What is a stablecoin & how do they work?

What is a Stablecoin and How do They Work
Updated as of 03 July 2025

Stablecoins have become one of the most practical innovations in the digital finance sector. Designed to combine the speed and flexibility of cryptocurrencies with the reliability of traditional money, stablecoins are changing the way we make payments, transfer value, and interact with financial systems, both on-chain and in the real world.

In this guide, we will break down what stablecoins are, how they work, what they can be used for, and how they can make payment settlements faster, more accessible, and compliant.

If you are looking to explore how businesses are adopting stablecoins for payment settlements, please find out here.

What Is a Stablecoin?

A stablecoin is a digital asset whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. 

This means:

  • 1 XUSD = 1 US Dollar
  • 1 XSGD = 1 Singapore Dollar
  • 1 XIDR = 1 Indonesian Rupiah

Stablecoins are emerging as essential infrastructure in the global economy, offering the benefits of cryptocurrency, such as fast transfers and global access, without the price swings associated with traditional cryptocurrencies like Bitcoin or Ethereum.

Types of Stablecoins

There are four main categories of stablecoins:

1. Fiat-Backed Stablecoins

These are backed 1:1 by real-world fiat currencies. For every token in circulation, there’s an equivalent amount of money held in reserve, usually by a regulated institution.

2. Commodity-Backed Stablecoins

Assets like gold, oil, or real estate back these stablecoins. Their value can fluctuate more than fiat-backed stablecoins, depending on the underlying asset.

3. Crypto-Backed Stablecoins

Backed by other cryptocurrencies, these are usually over-collateralised to account for price swings.

4. Algorithmic Stablecoins

These use smart contracts to control supply and demand. Instead of collateral, they rely on algorithms to maintain price stability. While innovative, this model has proven riskier and more fragile under stress.

How Do Stablecoins Work?

Stablecoins are designed to maintain a consistent value by being tied or pegged to another asset, such as a fiat currency, commodity, or a basket of cryptocurrencies. The way this peg is maintained depends on the type of stablecoin.

For fiat-backed stablecoins like XSGD or USDC, each token issued corresponds to one unit of fiat currency held in reserves. These reserves are stored in regulated bank accounts and are often audited to ensure transparency. When users want to redeem their stablecoins, the issuing platform burins the tokens anr returns the equivalent amount in fiat.

For crypto-collateralised and algorithmic stablecoins, smart contracts handle the minting and burning process, using on-chain logic to adjust the token supply based on demand, price deviations, or collateral value.

This structure ensures that stablecoins remain price-stable and redeemable, making them a reliable medium for payments, trading, and value storage.

Popular Stablecoins List

Here are some of the most widely used stablecoins:

Popular Stablecoin List

Are Stablecoins Safe?

Stablecoins offer many benefits, but like any financial tool, they come with risks. These depend largely on how the stablecoin is designed, backed, and governed. Key risks to be aware of:

  • Collateral risk: If a stablecoin isn’t fully backed or transparently audited, it may not maintain its peg in times of stress.

  • Smart contract risk: For decentralised stablecoins, bugs or exploits in smart contracts can affect stability or lead to loss of funds.

  • Regulatory risk: Rules around stablecoin usage are evolving globally. Institutions should ensure the stablecoins they use comply with local regulations.

  • Liquidity risk: Some stablecoins may not offer deep or consistent liquidity on all platforms, leading to slippage or delays in redemption.

Fiat-backed stablecoins from regulated entities, like XUSD and XSGD, tend to offer higher safety and transparency. These tokens are backed 1:1 by real currency, with oversight from regulated financial institutions.

In contrast, some algorithmic or crypto-backed stablecoins can be complex and risky, especially if not over-collateralised or properly governed, with TerraUSD as an example.

To mitigate these risks, users and institutions should prioritise:

  • Stablecoins issued by regulated entities
  • Transparent reserve reporting and audits
  • Platforms with strong track records and redemption mechanisms

At StraitsX, our stablecoins are fully backed by fiat reserves held in regulated financial institutions. They offer transparent, 1:1 redemption and are purpose-built for enterprise-grade, compliant usage.

How Stablecoins Benefit Payments

Stablecoins unlock new ways to move money globally, offering an efficient and scalable way to settle transactions. Rather than replacing legacy payment networks like SWIFT, stablecoins supplement traditional rails with compliant, accessible, and always-on infrastructure. 

For businesses operating across different time zones, regulatory environments, and currencies, stablecoins offer competitive advantages:

  • Speed

Stablecoins can settle payments in seconds, not days. Traditional bank transfers often take 1-3 business days, especially across borders and with different operating hours. On the other hand, stablecoins operate on-chain and move 24/7, even on weekends or public holidays.

Use-case: A logistics firm with operations in both Singapore and the US uses XSGD and XUSD to pay suppliers. Instead of waiting for SWIFT cut-off times, payments settle instantly, improving delivery timelines and supplier trust.

  • Lower Transaction Costs

Stablecoin transfers cost significantly less than SWIFT wires, card processing fees, or remittance platforms. There are no intermediary banks or unnecessary FX conversion fees.

Use case: A marketplace disbursing payouts to sellers in local stablecoins like XSGD avoids intermediary bank fees and card transaction charges, saving thousands at scale.

  • 24/7 Access and Availability

Stablecoins operate around the clock. There’s no need to wait for bank hours, batch windows, or weekend processing.

Use case: A global fintech rebalances its treasury daily between USDC, EURS, and XSGD across multiple markets. Stablecoins allow it to operate and settle in real time, something not possible with fiat alone

  • Currency flexibility

Stablecoins make FX simpler. Businesses can move between USD, SGD, IDR and other digital currencies without traditional conversion fees or delays.

Use case: A cross-border SaaS platform charges customers in USD and settles payouts in XSGD or XIDR—improving localisation and eliminating friction in regional transactions.

  • Programmability

Stablecoins support automation. Businesses can build conditional transfers, milestone-based payouts, and smart escrow directly into their financial workflows.

Use case:
A service platform uses smart contracts to release XSGD payments to vendors only after project milestones are approved, minimising manual oversight and payment disputes.

Whether you're managing treasury, paying vendors, or running a global platform, stablecoins offer a smarter way to move money as they are designed for the realities of modern business.

Explore our Stablecoins for Business Guide to see how stablecoins can fit into your operations.

How to Buy Stablecoins at StraitsX

With StraitsX, you can easily mint and use stablecoins:

  1. Sign up for a Personal or Business Account.
  2. Verify your identity by submitting the required documents.
  3. Transfer in from your bank account to mint.
  4. Use or transfer out your stablecoins to a self-custodial wallet.
  5. Swap XSGD or XUSD for other stablecoins 
  6. Earn passive income by providing liquidity on DeFi platforms.

Want to move larger amounts? StraitsX also offers an OTC Desk for institutions and high-net-worth individuals, enabling large block trades with deep liquidity and competitive pricing.

Final Thoughts

Stablecoins offer the best of both worlds: the speed and innovation of blockchain, with the stability and trust of traditional money. Whether you’re a business looking to streamline payments, a user sending remittances, or an investor exploring new markets, stablecoins like XSGD and XIDR are powerful tools that make digital finance more usable and accessible.

Start transacting smarter.
Explore stablecoin payments today with StraitsX.

Scale faster with stablecoin infrastructure that works.

StraitsX is here to help you simplify settlements, reduce costs, and unlock new markets.
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