Cryptocurrencies are known for wild price swing; but stablecoins promise stability by “pegging” their value to more stable assets like the US dollar. What are stablecoins exactly?
They are crypto tokens designed to maintain a constant value relative to a reference asset. Most stablecoins target a 1:1 peg with the US dollar, that is, one coin equals one dollar.
Issuers achieve this through methods such as holding dollar reserves or using algorithms to adjust supply. The stablecoin market has grown rapidly, about $255 billion of stablecoins existed by mid-2025 (99% of that is USD-pegged) and they are used for trading, DeFi (decentralized finance), cross-border payments, and as crypto “safe havens.”
What Are Stablecoins? Definition and Purpose
A stablecoin is, by definition, a cryptocurrency engineered to hold a stable value against a reference asset. Unlike Bitcoin or Ethereum, which can jump or crash many percent in minutes, stablecoins stay approximately flat. As the ECB notes, stablecoins;
“aim to maintain a stable value relative to a traditional asset, typically via a peg to a currency such as the US dollar”.
They function as a bridge between volatile crypto-assets and traditional fiat money. Users trade or store value in stablecoins to avoid crypto’s volatility while still moving assets on blockchains. Traders use stablecoins for crypto trading (to move in and out of volatile positions), remittances (cross-border payments with crypto rails), and even as substitutes for cash in some crypto-friendly businesses.
Most stablecoins peg to the US dollar. The market is dominated by USD-backed coins. This includes coins like Tether’s USDT and Circle’s USDC, which together make up the lion’s share of the $255B stablecoin market.
In contrast, euro- or commodity-pegged stablecoins exist but are niche (there are a few euro-pegged coins with market value under $350 million. The appeal of stablecoins lies in their speed and accessibility: they transfer as fast as crypto transactions and, in theory, avoid banking delays and fees when used for payments or remittances.
Major Stablecoin Examples
The table below shows leading stablecoins by type, backing, and status. It highlights how different designs affect trust and risk.
| Stablecoin (Ticker) | Backing/Type | Peg | Market Cap (2025) | Status |
| Tether (USDT) | Fiat-collateralized
(USD reserves) |
USD 1:1 | $167B | Largest stablecoin by far. |
| USD Coin (USDC) | Fiat-collateralized
(USD & treasury bills) | USD 1:1 | $67B | Regulated (New York-authorized) and regularly audited. |
| Dai (DAI) | Crypto-collateralized
(on-chain crypto) |
USD 1:1 | $5.4B | Decentralized stablecoin by MakerDAO; over-collateralized with crypto (Ether, etc.). |
| TerraUSD (UST) (†) | Algorithmic
(paired with LUNA token) |
USD 1:1 | Collapsed 2022 | Fallen. TerraUSD was an algorithmic coin using the LUNA token to maintain its peg. |
| Frax USD (FRAX) | Fractional-algorithmic
(crypto + code) |
USD 1:1 | $1.5B (mid-2025) | Newer fractional stablecoin. |
How Stablecoins Work: Mechanisms of Stability
Stablecoins maintain value through collateral or protocols. Fiat-backed stablecoins (like USDT; USDC; BUSD); hold cash or short-term government bonds equal to the coins issued. Ideally; anyone can redeem 1 coin for $1 of currency, keeping the market price at $1.
Issuers like Circle and Paxos; claim USDC and BUSD are backed 1:1 by dollar reserves. This backing keeps the price stable unless the reserves are mismanaged.
Crypto-collateralized stablecoins (e.g. MakerDAO’s DAI); lock up volatile crypto as collateral in smart contracts. Since crypto fluctuates; these coins often require over-collateralization (e.g. $150 of Ether to back $100 DAI) to absorb price swings.
Oracles feed price data into contracts so that if collateral value falls, the system automatically liquidates positions to keep peg. This removes any single custodian, but introduces new risks: complex smart contracts and price oracle vulnerabilities.
