What Are Stablecoins? Understand How They Work

In 2025, stablecoins processed over $33 trillion USD in transaction volume. Names like USDT and USDC have become common across crypto exchanges, fintech apps, and cross-border payment platforms. Yet most explanations treat stablecoins like speculative digital assets rather than what they actually are: a new type of payment rail built on blockchain technology.

This article closes that gap. You will learn what stablecoins are, how they maintain price stability, and how they function as settlement rails in production systems. By the end, you will be able to reason about stablecoins the way you reason about ACH or SWIFT: as payment rails with specific characteristics, tradeoffs, and appropriate use cases.

What Are Stablecoins?

A stablecoin is a digital currency designed to maintain a stable value relative to a reference asset, typically a fiat currency like the US dollar. Unlike Bitcoin or Ethereum, which can swing 10% or more in a single day due to price fluctuations, stablecoins aim to hold a consistent 1:1 peg with their reference currency. A stablecoin pegged to the dollar, for example, targets a stable price of exactly $1.00.

Think of it like a digital representation of a bank deposit. When a company like Circle (the issuer behind USDC) receives a dollar deposit through a regulated financial institution, they mint a USDC token on the blockchain, similar to how a bank credits your account when you wire funds in. When someone redeems their USDC, Circle burns the token and wires the dollar back. This mint-and-burn cycle, backed by cash and US treasuries, is what keeps one USDC worth one dollar. The difference from traditional banking is that these balances live on a public ledger and can move 24/7 without waiting for bank processing windows.

For a developer, the distinction is operational. You cannot price a merchant invoice in Bitcoin because the value might fluctuate 5% between the time the invoice is generated and the time the transaction settles. A stablecoin solves this volatility problem while retaining the core benefits of blockchain infrastructure:

• 24/7 Availability: No banking holidays or downtime.
• Programmability: Smart contracts can automate flows based on logic.
• Global Reach: The network is agnostic to borders.

When we discuss stablecoins in the context of payments infrastructure, we are almost exclusively referring to tokens that tokenize fiat currency on a public ledger. They act as a bridge, importing the stability of national currencies into a public and verifiable blockchain.

Over 90% of stablecoin market capitalization today is fiat-backed, with nearly all of that pegged to the US dollar. The total stablecoin market exceeded $200 billion by early 2025, with Tether (USDT) holding the largest share at over $140 billion and Circle's USDC at approximately $44 billion.

But market size alone doesn't tell you whether you can rely on these tokens in production. For that, you need to understand how the $1.00 peg actually holds.

How Fiat-Backed Stablecoins Maintain a Stable Value

Sending a stablecoin and having it arrive is the easy part. The harder question is: Why does the price stay at $1.00, and what happens when it doesn't? For developers building payment systems, the answer directly affects how you handle settlement finality, operational risk, and failure modes. The stability of a stablecoin is the result of specific mechanisms involving reserves, issuers, and market incentives.

Understanding these mechanics affects how you handle settlement finality, operational risk, and failure modes in your application.

Fiat Reserves, Bank Deposits, and Custodians

The majority of the stablecoin market operates on a fiat-backed model. By market capitalization, over 90% of stablecoins fall into this category. This is the model most relevant to enterprise payments.

In this architecture, a centralized issuer (such as Circle for USDC or Tether for USDT) mints stablecoins only when equivalent fiat value is deposited into their reserve accounts.

• The Reserve: The stablecoin issuer holds reserve assets, including cash, US Treasury bills (government debt instruments), money market funds, and other liquid assets in regulated financial institutions. These stable assets back every token in circulation.
• The Claim: The stablecoin token represents a redemption right; the issuer is contractually obligated to exchange it back for dollars.

For developers building treasury or payment systems, this means you treat stablecoin balances as cash equivalents only if the redemption path is reliable. The risk here is not code risk from a smart contract bug. It is counterparty risk. If a custodian holding reserve assets fails, or if the issuer faces regulatory action, the 1:1 backing can be threatened.

