Stablecoins go mainstream after Circle's blockbuster IPO. Here's what they do.

Since its June 5 trading debut, stablecoin issuer Circle's (CRCL) stock has climbed more than 500%.

The rising provider has issued over $61 billion worth of its stablecoin USD Coin (USDC-USD), making it the world's second largest in today's $253 billion stablecoin market.

On June 30, Circle announced that it applied to establish a national trust bank charter called First National Digital Currency Bank, N.A. If approved, it would be another step toward integrating stablecoin into traditional banking and financial markets.

Here’s a look at how stablecoins work and how they've risen to prominence today.

Stablecoins are a type of cryptocurrency whose value aims to mirror that of another asset.

For example, someone buying a stablecoin pegged to the US dollar would expect the value of that stablecoin to remain at a dollar, with some referring to the coins as "digital dollars." This sets stablecoins apart from other cryptocurrencies, which can change in value significantly.

Stablecoins are a popular payment option for other cryptocurrencies due to their price stability and facilitation of easier and quicker online transactions than traditional funds. Some believe these qualities could bring stablecoins into broader use.

"Over the long term, we expect stablecoins to evolve from money-rail of crypto markets to money-rail of the internet," Bernstein analyst Gautam Chhugani wrote when initiating coverage of Circle. "We believe total industry stablecoin supply will reach ~$4Tn over the next decade."

Read more: Can you buy crypto with a credit card? See the pros and cons.

There are two types of stablecoins: collateralized and algorithmic.

Issuers keep collateralized coin prices stable with reserves. For example, many providers issuing stablecoins pegged to the dollar keep reserves of at least $1 (or equivalent holdings) for each coin they issue.

With these reserves, users expect to be able to exchange their stablecoins for dollars or other backing assets at any time. Stablecoins can be backed by fiat currency such as the dollar, commodities like gold or oil, and even other cryptocurrencies.

Currently, the majority of value in the stablecoin market is held by US dollar or cash equivalent backed stablecoins. However, Circle CEO and co-founder Jeremy Allaire told Yahoo Finance earlier this year that the US shouldn't take that for granted.

"There is a digital currency space race, and the US needs to put laws in place that allow for digital dollars to thrive," Allaire said. "[On] the question of whether a commodity money like gold or a digital commodity like bitcoin could play a larger role as a store of value or a reserve asset, I'm open-minded about that. ... I think that could grow over time."