Algorithmic stablecoins use no reserve; instead they algorithmically expand or contract supply to stay near $1. These systems often involve a secondary token to absorb losses. In theory, they need no collateral, but in practice, they are fragile. As Gemini explains, algorithmic models have “proven difficult to scale” and often produce more volatility than expected.
Thus, most large stablecoins avoid pure algorithms, favoring tangible collateral for trust. In all cases, stablecoins rely on trust in the issuer or protocol. They typically promise 1:1 convertibility, but unlike a regulated bank deposit, users cannot redeem coins directly for cash unless they go through designated on-ramps or exchanges.
Notably; stablecoins do not offer FDIC insurance or other government guarantees. As experts warn, even if yields on stablecoins look attractive; these products do not provide any government-backed insurance
Are Stablecoins Really Safe? Key Risks and Incidents
Despite “stable” in their name, stablecoins are not risk-free. Their safety depends on design and execution. One big risk is reserve failure or fraud. If backing assets are less liquid or valued than claimed, the peg can break.
For example, in 2021 the New York Attorney General charged Tether with fraud, stating its claim of fully backed USD reserves “was a lie” and that it hid hundreds of millions in losses.
Tether settled for $18.5M and now provides more disclosure, but critics still note its reserves include loans and commercial paper, not just cash. This highlights that fiat-backed stablecoins require trust in the issuer’s transparency.
Banking risk is another issue. In early 2023, Silicon Valley Bank (SVB), a major custodian, went under. Circle (USDC issuer) had $3.3B of reserves at SVB, about 8% of its total. USDC briefly dropped to $0.87 before recovering. Circle tweeted that if the bank didn’t return all funds, it would cover any shortfall with its own capital.
Eventually, USDC got back to $1 after a U.S. Treasury intervention. This shows that even “fully collateralized” stablecoins can de-peg if their reserves get locked or lost and their maintenance relies on external banking stability.
Another risk is algorithmic/systemic failure. TerraUSD (a now-defunct algorithmic stablecoin )’s collapse in May 2022 wiped out $60 billion in market value. UST’s design would mint more UST when demand rose and burn when demand fell, using LUNA tokens to balance.
However, in a market downturn, confidence evaporated, UST lost its dollar peg and crashed to $0, taking LUNA with it. As sources recount, UST’s fall “caused a massive crypto crash” when it “lost its dollar peg and hurtled to zero.
This showed that algorithmic peg mechanisms can be very fragile when stress hits.
Operational and security risks also exist. Centralized stablecoins rely on companies and custodians; if their systems are hacked or mismanaged, funds can be stolen. Decentralized stablecoins rely on smart contracts; which have been exploited (e.g. DeFi hacks that drained stablecoin pools).
Phishing scams and fake “clone” stablecoins also threaten users. Experts note that hackers target stablecoins through phishing, contract exploits and rug pulls which can have big market impact.
If a popular DeFi protocol using stablecoins is exploited, it can freeze or lose millions of dollars overnight. Regulatory uncertainty is another risk. Stablecoin issuers aren’t banks so legal protection for users is unclear.
As noted, there is no FDIC insurance; in fact if a custodian bank fails, depositors (like stablecoin issuers) might not be fully covered. In the SVB case, Circle’s deposits were uninsured and only a government bailout prevented losses.
However, Legislative responses such as the GENIUS Act guarding stablecoins are now emerging. US laws now propose banks or regulated entities issue stablecoins, but until rules are final, regulatory risks could remains.
Expert Perspectives and Regulation
Big financial authorities warn large scale stablecoin adoption could be systemic risk. The Bank for International Settlements (BIS) and European Central Bank (ECB) have issued warnings. In 2025, the BIS said many stablecoins don’t stay at par (the $1 target), highlighting the fragility of their peg.
The ECB echoes this, saying stablecoins growth “poses strategic challenges” beyond crypto itself, potentially affecting monetary sovereignty and financial stability.
