What Are Stablecoins?

• Stablecoins are digital assets designed to maintain a stable value by pegging to an external asset.
• They matter because they provide relative price stability, enable onchain payments, and serve as foundational liquidity across DeFi and global financial applications.
• Stablecoins are widely used for cross-border payments, onchain savings, institutional settlement, DeFi collateral, and everyday payments.

While cryptocurrencies are often known for their volatility, stablecoins bring relative stability to cryptocurrency markets by allowing fiat currencies like the U.S. dollar to be represented on the blockchain as digital tokens. These stablecoins allow anyone around the world to hold a token that’s purposely designed to hold its value in relation to the fiat currency it claims to represent (e.g. 1 USD stablecoin tries to maintain a value of 1 U.S. dollar). Stablecoins first emerged in the mid-2010s, with Tether (USDT) launching in 2014 as the first major USD-backed stablecoin. 

The desire for stable assets on blockchains has resulted in the widespread adoption of stablecoins within the blockchain industry and decentralized finance (DeFi). As of 2025, stablecoins collectively represent approximately $300 billion in market capitalization across hundreds of stablecoins. Industry analysis projects the sector to expand to a multi-trillion dollar market by 2030 as global usage accelerates across payments, settlement, DeFi, and institutional finance.

The explosive growth of total stablecoin supply.

In this article, we’ll walk through the fundamental questions around stablecoins—what they are, how they work, and how Chainlink oracles power a variety of stablecoin designs.

What Is a Stablecoin?

At their core, stablecoins are cryptocurrencies that try to maintain a “peg”—the same market value as the external asset they represent. For example, a dollar-based stablecoin will aim to stay pegged to $1, while a gold stablecoin aims to stay pegged to the market price of gold. There are a variety of approaches stablecoins can take to match the price of the currency they’re pegged to consistently, such as collateralization with external assets or algorithmic mechanisms that leverage dynamically adjusting supply in relation to demand.

Types of Stablecoins

Fiat-Collateralized

Fiat-collateralized stablecoins are backed 1:1 by offchain fiat reserves such as U.S. dollars, euros, or other currencies. These reserves typically consist of cash, cash equivalents, and short-term U.S. Treasuries, held by regulated financial institutions. The peg is maintained through a redemption mechanism: holders can redeem 1 token for 1 unit of fiat currency, ensuring the market value tracks the underlying currency.

Crypto-collateralized

Crypto-collateralized stablecoins are backed by onchain digital assets such as ETH, WBTC, or other tokens. Due to the type of collateral being used, these designs often rely on overcollateralization—for example, depositing $100 worth of ETH to mint $50 worth of the stablecoin. Smart contracts autonomously enforce solvency. If collateral value falls below a required threshold, liquidation mechanisms kick in to maintain the peg. This approach allows stablecoins to remain transparently backed using fully onchain reserves.

Algorithmic / Hybrid

Algorithmic and hybrid stablecoins maintain their peg through supply-adjustment mechanisms, market incentives, or partial collateralization.

• Pure algorithmic designs use smart contracts to expand or contract supply based on market price deviations from the peg or other mechanisms.
• Hybrid models combine partial collateral with algorithmic controls to attempt to stabilize value.

These systems often rely on arbitrage mechanisms, bonding curves, or rebalancing strategies rather than full collateralization. Because they may hold limited reserves, robust price data is crucial for maintaining peg integrity, and hybrid models often incorporate external collateral or proof-of-reserve mechanisms.

How Do Stablecoins Work?

There are various economic mechanisms that stablecoins utilize to maintain relative stability by holding their peg. The most common examples of these include the ability to redeem the tokens for fiat money, collateralized debt positions, arbitrage, elastic supply, and more.

Stablecoin Examples

USDC is a stablecoin issued by Circle. Each USDC is backed by one dollar or an asset with equivalent fair value, held in offchain accounts with regulated financial institutions. Customers with a U.S. dollar bank account can redeem 1 USDC for 1 USD, ensuring that the tokens maintain their 1:1 peg with the U.S. dollar. Some stablecoins enable the issuer to freeze tokens belonging to a certain address, effectively making the frozen tokens unusable. This method can be used by stablecoin issuers to freeze large amounts of stablecoins obtained through protocol hacks or exploits.

Sky, an onchain stablecoin protocol, maintains the peg for its stablecoin, USDS, by having users lock up collateral into a smart contract. The smart contract then mints the stablecoin USDS as overcollateralized debt with an adjustable interest rate. In order to maintain the 1:1 peg of 1 USD = 1 USDS, Sky’s smart contracts adjust the interest rates set by token holders through onchain governance to encourage borrowers to pay back their debt or take out more stablecoin loans. By encouraging increases or decreases in the total supply via interest rate changes, the price of USDS will change, either rising in value when the supply and interest rate are low or decreasing in value when the supply and interest rate are high.

