The four main types of stablecoins are fiat-backed, crypto-backed, commodity-backed, and algorithmic. These digital assets maintain a stable value by being pegged to the value of a collateral. This provides a secure way for investors to manage crypto market volatility and interact with DeFi products – and much more.
For European investors looking to diversify their portfolios and protect capital, understanding how these digital currencies operate is critical.
- What are stablecoins
- Why stablecoins differ from fiat and digital payments
- What are the different types of stablecoins available today
- How different types of stablecoins stay stable
- What is the difference between the two types of stablecoins: USDC and USDT
- Stablecoins usage in companies and day-to-day transactions
- Which stablecoin options are best for use in the Netherlands
- Secure your portfolio with stable investments
What are stablecoins
Stablecoins are cryptocurrencies that hold a consistent value and are pegged to $1. They use reference assets to back up the value of $1 with most stables tracking USD. Other collaterals can be used to issue a stablecoin including commodities or cryptocurrencies.
Stablecoins mirror the value of a USD to make trading crypto easier during periods of volatility. It also makes it possible for traders to avoid having to consistently convert assets into BTC and make the trading experience more familiar to traditional investing.
Why stablecoins exist
Stablecoins exist to provide a safe haven at times for crypto investors. During periods of volatility or when traders want to exit positions, stablecoins are among the only cryptocurrencies which don’t experience volatility, with the value pegged to $1.
Investors have become integrated into the crypto and then the global financial network to make transferring tokens easier and globally. Stablecoins are transparent and depending on the network used, transactions can take seconds to complete.
Why stablecoins differ from fiat and digital payments
Traditional digital payments rely on third parties to verify and approve transactions while stablecoins are executed automatically on the blockchain. Stablecoins are transparent and the value of a transaction is recorded in real time and can be cross-referenced on the network.
Another difference is that digital payments can only be processed during business hours, while stablecoins are operational 24/7 making them easier to use globally, without too many gatekeepers.
Traditional digital payments represent electronic claims on bank deposits within local financial systems. Stablecoins represent programmable, globally accessible digital bearer instruments.
For example, cross-border wire transfers can take up to seven days to clear and require multiple routings. Stablecoin transfers move peer-to-peer instantly on networks like Ethereum or Solana.
What are the different types of stablecoins available today
Fiat-backed stablecoins
Fiat-backed stablecoins are backed one-to-one by traditional currencies and highly liquid equivalents held in off-chain reserves. This means the issuing company holds actual dollars, euros, or short-term government securities in a regulated bank account to match every token in circulation.
Because of this direct backing, regulators heavily favor fiat-backed models, and they dominate overall stablecoin activity. Major examples include USDC and USDT.
Crypto-backed stablecoins
Crypto-backed stablecoins use other volatile cryptocurrencies as collateral to maintain their value. To account for market volatility, these systems are over-collateralized via automated smart contracts.
Thus if someone wants to mint $1 of crypto-backed stablecoins like DAI, they need to deposit $2 worth of cryptocurrencies. In the DAI example, issuers need to deposit $2 worth of Ethereum in order to account for the volatility. This buffer protects the peg even if the underlying cryptocurrency experiences a sharp price drop.
Commodity-backed stablecoins
Commodity-backed stablecoins represent digital ownership of physical assets like gold or silver. Each token acts as a direct claim on a specific amount of the underlying commodity held in a secure vault. For instance, PAX Gold (PAXG) and Tether Gold (XAUT) allow investors to gain exposure to gold prices without the logistical burdens of storing physical metal.
Algorithmic stablecoins
Algorithmic stablecoins use computer code to automatically manage token supply and demand without relying on underlying reserves. The algorithm mints new tokens when the price goes above the peg target and burns tokens when the price drops below it.
As they lack tangible collateral, algorithmic stablecoins carry a high risk of systemic failure. The 2022 collapse of the algorithmic stablecoin TerraUSD (UST) erased billions in value, proving that these models struggle to maintain stability under extreme market stress.
How different types of stablecoins stay stable
Stablecoins keep their price pegged through collateralization as one of the main approaches. Other types of stablecoins such as crypto or algorithmic can rely on smart contract automation and market arbitrage to retain their value.
Fiat-backed stablecoins keep the equivalent value of USD or other fiat currencies in their treasury. This means 1 stablecoin can be exchanged with $1 at any time at a fixed one-to-one rate. The arbitrage method means, if the price of a stablecoin like USDC is depegged and drops to $0.98, arbitrage automation buys discounted tokens and exchanges them with the issuer at $1.00 per token.
Crypto and algorithmic models rely on smart contracts to automatically rebalance the pools. In this scenario, any attempted manipulation triggers the smart contract to either purchase or sell assets to maintain the peg. While it requires enough liquidity to keep afloat, the system is the most prone to vulnerabilities.
What is the difference between the two types of stablecoins: USDC and USDT
USDC and USDT are one of the main types of stablecoins which are widely used across crypto and TradFi. They are both backed by fiat, however some also hold bonds and other assets in their reserves. Transparency is what impacts institutional adoption for both types of stablecoins.
USDT (Tether)
USDT is issued by Tether Limited and is the largest stablecoin by circulation, processing hundreds of billions of dollars per month. Its reserves are backed by a mixture of USD, secured loans, precious metals, and other investments. Tether provides quarterly reserve breakdowns but has historically faced regulatory scrutiny regarding its reserve disclosures.
USDC (USD Coin)
USDC is issued by Circle. The asset is heavily utilized in decentralized finance and corporate treasury operations. Its reserves are backed exclusively by cash and short-term US Treasury bonds, offering a high degree of transparency. Circle provides daily reserve attestations and uses top-tier regulated custodians like BNY Mellon, making USDC highly more trusted across institutional investors.
Stablecoins usage in companies and day-to-day transactions
Companies increasingly use stablecoins for real-time merchant settlement, corporate treasury management, and cross-border business-to-business payments. Stablecoin infrastructure allows businesses to bypass the delays and high fees associated with legacy correspondent banking.
In corporate treasuries, stablecoins enable 24/7 liquidity management. Firms can move capital instantly across geographies to fund operations or execute high-yield investment strategies. Payment service providers integrate stablecoins to offer merchants instant payout capabilities with zero chargeback risk. Between January 2023 and August 2025, over $136 billion in stablecoin payments were settled, demonstrating massive institutional confidence in this technology.
Which stablecoin options are best for use in the Netherlands
For investors operating in the Netherlands, fiat-backed stablecoins that comply with the European Union’s Markets in Crypto-Assets (MiCA) regulation are the safest and most efficient options. The Netherlands has established itself as a major hub for innovative trading companies in Europe’s financial markets.
Under MiCA rules implemented in late 2024, stablecoin issuers must fully back their tokens with real money, segregate funds, and provide clear redemption rights. Euro-pegged tokens like EURI, issued by Banking Circle, are specifically designed to meet these stringent European standards.
Secure your portfolio with stable investments
Stablecoins provide an important bridge between TradFi and the cryptocurrency market. As the market matures and is expected to grow to over $300 billion in the next five years, it’s important to understand which ones to be integrated with.
If you still want to explore the crypto market without the stress of daily market management and stablecoin juggling, Yieldfund, a quantitative trading company from the Netherlands, provides access to crypto yields without hands-on trading. Investors can get up to 4% weekly returns paid out directly in stablecoins.
Contact one of our investor relations managers to learn more about Yieldfund.
