Stablecoins 101: The Key To Low-Risk Crypto Transactions For Businesses | by Gus Gonzalez | The Capital | Mar, 2025
Many businesses steer clear of cryptocurrency because of their volatility. But what if we told you there’s a way to invest in crypto without the risk? This is where stablecoins come in. They give businesses an easy way to do regular transactions without worrying about market fluctuations.
If you’re a business owner looking for a way to ease into crypto, this guide is for you. Learn everything about how stablecoins work, how they help businesses, the risks involved, and their role in the future.
Stablecoins are a type of digital currency that’s designed to maintain a stable value. They’re usually pegged to a fiat currency like the USD (USDT), cryptocurrencies (DAI), or commodities like gold (PAXG). Thanks to their stability, stablecoins offer a more practical alternative than decentralized cryptocurrencies like Bitcoin or Ethereum. Many businesses rely on them for cross-border transactions, payroll, treasury management, and more.
If you visit any cryptocurrency exchange site today, you’ll find hundreds of stablecoins. Most of them fall under one of these four categories:
Fiat-Backed Stablecoins
Fiat-backed stablecoins are by far the most popular type on the market. They’re pegged 1:1 to traditional currencies like the US dollar or Euro. This digital currency is backed by actual financial reserves in a bank, making it a more stable asset to invest in. Businesses can use them for affordable cross-border payments and as a safe store of value.
Examples of fiat-backed currencies include:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Global Dollar Network (USDG)
Fiat-Backed Stablecoins: Pros And Cons
Pros
- One of the most stable crypto asset types
- Backed by a physical asset
- Versatile and easy to use
Cons
- Highly centralized
- Strict regulations compared to other cryptocurrencies
Crypto-Backed Stablecoins
A crypto-backed stablecoin is supported by a reserve of other cryptocurrencies, such as Bitcoin or Ethereum. Unlike fiat-backed coins, they’re more decentralized and use smart contracts to hold crypto stocks. Many are also overcollateralized to offset market fluctuations, keeping ratios more stable.
Examples of crypto-backed stablecoins include:
- MakerDAO (DAI)
- sUSD
- Kava (USDX)
Crypto-Backed Stablecoins: Pros And Cons
Pros
- More decentralized
- Added transparency
Cons
- More fluctuations
- Less stable due to cryptocurrency volatility
Algorithm-Backed Stablecoins
Algorithm-backed stablecoins use an algorithm and smart contracts that determine their value, adjusting supply based on market conditions. While many of these coins’ exchange value links to hard currency units, no direct asset backs them up. This makes them more vulnerable to potential de-pegging and more fluctuations.
Examples of algorithm-backed stablecoins include:
- Ampleforth (AMPL)
- Frax (FRAX)
Algorithm-Backed Stablecoins: Pros And Cons
Pros
- More flexibility to adjust pricing
- Transparent
- More decentralization
Cons
- Prone to hacking
- Vulnerable to extreme market fluctuations and depegging
Commodity-Backed Stablecoins
A commodity-backed stablecoin is backed by physical assets like gold, oil, or real estate. Instead of pegging to a specific currency, the stablecoin’s value is determined by a set amount of the resource that backs it up. For example, one Tether Gold (XAUT) coin is one troy ounce of gold stored in a secure Swiss vault. These currencies are perfect for those who want to invest in precious metals while still using blockchain technology.
Popular examples of commodity-baked stablecoins include:
- Paxos Gold (PAXG)
- Tether Gold (XAUT)
- Tiberius Coin (TCX)
Commodity-Backed Stablecoins: Pros And Cons
Pros
- Grows in value
- Backed by a physical asset
- Does better than other assets during market downturns and recessions
Cons
- Limited adoption
- Risks of defaulting
- More regulations
Stablecoins offer clear advantages you won’t see with traditional crypto or fiat currencies. From cheaper transaction costs to stable prices, businesses can benefit from using stablecoins and enhance their financial operations in various ways:
Reducing Volatility Risks
The cryptocurrency space continues to be high-risk. It’s common to see double-digit gains followed by even bigger losses later.
Stablecoins, on the other hand, don’t have that issue. Whether pegged to fiat currency, gold, or traditional cryptocurrencies, being backed by something keeps fluctuations to a minimum. This stability makes it easier for businesses to conduct transactions without worrying about potential market instability.
