Ethereum, smart contracts and altcoins
Stablecoins
4 min
Most cryptocurrencies are highly volatile, which makes them awkward as everyday money. Stablecoins try to solve this by holding a steady value, usually pegged to a fiat currency such as the US dollar (1 token ≈ US$1).
Why they exist
Stablecoins let people hold a dollar-like value on a blockchain, move it instantly and globally, and park funds between trades without converting back to a bank account. They have become central plumbing for crypto trading and DeFi.
The main types — and how the peg is held
- Fiat-backed (collateralised by reserves): a company holds dollars or equivalents in reserve and issues one token per dollar. Trust depends entirely on whether those reserves truly exist and are redeemable — which is why transparency and audits matter, and why opaque reserves are a serious risk.
- Crypto-backed: the peg is maintained by over-collateralising with other cryptoassets locked in smart contracts. More transparent on-chain, but exposed to the volatility of the collateral.
- Algorithmic: the peg is managed purely by code and incentives, with little or no reserve. These have proven fragile — the 2022 collapse of one large algorithmic stablecoin wiped out tens of billions of dollars and is a cautionary tale.
"Stable" is not "safe"
A stablecoin can de-peg — lose its 1:1 value — if reserves fail, collateral crashes, or confidence breaks. Regulators worldwide are increasingly scrutinising them. Treat the word "stable" as a goal the issuer is attempting, not a guarantee.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.