Stablecoin

A stablecoin is a token that aims to hold a stable price, most often one US dollar. It can lose its peg (depeg) if its reserves or mechanism fail.

How it works

The most popular stablecoins, such as USDT and USDC, are issued by companies that hold reserves in dollars, US Treasury bills and similar assets for each token. Other types exist too: overcollateralized by crypto (like DAI) and algorithmic, where only code and incentives hold the price.

Stablecoins let you park money inside the crypto market without price swings, move it quickly between exchanges and wallets, and trade pairs like BTC/USDT. In DeFi they are lent out and added to liquidity pools.

Stability is a promise, not a guarantee. If reserves fall short, cannot be sold quickly, or the issuer runs into trouble, the price can slip below $1. Issuers can usually also freeze tokens at a specific address.

Example with numbers 1

You hold 1,000 USDT. While the peg holds, that is about $1,000. If the stablecoin depegs and trades at $0.97, your tokens are worth about $970.

Example with numbers 2

In May 2022 the algorithmic stablecoin UST lost its peg and fell almost to zero. In March 2023 USDC dropped to about $0.88 for a few days when part of its reserves was stuck in the failed Silicon Valley Bank, then returned to $1.

Common mistake

A common mistake is treating a stablecoin like dollars in a bank account and keeping everything in one token, especially one offering a high yield. A high rate usually means high risk. Prefer stablecoins with transparent reserves, do not put everything in one, and do not trust large sums to algorithmic designs.

Questions and answers

What is a stablecoin in simple terms?

It is a cryptocurrency pegged to a regular currency, usually the dollar: 1 token ≈ $1. People use it to hold money in crypto without sharp price swings.

Can a stablecoin lose its value?

Yes. If reserves fall short or the mechanism breaks, the token loses its peg. That happened to UST in 2022 and, briefly, to USDC in March 2023.

What is the difference between USDT and USDC?

Both are pegged to the dollar and backed by reserves, but they are issued by different companies with different reporting and regulation. In practice they differ in reserve transparency and in which exchanges and networks use them most.

Stablecoin

How it works

Questions and answers

Related terms

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