The easiest way to explain what stablecoins are is with an example: a stablecoin is a token built to always be worth exactly one dollar, or one unit of some other chosen asset. In this lesson you'll see how that price is held, how USDT, USDC, DAI and the others differ, why the peg sometimes fails, and how to use stablecoins wisely.
- A stablecoin is a token pegged to the dollar, the euro or gold, and it serves as the unit of account across the crypto world.
- The biggest stablecoins are backed by real reserves in dollars and government bonds, but as a holder you are trusting the issuer.
- Pegs can break: the algorithmic UST collapsed in 2022, and USDC briefly lost its peg in 2023.
- Issuers of centralized stablecoins can freeze tokens, and the rules for them are getting stricter in the EU and the US.
Why crypto needs a stable coin
Take bitcoin or ether: the price can move several percent in a day and tens of percent in a month. That's a pain when you want to lock in a profit, pay a partner or just sit tight for a while without going back into the banking system. A stablecoin fixes this. It lives on a blockchain like any other cryptocurrency, but its price barely moves.
Most stablecoins are pegged to the US dollar, since the dollar is still the world's main settlement currency. There are euro versions like EURC, and tokens backed by physical gold, such as PAXG and XAUT. But in trading volume and real-world use, dollar stablecoins hold the overwhelming share of the market.
In practice, the whole crypto infrastructure runs on stablecoins. Most exchange pairs are quoted in USDT or USDC, futures are settled in stablecoins, and in DeFi they're the core asset for lending and liquidity pools.
The peg is the price a stablecoin aims to hold, for example 1 dollar. A depeg is when the market price drifts noticeably away from the peg, usually downward, because people start doubting the reserves or the mechanism.
How stablecoins hold their price
A peg doesn't hold by itself. It needs a mechanism that either lets you swap the token for a dollar or nudges traders to push the price back to target. That mechanism decides who you're trusting and what can go wrong.
The most common type is the fiat-backed stablecoin. The issuer (Tether for USDT, Circle for USDC) keeps reserves in cash, short-term US Treasuries and similar assets, and issues the same amount in tokens. Large clients can redeem tokens with the issuer for dollars, and that arbitrage keeps the price pinned close to one dollar.
Crypto-backed DAI and its successor, USDS from Sky, work differently: to mint 100 dollars' worth of tokens, you have to lock up noticeably more than that in crypto as collateral. Ethena's synthetic dollar, USDe, holds its price by hedging with futures. And purely algorithmic stablecoins with no real backing have all but disappeared since UST collapsed.
| Model | Examples | Backed by | Main risk |
|---|---|---|---|
| Fiat-backed | USDT, USDC, PYUSD, EURC | Cash and government bonds held by the issuer | Trust in the issuer and banks, freezes |
| Crypto-backed | DAI, USDS | Over-collateralized crypto in a smart contract | Sharp drop in collateral, contract bugs |
| Synthetic | USDe | Crypto plus short futures positions | Negative funding rate, exchange risk |
| Commodity-backed | PAXG, XAUT | Physical gold in custody | Trust in the custodian, gold price |
| Algorithmic | UST (in the past) | Only a mint-and-burn mechanism | Loss of confidence and a death spiral |
Where stablecoins are used
For a trader, a stablecoin works like cash in a brokerage account: you sell a coin, park the result in USDT and wait for your next entry without withdrawing to your card. For businesses and individuals, it's a handy way to send money abroad fast, any day of the week.
In countries with high inflation or limits on buying foreign currency, people save in dollar stablecoins. Just don't confuse this with a bank deposit: there's no government insurance here.
Stablecoins also act as a bridge between services. USDT you received on an exchange can be sent to a DeFi protocol, another exchange or another person, and it's the same digital dollar everywhere, as long as the network matches.
- Settlement currency on exchanges: most pairs are quoted against USDT or USDC.
- Collateral for futures and margin trading.
- Lending and liquidity pools in DeFi protocols.
- International transfers and paying for services without a bank in the middle.
- Dollar savings where access to physical cash is restricted.
When stability breaks
In May 2022, the algorithmic stablecoin UST from the Terra ecosystem collapsed. Its peg relied on a swap mechanism with the LUNA token, and once confidence cracked, a spiral kicked in: selling UST ballooned the LUNA supply, LUNA got cheaper, and UST slid further and further off its peg. Within a few days, both tokens were worth next to nothing.
