2. Understanding How Stablecoins Work
In the previous section, we saw how stablecoins solve the volatility problem that makes Bitcoin impractical for everyday use. But how exactly do they work? What keeps a digital token worth exactly one dollar, day after day, through market crashes and rallies?
The answer lies in understanding the moving parts that make a stablecoin function. Just as a car needs an engine, transmission, wheels, and fuel to operate, a stablecoin requires several interconnected systems working together. When Circle issues a new USDC token or someone redeems Tether for dollars, multiple actors and processes spring into action behind the scenes.
Since early fiat-backed models like Tether first emerged in 2014 [1], stablecoins have grown from a niche tool to critical infrastructure. They serve as the bridge between traditional finance and the crypto ecosystem, providing liquidity for exchanges, enabling instant global transfers, and supporting everything from corporate treasury management to cross-border remittances [2]. With approximately $260 billion in circulating supply and multi-trillion dollar annual on-chain settlement volume as of September 2025, stablecoins now rival major payment networks [3], understanding how they work has become essential.
This section breaks down these components to show you exactly how stablecoins maintain their value. We'll explore who does what in the stablecoin ecosystem, back their tokens with reference [1], what happens when you mint, trade, and redeem them, why transparency matters for trust, and what common misunderstandings persist about their nature and risks. Understanding this complete picture helps you evaluate which stablecoins to trust with your money and recognize warning signs of potential problems.
Think of this as looking under the hood. You don't need to be a mechanic to drive a car, but knowing the basics helps you spot trouble before it strands you on the highway. Similarly, understanding stablecoin anatomy and separating fact from fiction helps you make informed decisions whether you're sending money abroad, accepting payment for your business, or simply holding digital dollars.
By the end of this section, you'll understand:
The key players in any stablecoin system and their roles
How different backing methods create different risk profiles
The technical process that creates and destroys stablecoins
Why reserve transparency became the industry standard
Common myths versus realities about stablecoins
What can go wrong and how to spot red flags
Let's start with the people and organizations that keep stablecoins running.
What This Section Covers
References
[1] What is a Stablecoins? - https://hedera.com/learning/tokens/what-is-a-stablecoin
[2] Stablecoins 101: Behind crypto’s most popular asset - https://www.chainalysis.com/blog/stablecoins-most-popular-asset/
[3] Banks and Stablecoins: a first step towards bridging traditional finance and the crypto world - https://www.finextra.com/blogposting/28798/banks-and-stablecoins-a-first-step-towards-bridging-traditional-finance-and-the-crypto-world
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