The Role of Stablecoins in Crypto: Use Cases, Benefits, and Market Impact

What Are Stablecoins

Stablecoins are digital assets designed to maintain a consistent value, typically pegged to fiat currencies like the U.S. dollar, euro, or yen. Unlike volatile cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), stablecoins aim for a 1:1 ratio with their underlying asset, offering a more stable medium of exchange and store of value.

They achieve this through various models. Fiat-collateralized stablecoins (e.g., USDT, USDC) are backed by cash reserves held in traditional financial institutions. Crypto-collateralized stablecoins (e.g., DAI) use other cryptocurrencies as collateral, often overcollateralized to manage volatility. Algorithmic stablecoins, which rely on supply and demand mechanisms instead of collateral to stay stable, have proven risky—highlighted by the collapse of TerraUSD (UST) in 2022.

Use Cases of Stablecoins

1. Trading and Hedging

One of the primary use cases for stablecoins is crypto trading. Traders use them to move in and out of volatile positions quickly. Rather than converting assets to fiat—which can be time-consuming and costly—traders often shift funds into stablecoins like USDC or USDT to lock in profits or limit potential losses.

Stablecoins also serve as a hedging tool, offering a haven during periods of market turbulence. In times of heightened volatility, traders may temporarily park their capital in stablecoins while awaiting more favorable market conditions.

2. Decentralized Finance (DeFi)

Stablecoins play a key role in decentralized finance (DeFi), acting as collateral, trading pairs, and units of account across a wide range of applications—including lending, borrowing, yield farming, and liquidity provision. Platforms such as Aave, Compound, and Curve Finance depend heavily on stablecoins to maintain liquidity and ensure price stability within their ecosystems.

In lending and borrowing protocols, users can deposit stablecoins to earn interest or use them as collateral to borrow other assets. Within automated market makers (AMMs), stablecoins add crucial liquidity to trading pairs, helping to reduce slippage and improve price discovery. Additionally, some DeFi platforms leverage stablecoins to mint and trade synthetic assets—tokenized representations of real-world financial instruments—broadening access to markets and financial products.

3. Cross-Border Payments and Remittances

Stablecoins provide a low-cost, fast, and transparent alternative to traditional cross-border payment systems such as SWIFT or Western Union. By eliminating intermediaries, they significantly reduce transfer fees and enable near-instant settlement of transactions.

For instance, a worker in the U.S. can send USDT to family members overseas within minutes, bypassing the delays and high costs associated with conventional remittance services. In regions with unstable local currencies or strict capital controls, stablecoins offer a reliable store of value and facilitate easier participation in global commerce.

4. Onboarding and Offboarding Fiat

Centralized exchanges (CEXs) frequently use stablecoins as a bridge between fiat and crypto. Rather than holding actual USD or EUR balances, these platforms maintain stablecoin reserves, streamlining compliance, minimizing reliance on traditional banking infrastructure, and improving overall user experience.

Beyond exchanges, stablecoins are also being adopted by crypto ATMs, payment processors, and wallet providers, enabling smoother deposits, withdrawals, and real-world spending. This growing integration highlights stablecoins’ expanding role in facilitating everyday financial transactions within the crypto ecosystem.

5. Payments and E-Commerce

Stablecoins are becoming more popular in e-commerce and point-of-sale (POS) systems, especially for international businesses. Platforms like BitPay and MoonPay let merchants accept stablecoins for payments while settling in fiat, helping reduce currency exchange fees and speed up transactions.

Some blockchain-based companies also use stablecoins to pay employees and freelancers around the world. This method is faster, cheaper, and more efficient than traditional payroll systems, especially for cross-border payments.

Benefits of Stablecoins

Price Stability

Stablecoins are more stable than regular cryptocurrencies, making them better for everyday use and long-term planning. Their steady value helps people trade, save, and spend with more confidence, especially during volatile market conditions.

24/7 Accessibility

Stablecoins can be sent or received anytime, without relying on banks or time zones. This makes them easy to use globally and especially helpful for people in areas with limited access to traditional financial services.

Lower Costs and Faster Settlements

Unlike traditional money transfers, which can be slow and expensive, stablecoins offer fast and low-cost transactions. This makes them a strong alternative for sending remittances or handling business payments.

Programmability

Because they’re built on blockchains, stablecoins can be programmed for automatic payments, smart contracts, and other advanced uses—paving the way for innovation in decentralized applications (dApps), financial automation, and blockchain-based supply chains.

Transparency and Auditability

Many fiat-backed stablecoins release regular audits to prove they are properly backed. Since they operate on public blockchains, their transactions can also be tracked and verified, although transparency levels vary by issuer.

Market Impact of Stablecoins

Liquidity and Market Efficiency

Stablecoins help improve liquidity in both centralized and decentralized markets. They allow users to move funds and trade quickly without converting to fiat, reducing reliance on banks and making trading more efficient across exchanges and DeFi platforms.

Monetary Policy Considerations

As stablecoins gain broader adoption, they are increasingly intersecting with traditional monetary systems. Regulators and central banks are paying close attention to their growth, raising concerns about several key issues:

• Systemic risk, particularly if stablecoins are not adequately backed or grow too large in scale.

• Shadow banking dynamics, where issuers operate outside established regulatory frameworks.

• Monetary sovereignty, especially in economies where stablecoin usage could surpass that of local currencies.

These concerns have accelerated global discussions around the development of central bank digital currencies (CBDCs) and the implementation of comprehensive stablecoin regulations.

Financial Inclusion

Stablecoins also support financial inclusion by offering a stable and accessible digital currency. In areas with poor banking access or unstable currencies, anyone with a smartphone and internet can save, send, and receive money, or join DeFi platforms—opening up access to financial tools not available through traditional systems.

Challenges and Risks

While stablecoins offer significant advantages, they also face several risks and challenges that users should be aware of.

Centralization Risks

Many fiat-backed stablecoins are controlled by centralized companies. This makes them vulnerable to regulation, operational issues, or poor management. Relying on a single entity goes against the decentralized nature of crypto and creates potential points of failure.

Regulatory Uncertainty

Stablecoin rules vary across countries and are still evolving. Changing regulations can affect how stablecoins are used, how widely they’re adopted, and how reliable they are over time.

Collateral Risks

Stablecoins backed by crypto or managed by algorithms can be unstable during market crashes. The 2022 collapse of TerraUSD (UST) showed how weak designs can cause a stablecoin to lose its value and impact the wider market.

Audit and Transparency Concerns

Some stablecoin issuers don’t regularly share clear or independent proof of their reserves. Without reliable audits, users may lose trust—especially during market uncertainty. Transparency is key to a stablecoin’s credibility.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.