“A stablecoin is a type of cryptocurrency designed to maintain a stable value, unlike volatile assets like Bitcoin, by pegging its price to a stable reserve asset, usually a fiat currency (like the USD) or a commodity (like gold).” – Stablecoin
What is a Stablecoin?
A **stablecoin** is a type of cryptocurrency engineered to preserve a consistent value relative to a specified asset, such as a fiat currency (e.g., the US dollar), a commodity (e.g., gold), or a basket of assets, in stark contrast to the high volatility of assets like Bitcoin.
Unlike traditional cryptocurrencies, stablecoins employ stabilisation mechanisms including reserve assets held by custodians or algorithmic protocols that adjust supply and demand to sustain the peg. Fiat-backed stablecoins, the most common variant, mirror money market funds by holding reserves in short-term assets like treasury bonds, commercial paper, or bank deposits. Commodity-backed stablecoins peg to physical assets like gold, while cryptocurrency-backed ones, such as DAI or Wrapped Bitcoin (WBTC), use overcollateralised crypto reserves managed via smart contracts on decentralised networks.
Types of Stablecoins
- Fiat-backed: Centralised issuers hold equivalent fiat reserves (e.g., USD) to support 1:1 redeemability.
- Commodity-backed: Pegged to commodities, with issuers maintaining physical reserves.
- Cryptocurrency-backed: Collateralised by other cryptocurrencies, often overcollateralised to buffer volatility.
- Algorithmic: Rely on smart contracts to dynamically adjust supply without full reserves, though prone to failure.
Despite the name, stablecoins are not immune to depegging, as evidenced by historical failures amid market stress or redemption pressures, potentially triggering systemic risks akin to fire-sale contagions in traditional finance. They facilitate rapid, low-cost blockchain transactions, serving as a bridge between fiat and crypto ecosystems for payments, settlements, and trading.
Regulatory Landscape
Governments worldwide are intensifying oversight due to stablecoins’ growing role in transactions. For instance, Nebraska’s Financial Innovation Act (2021, updated 2024) permits digital asset depositories to issue stablecoins backed by reserves in FDIC-insured institutions.
Key Theorist: Robert Shiller and the Conceptual Foundations
The most relevant strategy theorist linked to stablecoins is **Robert Shiller**, a Nobel Prize-winning economist whose pioneering work on financial stability, behavioural finance, and asset pricing underpins the economic rationale for pegged digital assets. Shiller’s theories address the volatility that stablecoins explicitly counter, positioning them as practical applications of stabilising speculative markets.
Born in 1946 in Detroit, Michigan, Shiller earned his PhD in economics from MIT in 1972 under advisor Robert Solow. He joined Yale University in 1982, where he remains the Sterling Professor of Economics. Shiller gained prominence for developing the Case-Shiller Home Price Index, a leading US housing market benchmark. His seminal book, Irrational Exuberance (2000), presciently warned of the dot-com bubble and later the 2008 financial crisis, critiquing how narratives drive asset bubbles.
Shiller’s relationship to stablecoins stems from his advocacy for financial innovations that mitigate volatility. In works like Finance and the Good Society (2012), he explores stabilising mechanisms such as index funds and derivatives, which parallel stablecoin pegs by tethering values to underlying assets. He has discussed cryptocurrencies in interviews and writings, noting their potential to enhance financial inclusion if stabilised-echoing stablecoins’ design to combine crypto’s efficiency with fiat-like reliability. Shiller’s CAPE (Cyclically Adjusted Price-to-Earnings) ratio exemplifies pegging metrics to long-term fundamentals, a concept mirrored in stablecoin reserves. While not a crypto native, his behavioural insights explain depegging risks from herd mentality, making him the foremost theorist for stablecoin strategy in volatile markets.
References
1. https://en.wikipedia.org/wiki/Stablecoin
2. https://csrc.nist.gov/glossary/term/stablecoin
3. https://www.fidelity.com/learning-center/trading-investing/what-is-a-stablecoin
5. https://klrd.gov/2024/11/15/stablecoin-overview/
7. https://www.bankofengland.co.uk/explainers/what-are-stablecoins-and-how-do-they-work
8. https://bvnk.com/blog/stablecoins-vs-bitcoin
9. https://business.cornell.edu/article/2025/08/stablecoins/