Another design for decentralized stablecoins involves using arbitrage within a stablecoin index, where the stablecoin is backed by multiple different stablecoins in order to achieve the stability of the peg. For example, if the price of one of the reserve stablecoins exceeds 1 USD while the index price as a whole is below 1 USD, then the smart contract will market sell the stablecoin exceeding 1 USD for the index stablecoin’s token to drive the index price back up to 1 USD. Chainlink oracles can provide reliable and high-quality price feeds that the stablecoin index smart contracts can reference when calculating how to rebalance the index.

Stablecoin Use Cases & Benefits

Stablecoins play a foundational role in both the blockchain economy and institutional financial infrastructure. Their stability, programmability, and global accessibility make them useful across a wide range of applications. 

Cross-Border Payments & Remittances

Stablecoins enable 24/7, instant, low-cost international transfers, eliminating the delays and high fees associated with other payment systems. Industry research shows that stablecoins significantly reduce settlement friction for global commerce and remittances:

• Fireblocks highlights stablecoins as the fastest-growing method for cross-border value movement.
• Cross River notes that real-time stablecoin payments are reshaping international payments by enabling faster, more transparent settlement.

DeFi Liquidity & Trading

Stablecoins act as the base liquidity layer of DeFi:

• Used as base pairs on DEXs to enable efficient trading.
• Serve as collateral for lending and borrowing across major lending protocols.
• Power yield strategies such as liquidity provision, automated market making, and staking.

Corporate Settlement & Treasury Management

Enterprises increasingly use stablecoins for instant settlement, predictable accounting, and treasury diversification.

• According to Fireblocks’ survey data, 90% of financial institutions are actively exploring or using stablecoins for payments, settlement, or onchain operations.
• Stablecoins reduce reconciliation delays and provide faster finality than traditional banking rails.
• Corporations are exploring tokenized treasuries paired with stablecoin-based settlement workflows to improve operational efficiency.

Everyday Payments

Stablecoins are gaining traction in consumer payments thanks to familiar, trusted platforms and fintech apps integrating them. Stablecoins offer faster checkout, lower fees, and easier international transfers compared to traditional payment processors. As merchant adoption grows, stablecoins could become the mainstream means of digital payment across the globe.

Stablecoin Risks

Different stablecoin designs have different risks associated with them. These may include:

• Depegging risk—Failure of the underlying economic or algorithmic mechanisms through liquidity events, “bank run” scenarios, suboptimal reserves practices, and more present the risk of the stablecoin depegging from its target.
• Regulatory risk—Stablecoins may be regulated in different ways depending on the respective geographic locations.
• Centralization risk—Some stablecoin issuers have the ability to freeze tokens at specific wallet addresses.
• Key management risk—If stablecoins are held in a non-custodial wallet, the user must take full responsibility for securely storing their private keys.

Why Chainlink Is Critical for Stablecoins

Despite the differences in stablecoin architecture, design, and risk, all stablecoins require accurate price data for their underlying pegging mechanism and when used in decentralized applications. Since exchange rates are constantly fluctuating, real-time price data needs to be fed to stablecoins in order for them to maintain their peg. Furthermore, since stablecoins are usually backed by other crypto assets or offchain bank reserves, tamper-proof methods of acquiring the details of these reserves are needed to ensure the security and reliability of these systems.

Chainlink is the industry-standard oracle platform bringing the capital markets onchain and powering the majority of DeFi. Since stablecoins collectively hold substantial value in DeFi applications, they require the same assurances and security guarantees as the blockchains they operate on. Effectively, this means that the oracles providing data to stablecoins need to be robust, decentralized, and have multiple layers of security to help ensure that stablecoin pegs remain at a 1:1 ratio. This provides transparency to the users of these stablecoins, as they can confirm that the stablecoin asset they are using is secure end-to-end and does not contain a single point of failure.

Chainlink solves this by acting as the decentralized oracle infrastructure that connects blockchain smart contracts with real-world data—including asset prices, reserves, and much more—in a secure, tamper-resistant, and blockchain-agnostic way:

• Reliable price data—Chainlink Data Feeds and Data Streams deliver accurate, aggregated, tamper-resistant onchain pricing data for fiat currency, commodities, crypto, U.S. equities, and more, which stablecoin protocols rely on for peg maintenance, liquidation triggers, index-based rebalancing, or collateral valuations. 
• Transparent reserves—Chainlink Proof of Reserve enables real-time, onchain verification of offchain or cross-chain reserves backing stablecoins. This allows anyone to independently audit collateralization, reducing the risk of infinite mint attacks or overissuance.
• Secure minting—By combining oracles with smart contract logic, Chainlink Proof of Reserve enables stablecoin protocols to programmatically enforce safeguards, e.g., minting only if reserves meet thresholds through Secure Mint.
• Cross-chain and cross-system infrastructure—Chainlink services such as CCIP and the Automated Compliance Engine (ACE), and the Chainlink Runtime Environment (CRE) for orchestration, give stablecoins the tools to operate across private and public blockchains, connect with traditional finance rails, and meet institutional requirements for compliance, auditability, and scalability, which are critical for large-scale adoption.