Your system must treat stablecoin balances differently than native crypto assets. You are not just trusting the blockchain. You are trusting the off-chain bridge to real dollars. Say you're building a payroll platform that holds contractor funds in USDC before disbursement. A custodian failure means your contractors don't get paid. Your system needs to track issuer health the same way you'd monitor a banking partner.

Issuance and Redemption Cycles

The supply of a stablecoin is elastic. It expands and contracts based on liquidity needs through minting and burning.

• Minting (fiat → stablecoin): An institutional customer wires USD to the issuer. The issuer verifies receipt and calls a mint function on the stablecoin smart contract, creating new tokens and sending them to the customer's wallet.
• Burning (stablecoin → fiat): A customer sends stablecoins to the issuer's redemption address. The issuer calls a burn function to destroy the tokens on-chain and wires the equivalent USD back to the customer's bank account.

This elastic supply is what keeps the peg intact at scale. When demand rises, new tokens are minted to meet it. When holders want to exit, tokens are burned, and supply shrinks. The system self-corrects as long as the issuer can honor redemptions. When they can't, things break fast.

In March 2023, Silicon Valley Bank collapsed with $3.3 billion of Circle's USDC reserves inside. USDC de-pegged to below $0.88 before banking access was restored. Payment platforms with no monitoring for issuer-level events continued accepting USDC at face value, and their ledgers didn't match reality.

Your payment system should detect issuer-level incidents, not just blockchain network failures. If the issuer halts redemptions, your system might need to pause acceptance or adjust risk parameters.

Market Arbitrage Enforcing the Peg

The issuer does not constantly intervene in the market to fix the price at $1.00. Instead, they rely on a distributed network of arbitrageurs.

• If price < $1.00: Arbitrageurs buy the stablecoin on exchanges for $0.99, redeem it with the issuer for $1.00, and pocket the difference. This buying pressure pushes the price back up.
• If price > $1.00: Arbitrageurs mint new stablecoins from the issuer for $1.00 and sell them on exchanges for $1.01. This selling pressure pushes the price back down.

These two forces help maintain price alignment without anyone actively managing it. Whenever the price drifts from $1.00, traders step in because there's money to be made by correcting it. The peg holds not because someone is controlling it, but because it's profitable to fix it when it breaks.

But this mechanism depends on arbitrageurs having access to liquidity. During extreme market stress, if they can't access capital (for example, when banking rails are closed on weekends), the peg might temporarily wobble. Think about an invoicing platform where merchants generate USDC-denominated invoices. If the peg drops to $0.995 on a weekend and your system auto-accepts at $1.00, you're eating the difference on every transaction. A simple price feed check before accepting payment can prevent this.

Fiat-Backed vs Algorithmic Models

While fiat-backed stablecoins dominate, you may encounter algorithmic stablecoins. These attempt to maintain a peg through on-chain incentives and smart contracts that manipulate supply, often backed by volatile crypto assets rather than fiat.

The problem with this approach showed up clearly in May 2022 when TerraUST collapsed. Terra relied on its companion token LUNA to absorb price fluctuations, but when confidence dropped, both tokens entered a death spiral. Over $40 billion in value was wiped out in days. The peg wasn't backed by dollars in a vault. It was backed by market confidence, and once that broke, there was nothing underneath.

Payment infrastructure requires a deterministic value. You cannot build a reliable settlement rail on a token that relies on game theory to hold its value. Stick to fiat-backed stablecoins for production payment flows.

Transparency and Attestations

How do you know the reserves actually exist? Unlike public blockchains, where every transaction is visible, off-chain reserves are opaque. Issuers address this through attestations: periodic reports by third-party accounting firms verifying that assets exceed liabilities.

Circle publishes monthly attestation reports from Deloitte that detail exactly what assets back each USDC token in circulation. Tether publishes quarterly reports from BDO Italia with reserve breakdowns.

For compliance and finance teams, these attestations are the difference between an internal accounting nightmare and a compliant instrument. When integrating a stablecoin, your compliance team will likely require these reports before approving the asset for treasury operations. Build this into your vendor evaluation process.

