What Is Stablecoin?
Also known as: Stable Coin, Stablecoins, Stable Cryptocurrency
In short
A stablecoin is a cryptocurrency that aims to peg its value to a fiat currency such as the US dollar, to gold or to another asset; it is used in the crypto market to hedge against volatility, to make payments and as a common unit of account in trading.
Stablecoins achieve stability through different methods. In fiat-backed stablecoins (USDT, USDC), the issuer states that it holds reserves such as cash and short-term government bonds for every token in circulation, and redeems tokens against these reserves. In crypto-backed models (DAI), users lock cryptocurrency worth more than the stablecoin they mint as collateral in a smart contract. Algorithmic stablecoins, on the other hand, try to maintain stability through mechanisms that expand and contract supply.
Stablecoins are used as the counterparty in most trading pairs on cryptocurrency exchanges, are a key source of liquidity in DeFi applications and offer a fast alternative in cross-border transfers. In the European Union, the stablecoin provisions of the MiCA regulation have applied since June 2024 and impose reserve and licensing obligations on issuers.
Stablecoins are not risk-free. In fiat-backed models, the transparency and quality of reserves, the issuer's banking relationships and regulatory intervention are the main risks. Crypto-backed models can struggle during sharp market declines. The best-known failure of algorithmic models is the 2022 collapse of TerraUSD (UST), which lost its peg. A stablecoin deviating from the value it is pegged to is called a 'depeg'.
Last updated: · This content is for information purposes only and is not investment advice.