By integrating the Chainlink platform, stablecoin issuers gain access to a unified, institutional-grade stack that enables real-time reserve verification, automated minting logic tied to collateral checks, cross-chain interoperability, scalable compliance, and more, unlocking the widespread adoption of stablecoins by both ordinary users and the largest financial institutions in the world.  

Stablecoin Ratings

Chainlink and S&P Global collaborated to bring Stablecoin Stability Assessments (SSAs) onchain. These assessments evaluate stablecoins on a scale from 1 (very strong) to 5 (weak), based on their ability to maintain a stable value relative to fiat currencies. By making S&P Global Ratings’ comprehensive stablecoin risk assessments available onchain via Chainlink, market participants can access real-time evaluations directly onchain.

As institutional adoption of digital assets accelerates, access to transparent, onchain risk data has become increasingly important. DeFi protocols, lending platforms, and institutional investors can seamlessly incorporate S&P Global Ratings’ analytical evaluations into their automated decision-making processes.

Stablecoin Regulations

In 2025, the U.S. enacted the GENIUS Act, the first comprehensive federal framework governing the issuance and oversight of dollar-backed stablecoins. The legislation aims to strengthen consumer protection, enhance transparency, and strengthen U.S. leadership in the global digital asset economy.

Key Provisions of the GENIUS Act

• 1:1 reserve backing—Issuers must fully back stablecoins with high-quality liquid assets, specifically cash or short-term U.S. Treasuries, ensuring redemption at par.
• Monthly public reserve disclosures—Issuers are required to publish monthly, independently attested reserve reports, giving users and regulators transparent visibility into collateral backing.
• Guaranteed redemption rights—Holders must be able to redeem stablecoins at a 1:1 rate, reinforcing stability and preventing liquidity crises that could trigger depegging events.
• Prohibition on presenting tokens as legal tender—Stablecoin issuers may not describe or market their tokens as legal tender, preserving the legal distinction between government-issued currency and privately issued digital dollars.
• Dual federal and state oversight—The framework introduces federal supervision through the OCC in coordination with state regulators, creating a dual oversight model similar to existing financial regulatory structures.

By setting clear rules for reserves, disclosures, and consumer protections, the GENIUS Act is designed to make stablecoins safer, more transparent, and more competitive. This regulatory clarity is expected to accelerate institutional adoption, strengthen global trust in U.S. dollar–backed digital assets, and reinforce the United States’ position in onchain finance.

For further analysis on the GENIUS Act, read Chainlink Digital Asset Insights Q1 2025.

Conclusion

Despite their simplicity, stablecoins can be considered to be one of the blockchain industry’s most significant innovations, allowing for the seamless transfer of stable value. While there are a number of different stablecoin designs, the common backbone of any stablecoin protocol is the data that it receives about the asset it is pegged to. Chainlink provides the battle-tested oracle infrastructure that helps ensure the reliability, security, and transparency of stablecoins and the stability of the larger digital asset ecosystem.

If you’re a developer and want to integrate Chainlink into your smart contract applications, check out the developer documentation or reach out to an expert.

FAQ

• Why is the U.S. regulating stablecoins?
  
  • The U.S. is regulating stablecoins to protect consumers, ensure full reserve backing, increase transparency, and strengthen the country’s competitiveness in digital assets. The GENIUS Act creates the first federal framework for stablecoin issuance and oversight.
• Are stablecoins safe?
  
  • Stablecoin safety depends on the design and reserves backing them. Fiat-backed stablecoins with transparent reserves tend to be more stable, while decentralized or algorithmic models involve additional risks.
• Can I use stablecoins for everyday payments?
  
  • Yes—stablecoins are increasingly accepted for daily spending.
• How do stablecoins maintain their peg?
  
  • Stablecoins maintain their peg through mechanisms such as fiat redemption, overcollateralization, supply adjustments, and arbitrage incentives, depending on the type of stablecoin.
• How do stablecoins make money?
  
  • Stablecoin issuers often earn revenue from interest on reserve assets (like U.S. Treasuries), transaction fees, or protocol-based mechanisms such as stability fees or minting/burning incentives.
• What is the primary purpose of stablecoins?
  
  • Stablecoins provide a price-stable digital asset that can be used for payments, trading, savings, and settlement.
• What are the most popular stablecoins?
  
  • Some of the most widely used stablecoins include USDT, USDC, USDS, PYUSD, and more, which together make up a significant portion of global stablecoin trading volume and market capitalization.