Monday, October 19, 2026

GlossaryConcept

Stablecoin: What It Is and How It Works

A stablecoin is a cryptocurrency designed to hold a steady value, usually pegged 1:1 to a fiat currency such as the US dollar and backed by reserves or collateral. It lets people move dollar-like value on a blockchain, around the clock, without the price swings of assets like bitcoin.

By COINOTAG Research DeskLast updated September 30, 2026Sources

Key facts

Launched: First widely used stablecoin: Tether (USDT), 2014
Consensus: None of its own: stablecoins are tokens issued on existing blockchains such as Ethereum, Tron and Solana
Official website: ethereum.org

How a stablecoin keeps its peg

A stablecoin is a token that lives on a blockchain like Ethereum, Tron or Solana. What makes it "stable" is a promise, backed by a mechanism, that one unit can be exchanged for one unit of the reference asset.

For the common dollar-backed type, the loop works like this:

Minting. An approved customer sends dollars to the issuer, and the issuer creates the same number of tokens.
Circulation. The tokens move freely between wallets, exchanges and DeFi applications, 24/7.
Redemption. A customer returns tokens to the issuer, the issuer burns them and pays out dollars.

Arbitrage keeps the market price close to $1. If the token trades at $0.99 on an exchange, traders who can redeem buy it cheaply and redeem it for $1; if it trades at $1.01, they mint new tokens for $1 and sell them. Each trade pushes the price back toward the peg, as long as people trust that redemption will actually work.

That trust rests on the reserves: what the issuer holds, where it is held and how often it is independently checked. Reserve quality is the single biggest difference between one dollar stablecoin and another.

How the peg holds: most stablecoins rely on arbitrage backed by redemption. If a fiat-backed stablecoin trades at $0.99 on an exchange, arbitrageurs can buy it there and redeem it with the issuer for $1, and that buying pushes the price back up; above $1, new tokens are minted and sold. The mechanism is only as strong as the redemption promise behind it. Hybrid designs such as FRAX mixed partial reserves with algorithmic mechanisms.

Types of stablecoins

Type	What backs it	Examples	Main risk
Fiat-backed	Cash, bank deposits and short-term government bills held by an issuer	USDT, USDC	Issuer and reserve risk; the issuer can freeze addresses
Crypto-collateralized	More crypto than the stablecoins issued, locked in smart contracts	DAI	A sharp crash in the collateral; contract bugs
Commodity-backed	Physical assets such as gold	PAX Gold, Tether Gold	Custody of the commodity; tracks the commodity, not the dollar
Algorithmic	Rules that expand or shrink supply, often through a sister token	UST (collapsed)	A confidence spiral that the mechanism cannot stop

Newer designs blur these lines. Yield-bearing stablecoins such as Savings DAI pass part of the reserve income on to holders, and synthetic dollars such as Ethena's USDe hold their value through hedged derivatives positions rather than cash reserves. These carry additional risks that a plain cash-backed token does not.

A short history

2014: Tether, first launched under the name Realcoin on Bitcoin's Omni Layer, introduced the model of a dollar-backed token on a blockchain.
2017–2018: MakerDAO's DAI showed that a stablecoin could be backed by crypto collateral in smart contracts, and Circle's USDC arrived in 2018 as a second large fiat-backed token.
2020–2021: the DeFi boom made stablecoins the main unit of account for lending, trading and liquidity pools.
2022: TerraUSD (UST), an algorithmic stablecoin on Terra, lost its peg in May and collapsed together with its sister token LUNA. The event pushed regulators and users toward fully reserved designs.
2024–2025: the EU's MiCA rules for stablecoins took effect in 2024, and the United States passed the GENIUS Act, its first federal law for payment stablecoins, in 2025.

2023 onward: payment companies joined in. On 7 August 2023 PayPal launched PayPal USD (PYUSD), issued by Paxos; on 5 September 2023 Visa said it had expanded USDC settlement to the Solana blockchain and to merchant acquirers. On 20 March 2024 BlackRock launched its first tokenized fund, BUIDL, on Ethereum, a sign of traditional asset managers moving dollar products on-chain.

What stablecoins are used for

Trading. Most crypto pairs on exchanges are quoted against a dollar stablecoin, so traders can step out of volatile positions without leaving the blockchain.
DeFi. Stablecoins are the base asset for lending markets such as Aave, for liquidity pools on DEXs and for yield farming.
Payments and remittances. Sending a stablecoin across borders settles in minutes and costs only the network fee, whatever the day or hour.
A dollar account. In countries with high inflation or capital controls, people hold dollar stablecoins as a savings substitute.
Settlement for tokenized assets. Tokenized funds and payment-focused apps use stablecoins as the cash leg.

The total value of stablecoins in circulation changes daily; this page does not quote a figure because it would go out of date.

Risks: depegs, reserves and freezes

A stablecoin is only as good as the mechanism behind it.

