What Is a Stablecoin? Types, How They Hold Their Peg and the Risks
A stablecoin is a cryptocurrency designed to keep a steady value, usually one US dollar. Stablecoins are the most used tokens in crypto: traders price assets in them, people send them across borders, and DeFi protocols run on them. But "stable" is a goal, not a guarantee.
Why stablecoins exist
Bitcoin and other crypto assets are volatile. Stablecoins give users a way to:
- Hold value on a blockchain without price swings
- Move dollars between exchanges quickly, 24/7
- Price and settle trades (BTC/USDT, ETH/USDC)
- Use lending, payments and other DeFi applications
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Open calculator →The main types
1. Fiat-backed stablecoins
An issuer holds reserves — cash, short-term government bonds and similar assets — and issues one token per dollar held. Users can, in principle, redeem tokens for dollars. The largest stablecoins work this way.
Key question: are the reserves really there, and are they safe and liquid? Look for regular attestations or audits and clear redemption rights.
2. Crypto-collateralized stablecoins
Tokens are backed by other crypto deposited in smart contracts, typically over-collateralized (for example $150 of ETH for $100 of stablecoins). If collateral value falls too far, positions are liquidated to protect the peg.
3. Algorithmic stablecoins
These try to hold their peg through supply and demand mechanisms rather than full reserves. The most famous example, TerraUSD, collapsed in 2022, wiping out tens of billions of dollars. Undercollateralized designs carry very high risk.
How the peg holds
If a fiat-backed stablecoin trades at $0.99, arbitrageurs can buy it below $1 and redeem it with the issuer for $1. If it trades at $1.01, they can create new tokens for $1 and sell them. This arbitrage pulls the price back to $1 — as long as redemption works and the market trusts the reserves.
Regulation
Rules have tightened. The EU's MiCA regulation sets requirements for stablecoin issuers. In the United States, the GENIUS Act, signed into law in July 2025, created a federal framework requiring payment stablecoins to be backed by high-quality reserves. Regulated stablecoins are generally considered lower risk, but no stablecoin is equivalent to an insured bank deposit.
Risks
- Depeg risk — the price can fall below $1 during stress, as some major stablecoins briefly did in 2023 when a bank holding reserves failed.
- Issuer risk — reserves could be mismanaged or frozen.
- Censorship / freezing — many issuers can freeze tokens in specific addresses.
- Smart contract and chain risk — bugs, bridge exploits or network outages.
- Platform risk — stablecoins held on an exchange depend on that exchange.
Do stablecoins earn yield?
Holding a stablecoin itself usually earns nothing. Platforms that offer yield on stablecoins are lending them out or using other strategies — with the corresponding risks. Compare any offered rate with the risk of losing principal.
Tax note
In the US, UK and Canada, swapping crypto into a stablecoin is generally a taxable disposal of the crypto. Converting between stablecoins can also be a disposal, though gains are usually tiny.
Calculate your trade result
When you take profits into a stablecoin, use the crypto profit calculator to see your net result after fees, and the crypto tax calculator to estimate the tax on that disposal.
CryptoMathly provides educational estimates only and is not financial, investment or tax advice. Crypto assets are volatile and you can lose money. Always verify figures with a qualified professional.