On regulation: authorities are moving fast. In the US, Congress passed the GENIUS Act in mid-2025, creating a federal framework for dollar-backed stablecoins. The Act requires issuers to hold safe reserves (like cash or Treasuries) and adhere to auditing rules.
Europe’s MiCA regulation (effective 2024-25) sets strict rules for issuers, including capital requirements and redemption rights. Experts say these rules are roughly the same.
Regulators emphasize transparency and consumer protection. The SEC has said so called “covered stablecoins” (1:1 USD backed coins redeemable on demand) aren’t securities if fully compliant. But the SEC and other agencies still say stablecoins must have honest reserves.
Politicians like Senator Elizabeth Warren have warned stablecoins must guard against bank run dynamics; Warren pointed to the UST case as an example and said issuers shouldn’t be allowed to invest reserves in risky assets. Indeed the 2022 UST debacle prompted calls to treat stablecoins like bank deposits.
On the other hand, Crypto data providers show stablecoins power most of DeFi. 45% of decentralized exchange (DEX) liquidity in May 2022 was stablecoins. That’s how important they are. Many crypto loans and trades use stablecoins as the unit of account.
In short, knowledgeable people agree stablecoins are useful but they say technical, financial and regulatory safeguards need to improve for stablecoins to be “safe.”
Conclusion
Based on the latest research, what are stablecoins can be answered simply: They’re cryptocurrencies pegged to stable assets. Stablecoins maintain stable prices via reserves or algorithms chainalysis.comecb.europa.eu, but certain events show they have non-trivial risks
Big issuers can face run-like pressures and smaller or algorithmic coins can fail catastrophically when confidence breaks. Transparent backing; robust auditing and prudent design are essential, otherwise some experts think stablecoins aren’t inherently safer than other crypto.
Overall; understanding what stablecoins are is only half the story; understanding their limits and the safeguards (regulatory or technical) in place is crucial to decide if any stablecoin is truly “safe”.
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Summary
Stablecoins are crypto tokens pegged to assets (often USD) to minimize volatility. Some stablecoins (fiat-backed, crypto-backed, algorithmic); maintain their peg. Looking at safety; despite their design, stablecoins face risks from reserve failures, algorithmic breakdowns, hacks and regulatory gaps (as seen in UST’s collapse and USDC’s brief de-peg).
FAQs
What is a stablecoin?
A stablecoin is a cryptocurrency that pegs its value to a stable reference asset (usually the US dollar or euro); so its price is almost constant. Unlike Bitcoin; stablecoins aim for price stability by design.
How do stablecoins maintain a stable value?
They either hold reserves or use algorithms. Fiat-backed stablecoins (like USDT/USDC); hold equal-value dollars or bonds in custody. Crypto-backed stablecoins (like DAI); lock up cryptocurrency as collateral in smart contracts. Algorithmic stablecoins adjust token supply programmatically. Each method tries to keep the coin at its $1 peg.
Are stablecoins risk-free or insured?
No; Stablecoins do not have government insurance (e.g. FDIC); like bank accounts. They rely on the issuer’s reserves or code. Always check how a stablecoin is backed and audited before trusting its stability.
What happened to TerraUSD (UST)?
TerraUSD was an algorithmic stablecoin. In May 2022; it lost its dollar peg, meaning it fell far below $1 and crashed to almost zero; which in turn destroyed its sister token LUNA. This event wiped out about $60 billion, a warning that algorithmic peg mechanisms can fail under stress.
Glossary
Stablecoin: A cryptocurrency tied to a stable asset (like a fiat currency or commodity); to reduce price volatility.
Peg: A fixed exchange rate. A stablecoin pegged 1:1 to the dollar means 1 coin = $1.
Fiat-collateralized: Backed by government money (e.g. USD in a bank). Each coin is supposed to be backed by an equal amount of fiat currency or liquid assets.
Crypto-collateralized: Backed by other cryptocurrencies.
Algorithmic stablecoin: A coin with no traditional collateral. It uses code rules to expand or contract supply to maintain its price. This can be very volatile if the mechanism fails.