Depeg. A stablecoin can trade below $1 when holders doubt its backing or cannot redeem quickly. Even large fiat-backed stablecoins have briefly slipped below $1 when part of their reserves was caught up in a bank failure, while UST never recovered in 2022.
Reserve quality and transparency. Holders rely on the issuer's reports and audits or attestations. Reserves in riskier assets, or poorly disclosed ones, raise the chance of a run.
Freezing and blacklisting. Centralized issuers can freeze tokens at specific addresses, for example to comply with sanctions or court orders.
Smart-contract and collateral risk. Crypto-backed designs can suffer bugs or liquidation cascades in a crash.
Regulation. A stablecoin may be delisted or restricted in a region where it does not meet local rules.

This is general information, not a recommendation to hold any stablecoin.

How stablecoins are regulated

European Union: under MiCA, dollar and euro stablecoins are regulated as e-money tokens or asset-referenced tokens. Issuers need authorization and must hold reserves under set rules, and exchanges in the EU have delisted tokens that do not comply.
United States: the GENIUS Act created a federal framework for "payment stablecoins", requiring full reserves in high-quality liquid assets, regular public reserve disclosures and licensed issuers.
United Arab Emirates: the Central Bank of the UAE regulates payment tokens, including dirham-backed tokens, while VARA in Dubai and the FSRA in ADGM supervise virtual-asset service providers in their jurisdictions.
Elsewhere: Hong Kong, Singapore and Japan have introduced licensing regimes for stablecoin issuers.

Rules continue to change, so the issuer's own disclosures and the local regulator are the reference for any specific token.

Stablecoin vs CBDC vs bank deposit

A stablecoin is issued by a private company or protocol and runs on a public blockchain. A CBDC (central bank digital currency) is a direct liability of a central bank. A bank deposit is a claim on a commercial bank, protected in many countries by deposit insurance, which stablecoins usually lack. Stablecoins trade the protection of the banking system for speed, openness and programmability.

Frequently Asked Questions

6 questions

What is a stablecoin in simple terms?

It is a crypto token designed to stay worth the same as a normal currency, usually one US dollar. It moves on a blockchain like any other token but is meant not to swing in price.

How do stablecoins stay at $1?

Fiat-backed stablecoins hold reserves and let approved customers mint and redeem at $1, so arbitrage pulls the market price back to the peg. Crypto-backed ones hold excess collateral in smart contracts. Algorithmic ones rely on supply rules and have the weakest track record.

What are the main examples of stablecoins?

The largest are the fiat-backed USDT (Tether) and USDC (Circle). DAI is the best-known crypto-collateralized stablecoin, and PAX Gold is an example of a gold-backed token.

Can a stablecoin lose its peg?

Yes. TerraUSD collapsed in 2022, and even large fiat-backed stablecoins have briefly traded below $1 during banking stress. A depeg happens when holders doubt the backing or cannot redeem fast enough.

Is a stablecoin the same as a CBDC?

No. A stablecoin is issued by a private company or protocol, while a CBDC is digital money issued directly by a central bank.

Do stablecoins pay interest?

Plain fiat-backed stablecoins do not pay holders; the issuer keeps the income from the reserves. Yield-bearing stablecoins and DeFi lending can pay a return, with added risk.

Related Terms

What is Algorithmic Stablecoins?
An algorithmic stablecoin is a crypto token that maintains a price peg (usually to the US dollar) through code-enforced supply rules rather than a bank account full of cash. Smart contracts automatically mint new tokens when the price drifts above the target and burn or contract supply when it drops below, using arbitrage incentives to nudge traders back toward equilibrium. Unlike fiat-backed stablecoins such as USDT or USDC, a purely algorithmic design holds little or no off-chain collateral, prioritizing decentralization and censorship resistance over hard reserves. This makes the model capital-efficient but fragile: when confidence breaks, the same feedback loop can drive the token toward zero in a death spiral.
What is a Yield-Bearing Stablecoin?
A yield-bearing stablecoin is a fiat-pegged crypto token, usually tied 1:1 to the US dollar, that pays passive interest directly to holders. Unlike a standard stablecoin that earns nothing, it routes income from its backing reserves or on-chain strategies, such as lending, liquid staking, or tokenized Treasury bills, back to whoever holds the token. Holders typically keep custody of their assets in their own wallet while the balance or redemption value grows over time. This makes the token behave like a tokenized, interest-earning savings account, helping offset inflation and giving global users borderless access to yield that was previously locked behind traditional finance.
What is Central Bank Digital Currency?
A Central Bank Digital Currency (CBDC) is a digital form of a country's official fiat money, issued and fully backed by its central bank. Unlike decentralized cryptocurrencies, a CBDC is centralized, pegged 1:1 to the national currency, and not mined — it is a direct liability of the central bank and counts as legal tender. CBDCs come in two main types: retail versions for everyday public payments and wholesale versions for interbank settlement. They aim to modernize payments, boost financial inclusion, and preserve monetary sovereignty, but raise concerns over privacy, state surveillance, and the disintermediation of commercial banks.
What is DeFi?
DeFi (decentralized finance) is a set of financial services, such as trading, lending and borrowing, that run as smart contracts on public blockchains instead of through banks or brokers. Anyone with a crypto wallet can use them, and the code, not a company, enforces the rules.
What is What Does Circle Internet Group Do?
Circle Internet Group (CRCL) is the issuer of USDC, the world's second-largest stablecoin. Having gone public via IPO in 2025, the company generates interest and transaction revenue at the crossroads of the crypto economy and traditional finance.