What is a Stablecoin?

A stablecoin is a digital asset designed to serve as a low-volatility reference inside crypto markets, most often pegged 1:1 to the US dollar. There are three main classes. First, fiat-backed stablecoins (USDT, USDC) hold reserves in bank deposits or short-term US treasuries. Second, crypto-collateralized stablecoins (DAI) are over-collateralized using volatile crypto as backing. Third, algorithmic stablecoins (TerraUSD before its collapse) attempt to maintain peg through supply/demand mechanics rather than reserves and have historically been the most prone to depeg. Stablecoins are used as a medium of exchange, as collateral inside DeFi protocols, and as a low-friction cross-border transfer rail. The main investor risk is reserve transparency: published attestations and full audits matter, and even large stablecoins can briefly depeg under extreme stress (USDC traded near $0.87 during the March 2023 SVB crisis before recovering). Regulation (the EU's MiCA framework, US-level stablecoin bills) is steadily tightening reserve, redemption, and licensing requirements for issuers.