A stablecoin is a crypto token designed to hold a steady price — almost always one US dollar. It pairs the boring price stability of cash with the properties of crypto: it moves 24 hours a day, crosses borders in minutes, and does not need a bank to approve the transfer.
That combination is why stablecoins became the default way to move dollars internationally without a bank wire, and why they now sit underneath most crypto cards. But “stablecoin” describes a goal, not a design. Two coins both worth $1.00 can be backed by completely different things and fail in completely different ways. That difference is the single most important thing on this page.
How a peg actually holds
A stablecoin does not stay at $1.00 because its issuer says so. It stays there because it is profitable for someone to push it back whenever it drifts.
If the coin trades at $0.99, a trader can buy it on the open market and hand it to the issuer for a full dollar, pocketing the cent. That buying pressure lifts the price. The same loop runs in reverse above $1.00: mint new coins for a dollar each, sell them for more.
Everything depends on the dotted line in that diagram. The peg holds only as long as redemption at par is credible. When the market doubts an issuer can pay out — because reserves are opaque, or the bank holding them is failing — the arbitrage stops, and nothing mechanical pulls the price back. This is why reserve quality is not an abstract governance question. It is the peg.
The three designs that work, and the one that didn’t
Fiat-backed (USDT, USDC, PYUSD, FDUSD). The issuer holds conventional assets — bank deposits and short-term government debt — against the coins in circulation. Simple, well understood, and the design regulators have converged on. Its weak points are the ones any bank has: the quality of the reserve assets, and whether the bank holding the cash is sound.
Crypto-collateralized (DAI). Users lock crypto worth more than the stablecoins they mint. If the collateral falls in value, positions are automatically liquidated to keep the system solvent. This design needs no bank, but it needs deep, liquid markets to liquidate into — and it consumes more capital than it issues, which limits how large it can get. Worth knowing: a substantial part of DAI’s backing has moved over the years into other stablecoins and real-world assets, so “decentralized” describes its governance more than its collateral today.
Synthetic / delta-neutral (USDe). Ethena’s USDe holds crypto and simultaneously shorts an equivalent amount of futures, so a price fall in one leg is offset by a gain in the other. The position also earns funding payments, which is where its yield comes from. This is a live trading strategy wearing a stablecoin’s clothes. It works while derivatives markets behave; it is exposed to sustained negative funding rates and to the exchanges holding the hedge. Treat it as a different instrument, not a cheaper USDC.
Algorithmic — the design that failed. These held the peg with a mint-and-burn relationship against a second, floating token, backed by nothing external. When confidence went, the mechanism actively accelerated the collapse: defending the peg meant printing more of the floating token, crushing its price, destroying the backing. UST collapsed this way in May 2022, taking tens of billions of dollars with it. Regulators worldwide have since made this design effectively unviable.
The major coins
| Coin | Issuer | Backing | Worth knowing |
|---|---|---|---|
| USDT | Tether | Reserves incl. Treasuries and other assets | Largest by a wide margin; deepest liquidity, especially outside the US and EU |
| USDC | Circle | Cash and short-dated Treasuries | The compliance-first choice; strongest position in regulated venues |
| DAI | Sky (formerly MakerDAO) | Crypto collateral plus real-world assets | The original decentralized design; collateral is more conventional than the label suggests |
| PYUSD | Paxos, branded by PayPal | Fiat reserves | Issued by a regulated trust company, not by PayPal itself |
| FDUSD | First Digital | Fiat reserves | Concentrated on one exchange’s markets |
| USDe | Ethena | Hedged trading position | Yield-bearing and synthetic; not a fiat-backed coin |
The practical split for most people is narrower than this table suggests: USDT where you need liquidity and acceptance, USDC where you need regulatory comfort. See USDT vs USDC for the direct comparison.
The redemption reality check
Guides often say you can “redeem 1 coin for $1 with the issuer.” For an institution, yes. For you, almost certainly not.
Direct redemption requires an account with the issuer, full verification, and a minimum size far above retail scale. What retail users actually do is sell on an exchange at whatever the market offers. The redemption channel still protects you — it is what keeps the market price near $1.00 — but you access it indirectly, through the arbitrageurs who do have accounts. In a genuine crisis, they get out at par and you get out at the market price.
What people use them for
- Cross-border payments. Fast, and cheap in the middle. The real costs sit at the on-ramp and off-ramp, not on the chain. See cross-border payments.
- Spending through a crypto card. Load stablecoins, spend anywhere Visa or Mastercard is accepted. See the crypto card guide.
- A dollar account without a US bank. In economies with high inflation or capital controls, this is the genuinely transformative use, and it is why adoption is strongest well outside the US.
- Trading and DeFi. The quote currency for most crypto markets, and the settlement asset for most on-chain lending.
The risks, plainly
Depeg. Stablecoins do trade away from $1.00 under stress. The most instructive case is USDC in March 2023: Circle disclosed that several billion dollars of reserves were stuck at the collapsing Silicon Valley Bank, and USDC fell to around $0.87 before recovering within days once US authorities guaranteed the bank’s deposits. Nothing about the coin’s design failed — the bank did. That is exactly the point: a fiat-backed stablecoin inherits the risk of wherever its cash sits.
Issuer risk. Holding a stablecoin means extending credit to a company. You are exposed to its solvency, its judgement, and its regulator. Read what an issuer publishes, and note whether it is a full audit or an attestation — a point-in-time snapshot confirming assets existed, which is what most issuers actually provide.
Freeze risk. Major fiat-backed issuers can and do blacklist addresses, typically at law enforcement request, and have frozen very large sums this way. This is a feature when stolen funds are recovered and a serious risk if your address is caught up in something. A regulated stablecoin is not bearer cash, and every major regulatory framework now explicitly requires this capability.
Chain risk. The same coin exists separately on many networks. Sending on a network the recipient does not support is the most common way people permanently lose stablecoins. Always match the network, not just the address. See blockchain basics.
Yield risk. Any stablecoin paying meaningful yield is doing something to earn it — lending, hedged trading, or holding riskier assets. The yield is the compensation for a risk that has not shown up yet. A coin that pays nothing and a coin that pays 10% are not the same product with different generosity.
How to judge a stablecoin in five minutes
- What backs it? If you cannot answer in one sentence, stop.
- Who issues it, and under whose supervision? A named, regulated entity in a jurisdiction you can point to.
- What do they publish, how often, and is it an audit or an attestation?
- Where is it liquid? A coin you cannot sell in size at 3am is not a cash equivalent.
- Does it pay yield, and from what? If the answer is vague, treat it as an investment, not as dollars.
For most people moving or spending money, the answer is one of the two largest fiat-backed coins, held only as long as you need it. Stablecoins are excellent rails and mediocre savings.
Where to go next
Compare the two market leaders in USDT vs USDC, read what actually happens during a break in anatomy of a depeg, learn the vocabulary in the Web3 payments glossary, and check the rules where you live in regulations.