In March 2023, even USDC briefly lost its peg: part of its reserves turned out to be sitting in Silicon Valley Bank, the US lender that had just failed. The price dropped well below a dollar and only recovered after US authorities guaranteed the bank's deposits. That same year, the New York regulator ordered Paxos to stop minting new BUSD, and what was once one of the largest stablecoins gradually faded from the market.
Freezes are a separate risk. At the request of law enforcement or because of sanctions, the issuer of a fiat-backed stablecoin can block the tokens at a specific address. This rarely happens to law-abiding users, but if you receive funds from an address linked to fraud, those tokens can end up frozen in your wallet.
A stablecoin protects you from crypto market swings, but not from problems with the issuer, the banks holding the reserves, smart contracts or regulators. Keeping a large sum in a single stablecoin on a single platform isn't smart.
Stablecoin regulation
Stablecoins were the first crypto assets to get laws of their own. In the EU, under the MiCA regulation, since mid-2024 stablecoins can only be issued and offered with a license and under strict reserve requirements. USDC has that license and USDT doesn't, so European platforms have restricted USDT trading for clients in the EEA.
In the US, the GENIUS Act was passed in summer 2025: issuers must hold one-to-one reserves in dollars and short-term Treasuries, disclose what those reserves consist of on a regular basis and not pay interest to holders. Rules in other countries vary and keep changing, so if you use stablecoins for large sums or for business, check their status in your jurisdiction.
A stablecoin earns nothing on its own. The interest is paid by the platform that puts your tokens to work: an exchange, a lending protocol or a liquidity pool. That means the platform's risks are stacked on top of the stablecoin's.
How to choose and store a stablecoin
For everyday trading, the choice usually comes down to what your exchange offers, and USDT and USDC trade almost everywhere. For storage, other things matter more: who the issuer is, where the reserves are held and how often reports on them come out.
Anything you don't need for active trading can sit in your own non-custodial wallet, so you don't depend on an exchange. Just keep in mind that the issuer can still freeze tokens there, because the token remains under the control of its smart contract.
Look closely at the token's name, too. On DEXs and lesser-known networks you'll run into fakes using the USDT or USDC ticker with no backing at all. Before you accept a token like that as payment, check the contract address on the issuer's website or on CoinGecko.
- Check who issues the stablecoin and whether the issuer publishes regular reserve reports.
- Make sure the stablecoin you pick is allowed and supported by platforms in your country.
- Choose a low-fee network that both the sender and the recipient support.
- Don't accept transfers from strangers when you can't tell where the funds came from.
- Spread large sums across several stablecoins and storage methods.
Open the transparency pages of Tether and Circle and write down, for USDT and USDC: how many tokens are in circulation, what the reserves consist of and the date of the latest reserve report. Then find the official USDT contract address on Tron or Ethereum on CoinGecko and save it. That's the address to check against whenever someone sends you "USDT". By the end you should understand who you are trusting when you hold each of the two stablecoins, and be able to tell a real token from a fake with the same ticker.
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FAQ
What's the difference between USDT and USDC?
Both are pegged to the dollar and backed by reserves, but they're issued by different companies: USDT by Tether, USDC by the US-based Circle. They differ in reserve composition, approach to reporting and regulatory status. For example, in the EU only USDC holds a MiCA license.
Can a stablecoin lose its value?
Yes. Fiat-backed stablecoins can temporarily lose their peg because of reserve problems, and poorly backed ones can go to zero entirely, like UST in 2022. That's why it matters to understand what holds a particular token's price.
Can I keep my savings in stablecoins?
Plenty of people do, but it's not a deposit: there's no government insurance, and the risks come from the issuer, the platform and the laws of your country. If you hold a meaningful amount in stablecoins, spread it out and keep part of it in your own non-custodial wallet.
Which network is best for sending USDT?
Pick a network that both the sender and the recipient support, with a fee that makes sense for your amount. Fees vary a lot between networks and change over time, so compare them on your exchange or in your wallet before sending. Before you send, double-check the network on both sides and do a small test transfer first.
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