A quick guide to how stablecoins work.
Stablecoins are some of the most widely used assets in crypto. Tokens like USDT and USDC are designed to track the value of a fiat currency, usually the US dollar. They make it easier to move value between platforms, hold a stable balance, and interact with DeFi without constantly thinking about price swings.
This guide explains how stablecoins work, the differences between major types, and what to keep in mind when using them in a self-custody wallet.
A stablecoin is a crypto asset designed to maintain a relatively stable price. The most common target is one dollar per token. To achieve this, different stablecoins use different mechanisms, ranging from traditional reserves to on-chain collateral and algorithmic rules.
From a user’s perspective, a stablecoin behaves like any other token in a wallet. You can send it, receive it, and use it in smart contracts. The distinction lies in how its value is supported behind the scenes.
Fiat-backed stablecoins such as USDC and some forms of USDT are issued by companies that hold reserves in bank accounts and other low-risk instruments. For every token in circulation, there is supposed to be an equivalent amount of assets held in reserve.
These projects usually publish regular attestations or reports to show how reserves are managed. While this model relies on trust in the issuer and banking partners, it has proven to be the most widely adopted form of stablecoin so far.
Some stablecoins use crypto assets as collateral instead of traditional reserves. A well-known example is DAI. Users lock up collateral such as ETH in a smart contract, and the protocol issues DAI against that collateral. If the collateral value falls too far, the protocol can liquidate positions to maintain stability.
This model is more decentralised but also more complex. It depends on market incentives, risk parameters, and robust contract design.
There have also been attempts to create algorithmic stablecoins that do not rely on direct collateral backing. These systems adjust supply based on market demand in an attempt to maintain the peg. Some hybrid designs combine elements of both collateral and algorithmic mechanisms.
Algorithmic stablecoins have had mixed results, and some high-profile failures have highlighted the risks involved. As a result, many users prefer fiat-backed or crypto-collateralised options for everyday use.
From a practical standpoint, stablecoins fit naturally into a self-custody setup. You can hold them in the same wallet as your other tokens, use them in DeFi, or keep them as a relatively stable portion of your portfolio.
When you receive stablecoins directly to your wallet through a platform like Elbaite, you gain the benefits of both self-custody and stability. You do not rely on an exchange to hold your balance, and you can move or deploy those tokens on-chain whenever you like.
Stablecoins reduce price volatility, but they do not eliminate risk. Important factors to consider include:
Spreading exposure across more than one stablecoin type and keeping an eye on news about major issuers can help manage these risks.
People use stablecoins for a wide range of purposes, including:
In each of these cases, having stablecoins in your own wallet rather than on a platform gives you more flexibility and control.
Stablecoins bridge the gap between traditional money and the crypto world. They make it easier to navigate markets, manage risk, and participate in Web3 without constantly worrying about price swings. When combined with self-custody and direct-to-wallet buying, they become powerful tools for both everyday users and more advanced strategies.
Web3 can feel complex at first, but most of the moving parts follow repeatable patterns. As you recognise how wallets, networks, contracts, and fees interact, the ecosystem starts to feel less like a maze and more like a toolkit you can use intentionally.
Elbaite makes it simple to buy crypto directly to your wallet without holding funds on an exchange.
This direct-to-wallet flow gives you full control from the moment you buy.
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