Stablecoins Explained Simply: What They Are, How They’re Created, and How They Stay Pegged
Cryptocurrency is known for its wild price swings. One day Bitcoin is up 10%, the next it’s down 15%. For beginners, this can be confusing—even risky. But not all cryptocurrencies are so unpredictable.
That’s where stablecoins come in.
Stablecoins are designed to do exactly what their name says: stay stable. But how do they work, how are they created, and how do the companies behind them actually make money?
Let’s break it all down in plain, non-technical language.
What Are Stablecoins?
Stablecoins are cryptocurrencies that are built to maintain a fixed value—usually equal to $1.
So while Bitcoin and Ethereum change price all the time, a stablecoin like USDT or USDC always tries to stay at $1.
It’s like having a digital version of the U.S. dollar that lives on the blockchain.
Why Are Stablecoins Useful?
- They protect you from crypto volatility
- They let you store digital cash without using a bank
- They make it easy to trade between cryptos
- They allow fast, cheap cross-border payments
- You can earn passive income by lending them in DeFi
Stablecoins are the bridge between the crypto world and traditional money.
How Are Stablecoins Created (Minted)?
Let’s keep it simple.
Example:
You give $1 to a stablecoin company like Tether or Circle.
They create (or “mint”) 1 USDT or 1 USDC and give it to you.
This new digital coin is now backed by your $1, which they keep safely in reserves (like in banks or short-term investments).
When you want your money back:
- You return the stablecoin
- They “burn” (destroy) the token
- They give you back your $1
This keeps the supply and demand balanced.
How Do Stablecoins Stay Pegged to $1?
Let’s say people start selling their USDC quickly. The price could fall below $1—say to $0.98.
But here’s what happens next:
- Arbitrage traders step in.
- They buy cheap USDC at $0.98.
- Then redeem it with Circle for $1.
- They make a profit—and the price returns to $1.
This system of buying low and redeeming at full value pulls the price back up.
If the price goes above $1? The company mints more stablecoins and sells them, increasing supply and pushing the price back down.
It’s like a see-saw: always trying to balance.
Types of Stablecoins (in Simple Words)
1. Fiat-Backed Stablecoins
These are backed by real dollars (or similar assets). For every token, there’s supposed to be $1 in a bank or investment.
Examples:
- USDT (Tether)
- USDC (Circle)
- BUSD (by Binance)
These are the most common and widely trusted.
2. Crypto-Backed Stablecoins
These are backed by other cryptocurrencies (like Ethereum), not real dollars.
Because crypto is volatile, these stablecoins are over-collateralized—meaning they lock up more value than needed.
Example:
- DAI (by MakerDAO) – Backed by ETH and other crypto
If you want to mint 100 DAI, you might need to lock up $150 worth of ETH.
3. Algorithmic Stablecoins
These use math and code—not real money or crypto—to control supply and keep the peg.
Example:
- UST (now failed)
They work when things are stable, but can collapse under pressure. That’s why they’re seen as risky.
How Do Stablecoin Companies Make Money?
You might wonder:
If they give you $1 in stablecoins for every $1 you deposit… where’s the profit?
Let’s break it down in simple terms.
1. Investing Your Deposits
Stablecoin companies don’t just leave your money sitting in the bank. They often put it into low-risk investments like:
- U.S. Treasury bonds
- Short-term government securities
- Interest-earning accounts
These are safe and generate small but steady returns.
For example, if they earn 4% yearly on $10 billion in reserves, that’s $400 million in passive income.
2. Transaction Fees
Some stablecoins charge fees when you move tokens on their platforms, or when large institutions mint or redeem coins.
These fees go back to the company.
3. Partnerships and Integrations
Being the “go-to” stablecoin means they can partner with DeFi apps, wallets, and exchanges—which increases their usage and sometimes brings in platform fees or co-branding deals.
4. Treasury Management
Companies like Circle (USDC) are professional financial firms. They actively manage the reserves to maximize safe profits without putting the peg at risk.
Is It Safe to Use Stablecoins?
Generally, yes—but with caution.
Pros:
- Transparent (many companies show audits or reports)
- Fast and easy to use
- Widely accepted in crypto platforms
Cons:
- Not all are equally trustworthy
- Some may not hold enough reserves
- Regulators are watching closely
To stay safe, stick with well-known stablecoins like USDT, USDC, or DAI.
Real-Life Example: How a Beginner Uses Stablecoins
Let’s say Mike wants to invest in crypto but doesn’t like risk. he puts $1000 into a local exchange and buys USDT.
Now she:
- Doesn’t worry about price swings
- Can easily buy BTC or ETH when he’s ready
- Uses her USDT in a DeFi app to earn 6% interest
All without touching a traditional bank!
Final Thoughts: Why Stablecoins Matter
Stablecoins are more than just “digital dollars.”
They’re the foundation of the crypto economy—used in trading, DeFi, remittances, and savings.
For new users, stablecoins offer a safe and simple entry point into crypto.
Understanding how they work—and how the companies behind them earn profit—helps you become a smarter, more confident crypto user.
