The learning path
A stablecoin is a token designed to hold a steady value, nearly always pegged to one US dollar. Fiat backed stablecoins like USDC and USDT hold cash and Treasury bills in reserve. Crypto backed ones like DAI are overcollateralized by assets locked in smart contracts. Algorithmic stablecoins with no real backing have failed catastrophically and should be treated as a different asset class entirely.
Why they exist
Crypto is volatile. If you want to take profit, sit out a downturn, or price something in a stable unit, you need a dollar that lives onchain. Moving back to a bank takes days and often costs money. A stablecoin settles in seconds and never leaves the network.
They are also the main way dollars reach people whose local currency is failing. That use case is quieter than trading, and arguably more important.
The three types, and how they differ
| Type | How it holds the peg | Examples | Main risk |
|---|---|---|---|
| Fiat backed | A company holds cash and short term Treasuries and redeems one for one | USDC, USDT, PYUSD, RLUSD | You are trusting the issuer, their reserves and their banks |
| Crypto backed | Users lock more crypto than they mint, contracts liquidate if it falls | DAI, LUSD, GHO | A violent crash can outrun liquidations |
| Algorithmic | Supply expands and contracts by formula, with little or no real backing | Historically UST, mostly gone | Reflexive collapse. Several have gone to zero |
Which to use
For most people the answer is USDC. It is issued by a US regulated company, reserves are held in cash and short term Treasuries, attestations are published monthly, and it is supported everywhere. USDT is larger and more liquid, especially outside the US, with a longer history of questions about reserve composition.
Neither is risk free. USDC briefly traded at 88 cents in March 2023 when part of its reserves sat in a bank that failed. It recovered fully within days, but the episode is the correct mental model: these are claims on a company, and companies have counterparties.
Four questions to ask about any stablecoin
What exactly backs it?
Cash and Treasuries is the strongest answer. Commercial paper is weaker. Its own governance token is a serious warning.
Who holds the reserves and who checks them?
Look for regular attestations by a recognized accounting firm, and note the difference between an attestation and a full audit.
Can you actually redeem it?
Direct redemption is usually limited to institutions. Everyone else depends on market liquidity, which is exactly what disappears during a scare.
What happened last time it was stressed?
Every major stablecoin has been tested. How it behaved then tells you more than any whitepaper.
Using them safely
- Check the network. USDC exists on Ethereum, Base, Solana, Arbitrum and many others. They are not interchangeable. Sending Ethereum USDC to a Solana address loses it.
- Beware of bridged versions. USDC.e and similar are bridged, not native. They usually trade close to par but carry the bridge risk on top.
- Verify the contract address. Anyone can deploy a token called USDC. Get the address from the issuer, not from a search.
- Do not assume yield is free. Earning 8 percent on a stablecoin means someone is taking risk with it. Find out who and what.
Common questions
Are stablecoins actually safe?
Safer than volatile crypto for holding value, and not as safe as a bank deposit. There is no FDIC insurance. You are exposed to the issuer, their banks and the smart contract.
Why do stablecoins pay interest?
Issuers earn yield on the Treasuries backing the token. Some pass part of it on. Higher rates from DeFi protocols come from lending the stablecoin out, which adds borrower and contract risk.
What is a depeg?
When a stablecoin trades meaningfully away from a dollar. Small wobbles are normal. Large sustained ones signal doubt about the backing. See depeg.
Can a stablecoin be frozen?
Yes. USDC and USDT can both freeze addresses and have done so at law enforcement request. This is a real difference from Bitcoin or ETH, which nobody can freeze.
Where to go next
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