypto assets but also uses an algorithmic delta-hedging strategy (shorting futures against the collateral) to maintain stability. Overall, algorithm-driven stablecoins are an innovative idea, but you should be cautious using them, as their stability is only as good as the design and market confidence behind it.
Programmability: The key differentiator of stablecoins
Unlike regular dollars in a bank, stablecoins are digital tokens on blockchain networks, which means you can program them. This programmability is what really sets stablecoins apart and makes them powerful.
In essence, programmability enables stablecoins to combine the stable value of traditional money with the automation and flexibility of cryptocurrencies. You can transfer stablecoins globally in minutes, 24/7, without needing a bank’s permission—and you can also embed them into smart contracts (self-executing code) that handle money for you.
What does this mean? It means payments and financial services can be automated in ways not possible before. For example, you could leverage a smart contract to pay your supplier automatically in USDC as soon as you receive a shipment. Businesses are excited about this too: stablecoins are increasingly helping to streamline operations by automating payment flows.
Simply put, stablecoins serve as the infrastructure for smart payments. They provide a token that holds stable value, which is crucial for practical use, and that token can be handled by code. Consequently, experts describe moving to stablecoin-based finance as going from manual, reactive processes to intelligent, automated ones.
This is a huge differentiator from normal electronic money, which still flows through slow, closed banking networks.
Risks, limitations, and regulatory considerations of stablecoins
While stablecoins are useful, you should be aware of their risks and limitations, as well as the evolving regulatory landscape.
Here are some key considerations:
Peg Stability Risk
A stablecoin’s peg (its target price, like $1) is generally trusted, but it is not absolutely guaranteed. Peg stability risk means the token could deviate from its intended value. If users lose confidence or if the backing assets become inaccessible, a stablecoin can “break the buck.” For example, in March 2023 USD Coin (USDC) suddenly fell to about $0.87 when its issuer Circle revealed that $3.3 billion of its reserves were stuck in a failing bank. Although USDC later restored its peg (after U.S. regulators ensured the bank’s deposits were safe), this event showed that even fiat-backed coins can wobble if something threatens their reserves. Remember that the 1:1 value is a target, not a law of nature. It holds because people believe in the backing or the system.
Algorithmic Risk
We touched on this above, but it’s worth underscoring: stablecoins that rely on algorithms or secondary tokens to hold their value carry significant risk. Algorithmic risk refers to the possibility that the formula controlling the coin fails under pressure. Terra’s UST collapse is a cautionary tale: its mechanism worked in normal times but became unstable in a crisis, leading to a total loss of peg and confidence. Without concrete reserves, an algorithmic stablecoin can enter a vicious cycle (falling price > people sell > price falls more). Many users of UST and similar projects learned that “stable” was only true until it suddenly wasn’t. A painful lesson as billions of dollars of value vanished. After these events, algorithmic stablecoins are viewed skeptically; in fact, regulators in some jurisdictions outright prohibit purely algorithmic stablecoins because they consider them too dangerous to consumers.
Counterparty Risk
Counterparty risk in stablecoins means you are relying on some entity or infrastructure to honor the peg. For fiat-backed coins, you trust the issuer (and its banking partners) to safeguard the reserve assets. If that issuer commits fraud, mismanages funds, or faces insolvency, your stablecoins could become worthless or irredeemable. This is why it’s important that issuers have audits and oversight. For instance, USDT (Tether) has faced skepticism in the past about whether it truly held sufficient reserves; it now publishes attestations, but historically it had opacity that worried some users. USDC is issued by Circle, which is U.S.-regulated and provides monthly reserve reports. This is a level of transparency that reassures users, yet as we saw, even Circle had exposure to a failed bank (introducing risk from their banking counterparties). There’s also a risk that an issuer could freeze or blacklist your stablecoin funds (most centralized stablecoins have clauses allowing them to freeze tokens in certain cases like law enforcement requests). Meanwhile, with decentralized stablecoins such as Maker’s USDS, you avoid trusting a single company, but you then rely on the smart contract code and the governance of that protocol. A bug in the code or a governance attack could theoretically jeopardize the system. You should be mindful of who is backing the stablecoin you use and under what rules.
Stablecoin regulation: US vs. RoW
The rapid growth of stablecoins has caught regulators’ attention globally.
Different regions have taken different approaches in balancing innovation with risk management:
- United States: For years the U.S. had no specific stablecoin law, instead using existing financial rules and enforcement actions. However, the U.S. is now moving toward clearer rules: in 2024 and 2025, lawmakers introduced bills to establish a framework for stablecoins. Notably, in mid-2025 Congress passed the so-called GENIUS Act (getting stablecoin legislation on the books). This law allows both banks and licensed non-bank companies to issue stablecoins in the U.S., provided they maintain high-quality reserves and comply with oversight. It also prohibits stablecoin issuers from directly paying interest to users (to prevent them from acting like unregulated banks). After the GENIUS Act, stablecoin issuers in the U.S. will need to register and meet prudential standards, but there’s an opening for fintech and trust companies (not just traditional banks) to be issuers. In summary, the US is tightening regulation to ensure stablecoins are safe (e.g. regular audits, liquidity requirements) yet trying not to stifle the market—basically treating them as a new class of digital money that needs guarding.
- European Union: The EU took a more sweeping approach early on. It passed the MiCA (Markets in Crypto-Assets) regulation, which as of 2023/24 creates a comprehensive legal regime for crypto assets, including stablecoins. Under MiCA, any significant stablecoin (termed “asset-referenced token” or “e-money token” depending on its design) must be fully backed by reserves, 1:1, with assets held in custody by a qualified third party. Issuers have to publish whitepapers and meet capital and liquidity requirements. Notably, the EU essentially banned algorithmic stablecoins that aren’t backed by actual assets. There are also rules that if a stablecoin (not denominated in euros) becomes too popular, it might face limits (the EU was wary of something like a global Facebook stablecoin taking over euro transactions, for instance). In short, the EU treats stablecoins somewhat like e-money: issuers need a license and must safeguard reserves like a bank would. These rules aim to protect users and the financial system from stablecoin collapses.
- Rest of World: Other jurisdictions are also establishing stablecoin regulations. Japan was one of the first: a 2023 law in Japan defined stablecoins as digital money and allowed only licensed banks, trust companies, and regulated money transfer agents to issue stablecoins. This means in Japan, stablecoins are tightly controlled (which ironically led to slow adoption domestically, but ensures safety). Hong Kong in 2025 launched a new licensing regime for stablecoin issuers, requiring any stablecoin offered to retail to be fully backed by high-quality, liquid assets and giving holders legal redemption rights. Hong Kong’s rules are among the strictest, shaped by the lessons of past failures. They even demand over-collateralization buffers and segregated reserves to protect users. Singapore, similarly, has proposed guidelines for stablecoins to be fully collateralized and issuers to meet security and liquidity standards. The UK has amended its laws to treat certain stablecoins as “digital settlement assets,” bringing them under payments regulation and Bank of England oversight. For you as a user, this patchwork means you should check the local status of stablecoins: regulations might affect which stablecoins you can legally use or how you can cash them in. But broadly, the world is moving to make stablecoins safer and more transparent through regulation.
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.
