A stablecoin pegs its value to a stable asset, usually the US dollar. Tether and USDC are the largest. One token equals one dollar, or close to it. That stability makes stablecoins useful for trading, settlement, and holding value without exposure to crypto volatility. Traders park funds in stablecoins between trades. Businesses use them for cross-border payments. People in countries with unstable currencies use them as a dollar substitute.

Not all stablecoins are equally stable. Tether has faced questions about whether its reserves actually hold enough dollars. USDC is more transparent, publishing monthly attestations. Algorithmic stablecoins like TerraUSD tried to hold the peg with code instead of collateral. TerraUSD collapsed in May 2022, wiping out $40 billion. The lesson is simple: a stablecoin is only as good as its reserves. Fiat-backed stablecoins hold dollars or equivalents in bank accounts and treasuries. Crypto-backed stablecoins hold other crypto as collateral. Algorithmic stablecoins use incentives and arbitrage. The first two have survived stress tests. The third has not.

Stablecoin types

• Fiat-backed — USDC, USDT, reserves in dollars
• Crypto-backed — DAI, collateral in ETH and other crypto
• Algorithmic — UST, failed in 2022
• Commodity-backed — pegged to gold or other assets

Stablecoins are the plumbing of crypto. They are not exciting. They are necessary.