Glossary
What is a stablecoin?
In one sentence
A stablecoin is a crypto token designed to hold a steady value, usually one US dollar — "stable" is an intention, not a guarantee.
Stablecoins exist because moving in and out of volatile assets is awkward. Rather than converting back to bank money each time, traders park value in a token that is supposed to stay at a dollar.
There are three broad mechanisms. Fully reserved stablecoins are backed by cash and short-term government debt held by a company — your confidence rests on whether the reserves are real and properly audited. Over-collateralised stablecoins are backed by other crypto locked in smart contracts, worth more than the tokens issued, with automatic liquidation if the collateral falls. Algorithmic stablecoins tried to hold the peg through supply mechanics without adequate backing.
That third category has repeatedly failed, most spectacularly in 2022 when a major algorithmic stablecoin collapsed to near zero within days and took tens of billions of dollars of value with it. Even reserved stablecoins have briefly traded below a dollar when confidence in their backing wavered.
Treat a stablecoin as a claim on an issuer or a mechanism, not as cash.
For example
Holding a stablecoin still carries risk — you are trusting whoever or whatever maintains the peg.