Stablecoin
Also called: stable coin · stablecoins
Definition
A stablecoin is a cryptocurrency designed to keep a steady value, usually 1 US dollar, by being backed by reserves such as cash and treasury bills, by crypto collateral, or by other mechanisms.
How stablecoin works
Stablecoins let traders hold dollar value on-chain and move it quickly between exchanges and wallets. Most trading pairs on crypto exchanges are quoted in stablecoins such as USDT and USDC.
There are several types. Fiat-backed stablecoins, like USDT from Tether and USDC from Circle, hold reserves and let approved customers redeem them. Crypto-backed stablecoins, like DAI or USDS, are overcollateralized by crypto in smart contracts. Synthetic dollars, like Ethena's USDe, use hedged positions. Algorithmic designs without solid collateral have failed in the past, most famously TerraUSD in 2022.
Stablecoins are stable, not risk-free. Risks include reserve quality, the issuer freezing addresses, regulatory changes and depegs, when the price drifts away from 1 dollar. Rules also differ by region; in the EU, MiCA stablecoin rules have applied since 30 June 2024.
Example
Suppose you sell 0.1 BTC at 60,000 USDT on an exchange and receive 6,000 USDT. A week later BTC falls to 54,000. Your 6,000 USDT is still worth about 6,000 dollars, while 0.1 BTC would now be worth 5,400. If the stablecoin itself dipped to 0.97 dollars during a depeg, your 6,000 USDT would be worth about 5,820 dollars until it recovered.
Common mistakes
- Treating all stablecoins as equally safe regardless of how they are backed.
- Sending a stablecoin over a network that the receiving platform does not support.
- Holding a little-known stablecoin because it offers a much higher yield than the main ones.
Learn and practise
FAQ
Are stablecoins the same as dollars?
No. They are tokens designed to track the dollar. Their value depends on the issuer's reserves, redemption and the market.
What is the most used stablecoin?
USDT, issued by Tether, has long been the largest stablecoin by market capitalization, with USDC from Circle second.
Can a stablecoin lose its peg?
Yes. Even major stablecoins have traded below 1 dollar briefly during stress, and some smaller ones never recovered.