Faster, Cheaper Cross-Border Transactions
Traditional banking could take up to five business days to make a simple bank transfer. To add insult to injury, some banks charge exorbitant fees that eat into your business’s monthly profits.
In contrast, stablecoins let you transfer funds to someone in a matter of minutes. Blockchain technology eliminates the need for third-party verification, allowing for 24/7 transactions and making the process much faster.
Stablecoin transactions are also much cheaper than banks or credit cards, with the average fee hovering around 0.5–3.0% for most transactions. Businesses doing multiple transactions throughout the month could save thousands just by switching to stablecoin payments.
More Liquidity in Crypto Markets
Stablecoins act as intermediaries for those who want to trade their crypto into fiat and vice versa. They offer stable trading pairs and make it easier for investors to enter and exit the market without exchanging their funds back to fiat currency.
In decentralized finance (DeFi) platforms, stablecoins are widely used for margin trading, lending, and staking, offering a reliable medium to borrow and earn passive income. Investors can deposit their stablecoins into liquidity pools on platforms like Compound, where they’ll earn interest and additional passive income.
During periods of high market volatility, stablecoins are a safe asset for investors to store their funds. Doing this helps preserve their portfolio’s value within the crypto space without the need to completely exit the market. They serve as a valuable tool for hedging risk, maintaining liquidity, and increasing efficiency.
Compliance & Regulation Benefits
Stablecoin issuers need to follow Know Your Customer (KYC) & Anti-Money Laundering (AML) rules.
These regulations promote stablecoin usage, prevent money laundering, and eliminate any chances of fraud. Stablecoins are under more legal scrutiny, making them a safer investment option. Businesses can operate in the crypto space freely while knowing they’re staying compliant with the law.
While stablecoins have their advantages, there are a few risks business owners and investors should be aware of before investing:
Changing Rules
With stablecoins becoming a more popular way to pay, governments worldwide are creating stricter regulations regarding their usage. This is especially true after the recent Terra/LUNA crash in 2022 that wiped billions off the crypto market. Many organized crime groups also use stablecoins while staying anonymous to carry out illegal activities.
These situations forced governments to step in. So far, the EU, the US, and the UK are creating laws to crack down these problems, which may present issues for crypto service providers and force investors to reassess their portfolios to stay compliant.
Centralization Concerns
Unlike decentralized cryptocurrencies, many stablecoins, such as USDT, are controlled by a central entity. While centralized stablecoins promote stability and give businesses more confidence to invest, it has its downsides.
The added regulation gives central authorities more power to control transactions, blacklist or freeze funds, or enforce compliance rules if they find anything suspicious. For business and investors who love the privacy of crypto transactions, this added oversight may be seen as a disadvantage they may not be willing to accept.
De-Pegging & Collapse Risks
Terra’s collapse shows that not every stablecoin is equally safe. If the coin doesn’t have enough funds or consumer confidence is low, it may be enough to cause it to collapse. Businesses can mitigate these risks by choosing well-regulated stablecoins and diversifying their holdings to minimize losses.
Stablecoins are becoming a bigger part of the economy, and they’re only going to grow more in importance as more people adopt them globally. According to a recent report by a16z, stablecoins were responsible for $8.5 trillion in transactions across 1.1 billion transfers worldwide. That’s more than the entire GDP of many countries.
With so many transfers happening via stablecoins, they’ll become even more widely accepted by financial institutions in the next few years. Large financial companies like Visa, Paypal, and Stripe are already investing billions in stablecoin technology, signaling strong institutional interest. PayPal even has its own fiat-backed stablecoin, PayPal USD (PYUSD), which has over 400 million active users.
As more financial companies push for adoption, stablecoins will become a core component of banking and financial services.
Stablecoins offer a safe haven in the crypto world and bridge the gap between the traditional cryptocurrencies and fiat currencies. These digital currencies make everything easier and faster, from DeFi investing to business payments.
However, that’s not to say they don’t have their risks. Changing regulations, potential depegging, and centralization may pose a problem to your business’s finances if you’re not careful. Always take time to research a stablecoin’s fundamentals before deciding to invest.
Now that you understand how stablecoins work, it’s time to use them to your advantage. Whether you’re looking to streamline transactions or find a safe asset against market volatility, they’re a powerful tool for any business’s financial operations.
