Stablecoins Explained: Use Cases for Companies

Stablecoins Explained: Types & Use Cases for Companies

Understanding Stablecoins

In this section, we will explain what a stablecoin is, give a clear stablecoin definition, and prepare a stablecoin explained for beginners – that is, a simple explanation of this concept. Stablecoin, explained in our case, is a description of the topic in the most accessible language. In particular, we will understand how a stablecoin works and why a business needs it.

What is a stablecoin?

A stablecoin is a cryptocurrency created to maintain a stable value. Unlike Bitcoin or Ether, the rate of a stablecoin is pegged to a known asset – most often the US dollar. This means: it is issued by a company or organization, and each token is backed by a certain amount of real currency or other liquid asset. Due to this, price fluctuations are not as large as in conventional cryptocurrencies (they are practically “dead” around one dollar). For example, if you buy a stablecoin, you can always exchange it back for dollars or euros without loss – and this is included in the definition of a stablecoin. Stablecoins work on the blockchain – a distributed ledger of transactions – so the transfer takes place without bank intermediaries. This makes them available 24/7.

Stablecoin definition and key features, types of stablecoins

The key feature of a stablecoin is its value stability. In other words, for the holder, a stablecoin is actually a digital version of a currency (usually the US dollar), only in token form. 

How Stablecoins Work

Let’s look at the main types of stablecoins – groups of stablecoins based on the price support mechanism:

Fiat-collateralized: The most common type. The token is collateralized in traditional currency (US dollar, euro, etc). Classic examples are Tether and USD Coin, each of which is officially pegged to the US dollar. Issuers must maintain cash reserves or the equivalent in derivatives (usually US bonds) so that the number of tokens equals the amount of reserves.

Crypto-collateralized: These tokens are backed by other cryptocurrencies instead of fiat. For example, MakerDAO’s Dai (DAI) is locked up with an over-collateralized amount of Ether and other tokens to guarantee price stability.

Commodity-backed: They are backed by real goods. For example, PAX Gold (PAXG) is a stablecoin where each token is backed by one ounce of gold in the vault.

Algorithmic: They have no physical collateral. Instead, stability is provided by software code. When demand changes, the system automatically adjusts the number of tokens in circulation. If the token price is higher than $1, the program “burns” the excess, and when it is lower than $1, it issues new coins. This approach demonstrates how risky the idea can be without physical reserves — an example is the collapse of the algorithmic TerraUSD (UST) in 2022, when the mechanism could not maintain the peg.

Here we will tell you how stablecoins maintain their stability and carry out transactions. In essence, how do stablecoins work is a question of the “kitchen” of these tokens. In practice, stablecoins operate according to two schemes (or a combination of them). First, many of them work according to the scheme with reserves (collateralized): the issuing company issues a token only when it has received fiat (say, dollars) to its account. For each emission stablecoin, the corresponding currency remains in reserve. Thanks to this mechanism, the token owner can always return it to the issuer and get back $1 or the equivalent — hence a hard peg to the currency is ensured. Second, some stablecoins use an algorithmic approach: they do not have physical assets, but regulate their supply through smart contracts. If the demand for the coin increases, the system adds new tokens; if the demand falls, it reduces the number in circulation. This is how algorithmic stablecoins work. Here are a few stablecoin examples that illustrate different approaches. The most common are Tether (USDT) and USD Coin (USDC) – fiat stablecoins pegged 1:1 to the US dollar. 

Benefits and Risks for Companies

The use of stablecoins in business has both significant benefits and significant risks. Let's consider the main pros and cons of stablecoins. Advantages: Stablecoins allow payments to be made instantly and 24/7 without bank holidays and weekends. In large multinational transactions, this means faster and cheaper transfers: a payment that previously took days can be completed in minutes. Companies save on high correspondent bank fees and gain full transaction transparency (each transfer is visible in the blockchain). In addition, stablecoins contribute to better liquidity management: they provide 24/7 access to funds in different countries and the ability to centralize reserves (instead of frozen balances in local accounts). Companies can invest temporarily free funds in profitable programs (for example, some stablecoins offer interest payments on deposits). Another plus is protection against currency risks: according to experts, when funds are saved in stablecoins, companies gain greater predictability, because their value is fixed to a stable currency.

Risks and limitations: Despite their stability, stablecoins are not without dangers. First, there is the risk of counterparty reliability: if the issuer does not have sufficient reserve support or turns out to be unscrupulous, the tokens can lose value or be frozen. In the past, questions have arisen about the transparency of reserves of some issuers. Second, there are technical risks: smart contract failures, hacker attacks or infrastructure failures can jeopardize transactions. Algorithmic stablecoins are particularly vulnerable: the example of TerraUSD in 2022 showed that a mechanism without real assets can completely fail. Third, stablecoins still experience regulatory uncertainty and geographical diversity of norms. Approaches to cryptocurrencies vary widely across jurisdictions. Companies must consider legal restrictions (e.g. KYC/AML requirements) and potential sanctions if they break the rules.

Treasury management with stablecoins

Stablecoins are successfully integrated into treasury operations. They become a convenient liquidity management tool: funds can be moved between departments at any time, not just during banking hours. Thanks to this, treasuries are able to allocate cash more rationally: for example, centralize surpluses in a timely manner and invest them in revenue programs, while other departments use stablecoins for payments. As finance managers note, capital in motion is working capital, and stablecoins make it possible to maintain the flow of funds without artificial freezing. For the treasury, this means better visibility of the balance sheet: after all, if money is on the blockchain, it is either there or not — it is immediately visible. As a result, the organization frees up working capital that was previously idle in delayed payment processes.

FAQ on stablecoins

What is a stablecoin?

A stablecoin is a digital unit of account created for payments with reduced volatility. In essence, it is a cryptocurrency pegged to a stable asset (usually fiat currency).

How do stablecoins work for businesses?

A business can use a stablecoin as a digital dollar in its own payments. The mechanism is familiar: the company converts fiat currency into an equivalent amount of stablecoins and sends them to a counterparty or employee via the blockchain (without banks). As a result, the recipient receives the money almost instantly and can exchange the tokens back for fiat at any time.

Are stablecoins safe for company use?

Stablecoins are safer than many other cryptocurrencies (due to their exchange rate stability), but they are not flawless. The most important thing is to choose proven projects with transparent reserves. For example, the issuers of the most popular stablecoins have external audits and are strictly regulated, so their coins are considered relatively reliable.