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What Is a Stablecoin?
What stablecoins are, how fiat-backed, crypto-backed and algorithmic stablecoins try to hold their value, what they’re used for and the risks to understand.
Key takeaways
- A stablecoin is a crypto token designed to track the value of a currency such as the US dollar.
- Most large stablecoins are backed by reserves of cash and government bonds; how safe they are depends on those reserves.
- Stablecoins can lose their peg, and algorithmic designs have collapsed completely.
On this page
Most cryptocurrencies swing wildly in price. Stablecoins are designed not to. A stablecoin is a crypto token that aims to keep a steady value, usually one US dollar, while moving on a blockchain like any other token. That makes them the plumbing of much of the crypto world, and a growing part of payments.
How stablecoins hold their value
| Type | How it tries to stay stable | Main risk |
|---|---|---|
| Fiat-backed | Each token is backed by cash and short-term government debt held by the issuer | The reserves aren’t what they claim, or can’t be accessed quickly |
| Crypto-backed | Loans are over-collateralised with other crypto locked in smart contracts | A crash in the collateral, or a smart-contract bug |
| Algorithmic | Code expands and shrinks supply to hold the price, with little or no backing | Collapse if confidence breaks |
| Commodity-backed | Tokens represent gold or another asset held in storage | Custody and audit risk |
Fiat-backed coins are by far the largest. The issuer promises that one token can be redeemed for one dollar, and publishes reports on its reserves. How often those reports are independently audited varies by issuer.
What stablecoins are used for
- Trading: moving between crypto assets without converting back to dollars.
- Payments and transfers, including sending money across borders quickly.
- Decentralised finance: lending and borrowing on DeFi platforms.
- Holding dollars in countries where the local currency is unstable.
The risks
- Losing the peg. Even well-known stablecoins have briefly dropped below a dollar during market stress, such as when a bank holding part of one issuer’s reserves failed in 2023.
- Collapse. In 2022, the algorithmic stablecoin TerraUSD lost its peg and fell to almost nothing within days, wiping out billions of dollars.
- Issuer control. Many issuers can freeze tokens at specific addresses, for example at the request of law enforcement.
- No deposit protection. Stablecoins aren’t bank deposits and typically aren’t covered by schemes like FDIC insurance in the US or the FSCS in the UK.
- Yield promises. Platforms offering high, “guaranteed” interest on stablecoins carry real risk, and some have been outright scams. See our crypto scam red flags.
Regulation is catching up
Governments are creating dedicated rules for stablecoins, covering reserves, redemption rights and who can issue them. The US passed a federal stablecoin law in 2025, the EU’s MiCA regulation already covers them, the Central Bank of the UAE regulates payment tokens, and UK rules arrive with its new crypto regime, expected in October 2027. Our guide to whether crypto is legal in the UAE, UK and US covers the wider picture.
Frequently asked questions
Are stablecoins safe?
Safer than volatile crypto for holding value in the short term, but not risk-free. Safety depends on the issuer, its reserves and where you hold the tokens.
Do stablecoins pay interest?
The tokens themselves usually don’t. Platforms that pay interest on them are lending your coins out, which adds risk.
Is a stablecoin the same as a central bank digital currency?
No. Stablecoins are issued by private companies or protocols; a central bank digital currency would be issued by a central bank.
Sources
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