Once you're confident in the token's backing, the next question is: How does a stablecoin transaction actually move from sender to receiver?

How Stablecoin Settlement Works

Stablecoin transactions settle on blockchain networks, which means understanding blockchain mechanics is necessary for building reliable payment systems.

Transaction Lifecycle

When you initiate a stablecoin transfer, the transaction follows a specific path. Your application broadcasts the signed transaction to the network. The transaction enters the mempool, where pending transactions wait until validators include them in a block. Once included, the transaction has its first confirmation.

But one confirmation is not settlement. As more blocks are added, the transaction becomes increasingly difficult to reverse. After enough confirmations, the exact number depends on the network and your risk tolerance, the transaction reaches finality. At that point, the balance update is irreversible.

Network Differences

Settlement speed varies across blockchain networks. On Ethereum, blocks are produced every 12 seconds, but true finality takes approximately 12–15 minutes. Faster networks like Solana achieve fast confirmation times, often under one second, with full finality around 12 seconds. Tron, which hosts significant USDT volume, produces blocks every three seconds with practical finality in around one minute.

Layer 2 networks like Base and Polygon offer faster confirmation times with lower fees, though they inherit security guarantees from their underlying Layer 1 chain. Flutterwave's stablecoin infrastructure runs on Polygon, which provides sub-second confirmations and transaction fees that typically stay under $0.01. Choose your network based on the tradeoffs that matter for your use case.

Irreversibility and Fees

Unlike card payments or ACH transfers, blockchain transactions cannot be reversed once finalized. There is no chargeback mechanism, no dispute process at the protocol level, and no way to claw back funds sent to the wrong address.

This irreversibility eliminates chargeback fraud risk almost entirely, which costs merchants billions annually on card networks. But it also means user errors are unrecoverable without the recipient's cooperation. Your application layer must handle refunds because the blockchain will not.

Transaction fees are paid in the network's native currency rather than as a percentage of the transfer amount. Fees vary based on network congestion, from under $1 on Layer 2 networks to $50 or more on Ethereum during high-demand periods.

Stablecoins vs Traditional Payment Rails

Stablecoins compete architecturally with ACH and SWIFT, not with Visa and Mastercard. Card networks handle authorization and routing, while final settlement occurs later through banking rails. Stablecoins handle settlement directly on-chain.

Understanding this distinction clarifies where integration makes sense.

Characteristic	Stablecoins	ACH	SWIFT	Cards
Settlement Speed	Seconds to minutes	1-3 business days	1-5 business days	1-3 business days
Operating Hours	24/7/365	Business days only	Business days only	24/7 authorization, batch settlement
Cost	$0.01-$5 network fee	$0.20-$1.50	$25-50+	1.5-3.5% of transaction
Finality	Irreversible	60-day return window	Reversible via investigation	120-day chargeback window
Geographic Reach	Global	US domestic	Global with correspondent banks	Global with network acceptance

The comparison reveals complementary strengths. Stablecoins excel at cross-border transfers where traditional correspondent banking adds days of delay and percentage-point fees. ACH remains superior for domestic US payments where low cost and established integration outweigh speed benefits. Cards provide consumer protection through chargebacks that stablecoins cannot match.

Choose based on your use case. A platform paying international contractors benefits from stablecoin rails. A consumer e-commerce checkout benefits from card acceptance with its buyer protections.

If stablecoin rails are the right fit for your use case, the next step is understanding what integration actually looks like at the system level.

Integrating Stablecoins in Your Payment Flows

Adding stablecoin support to a payment platform involves wallet management, transaction initiation, confirmation handling, and reconciliation. While detailed implementation guidance deserves its own treatment, understanding the high-level patterns helps you evaluate the engineering investment required.

Wallet Management

Your system needs a way to receive funds.

