Stablecoins Explained
Cryptocurrencies designed to maintain a stable value.
Why They Exist
Bitcoin and other cryptocurrencies are extremely volatile — prices can swing 10-30% in a single day. This makes them impractical for everyday payments or as a stable store of value.
Stablecoins solve this by maintaining a steady value (usually $1 USD), allowing people to use cryptocurrency without worrying about price fluctuations.
Types of Stablecoins
Fiat-Backed (Most Common)
Backed 1:1 by real dollars held in bank accounts. For every stablecoin issued, $1 (or equivalent) is held in reserve.
Crypto-Backed
Backed by other cryptocurrencies (over-collateralized to handle volatility). More decentralized but more complex.
Algorithmic (High Risk)
Use algorithms to maintain peg without collateral. History shows these often fail catastrophically (see: UST/Terra collapse 2022).
Major Stablecoins Compared
| Aspect | USDC | USDT |
|---|---|---|
| Issuer | Circle (US company) | Tether Limited (offshore) |
| Backing | Cash + short-term treasuries | Cash + commercial paper |
| Audits | Monthly attestations | Quarterly attestations |
| Transparency | Higher | Lower |
| Market Cap | ~$25 billion | ~$95 billion |
| Primary Use | DeFi, institutions | Trading, exchanges |
Common Use Cases
Safe Haven
Move funds to stablecoins during market volatility without converting back to fiat.
Trading Pairs
Most crypto trading pairs use USDT or USDC as the quote currency.
Payments
Send dollar-equivalent value globally without traditional banking delays.
DeFi
Provide liquidity, earn yield, or use as collateral in DeFi protocols.
- De-pegging: Stablecoins can lose their $1 peg (UST went to $0)
- Counterparty risk: You trust the issuer to hold actual reserves
- Regulatory risk: Governments may restrict or ban stablecoins
- Smart contract risk: Bugs in the contract code
- Centralization: Issuers can freeze/blacklist addresses
Case Study: UST/Terra Collapse (2022)
UST was an algorithmic stablecoin that collapsed from $1 to near $0 in days, wiping out $40+ billion in value. This demonstrated that not all stablecoins are equally safe. Stick to well-audited, fiat-backed options.
- Not all stablecoins are equally safe — backing matters
- USDC is generally considered more transparent than USDT
- Avoid algorithmic stablecoins until you deeply understand their mechanisms
- Stablecoins on different blockchains (Ethereum vs Tron) are not interchangeable
- Even stablecoins carry risk — they are not the same as actual dollars