Stablecoin
A stablecoin is a cryptocurrency pegged to the value of an ordinary currency, most often the dollar. One USDT or USDC should always be worth about a dollar, which is why people park money in them between trades and settle payments with them.
How it works
Fiat-backed stablecoins (USDT, USDC) hold reserves in dollars and short government debt: every issued token is meant to have a dollar behind it. The peg holds through redemption, since a large holder can exchange tokens with the issuer at par and arbitrage pulls the price back to a dollar.
Crypto-backed ones (DAI) work differently: collateral in ETH and other coins exceeds the issued amount, typically by half again, and that excess absorbs a fall in the collateral's price.
Algorithmic ones hold no reserve at all and defend the price by minting and burning a second token. That design has already failed: in May 2022 UST lost its peg and roughly $40bn of value disappeared within days.
What happens to a peg
March 2023: $3.3bn of USDC reserves sat in the collapsed Silicon Valley Bank.
| Before the news | $1.0000 |
| Low on 11 March | ≈ $0.8800 |
| Three days later | ≈ $0.9990 |
Selling into the panic cost about 12%; waiting cost almost nothing. A stablecoin's real risk is not volatility but what backs the reserve and who verifies it.
What to weigh
- What backs itCash and short government paper are one thing. Corporate paper, loans and "other assets" are another.
- Who attests, and how oftenA monthly report from an independent firm and an annual press release are not the same level of assurance.
- Which rules applyIn the EU, MiCA has applied since 2024, putting reserve requirements and licensing on stablecoin issuers. That is a checkable fact rather than a promise.
- The network it lives onThe same USDT exists as ERC-20, TRC-20 and more. Sending to the wrong network loses the money for good.
- Whether you can redeemIf only a client with a million can redeem tokens for dollars with the issuer, the peg is not being defended on your behalf.