• Segregated Wallets: You generate a unique blockchain address for every customer or deposit session. This makes reconciliation easy (Address A = Customer A), but gas costs are higher because you eventually have to "sweep" funds to a central treasury.
• Omnibus Wallets: You use one central address for all inflows. Customers must include a "memo" or unique identifier in the transaction metadata. This is efficient but prone to user error (users forgetting the memo).

On-Chain Event Monitoring

You cannot rely on webhooks from a third party alone; robust systems run their own "listeners."

A typical flow:

1. Listen: Service watches the blockchain for Transfer events to your deposit address.
2. Filter: Check if the token contract matches the official stablecoin address (preventing fake token scams).
3. Count: Wait for X confirmations (e.g., 12 blocks).
4. Reconcile: Update the user's balance in your database.

Handling Failed or Stuck Transactions

Blockchain transactions can fail (e.g., out of gas) or remain pending if the offered gas fee is too low. Your UI must account for this pending state. Unlike a declined credit card which is instant, a pending blockchain transaction might time out after hours. Your system needs logic to detect these zombies and prompt the user to retry or speed up the transaction.

Risks and Limitations

Building with stablecoins requires clear-eyed assessment of the risks they introduce.

Custody Risk

Custody risk means that whoever holds the private keys controls the assets. Compromised keys mean lost funds with no recovery mechanism. Production systems require enterprise-grade security: hardware security modules, multi-signature schemes, and strict access controls.

Issuer Risk

Issuer risk acknowledges that stablecoins are only as reliable as their issuers. If an issuer mismanages reserves, faces regulatory action, or experiences operational failures, your stablecoin balances are affected. Diversifying across compliant issuers and monitoring issuer health reduces but does not eliminate this risk.

Regulatory Exposure

Regulatory exposure varies by jurisdiction and continues to change. Some regions have clear frameworks for stablecoin usage; others have ambiguous or restrictive rules. Your compliance team must evaluate the regulatory status of stablecoin operations in every market you serve.

Network Congestion

Network congestion can spike transaction fees and delay confirmations during high-demand periods. Your system should handle variable fees gracefully and set appropriate expectations for users about settlement timing.

Irreversibility

Irreversibility shifts all refund responsibility to your application layer. You cannot rely on the payment network to reverse fraudulent or erroneous transactions.

These risks do not disqualify stablecoins from serious payment infrastructure. They require the same thoughtful risk management you apply to any financial system dependency.

Where Stablecoins Fit in Modern Payment Architectures

Stablecoins are not a hammer for every nail. They fit best in specific architectural gaps where traditional rails struggle.

Cross-Border Treasury Movement

Moving funds between subsidiaries across Nigeria, the UK, and the US via SWIFT is slow and expensive, with fees exceeding 8% in some African countries and settlement taking days. Stablecoins allow for near-instant treasury rebalancing, freeing up working capital that would otherwise be stuck in transit. This is already happening at scale. Flutterwave, for example, built a stablecoin-powered cross-border payment network across 30 African countries, settling transactions in seconds instead of days.

Merchant Settlement

For merchants selling internationally, waiting as much as T+2 days for settlement ties up cash flow. With stablecoin settlement, merchants can receive funds in minutes. Flutterwave's recently launched stablecoin balances let merchants hold and transact in USDC and USDT alongside traditional currencies like USD and NGN, giving them the option to settle on whichever rail best fits the transaction.

Liquidity Bridging

Fintechs can use stablecoins to bridge liquidity between different fiat currencies. Rather than pre-funding accounts in every target currency, companies can hold liquidity in stablecoins and swap into local fiat only when a payment needs to be made.

Conclusion

For developers building payment systems, understanding stablecoins is now part of the job. You need to recognize that stablecoin rails offer specific advantages for specific use cases: faster cross-border settlement, lower fees for international transfers, and 24/7 operation without banking hour constraints.

The technology continues to mature. Regulatory frameworks are crystallizing in major jurisdictions. Enterprise adoption is accelerating. Platforms like Flutterwave are demonstrating how stablecoin infrastructure integrates with traditional payment methods to serve merchant needs across emerging markets.

Explore how stablecoin settlement fits into your payment architecture.