Stablecoin
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Stablecoin is a cryptocurrency designed to maintain a stable value, typically pegged 1:1 to a fiat currency like the US dollar. Stablecoins combine the speed and programmability of crypto with the price stability of fiat, making them the dominant medium of exchange for crypto trading and DeFi.
Types of stablecoins
Fiat-backed (centralized)
Issued by companies that hold cash, treasuries, or equivalents in reserve to back each token 1:1.
- USDT (Tether) — largest stablecoin by market cap and trading volume
- USDC (Circle) — more transparent reserve structure, regular attestations by auditors
- FDUSD, PYUSD — newer entrants
Trade-off: you must trust the issuer and their auditors. The issuer can also freeze addresses at a regulator's request.
Crypto-backed
Minted when users deposit over-collateralized crypto (e.g., 150% ETH) into a smart contract.
- DAI (MakerDAO) — backed by a mix of ETH, wBTC, and other assets
Trade-off: more decentralized, but capital-inefficient and exposed to collateral volatility.
Algorithmic (high risk)
Maintain peg through algorithmic mint/burn with a volatile sister token, not real reserves.
- UST (TerraUSD) — collapsed catastrophically in May 2022, wiping out ~$40 billion in value in days. Its death spiral is the textbook warning against unbacked algorithmic designs.
Use cases
- Trading — park funds in stablecoins during crypto volatility without leaving the crypto ecosystem
- Remittances — cheap, fast cross-border transfers
- DeFi — lending, borrowing, yield farming with predictable unit of account
- Payouts — miners and freelancers can receive stable-value crypto
Risks
- Depeg events — even fiat-backed stablecoins have briefly lost their peg (USDC fell to $0.87 during the March 2023 Silicon Valley Bank crisis)
- Issuer risk — reserves may be less liquid than claimed
- Regulatory risk — stablecoins are an active target of new legislation worldwide
