A stablecoin is a cryptocurrency designed to hold a constant value, almost always one US dollar. They exist because volatility makes an asset useful for speculation and useless for almost everything else: you cannot settle a trade, quote a price or park proceeds in something that might move ten percent overnight.
They have become the plumbing of the entire market. Most crypto trading is denominated in stablecoins rather than dollars, and they are the standard vehicle for moving value between exchanges and across borders. Most people treat them as interchangeable with cash. They are not, and the reasons matter.
Three ways to hold a peg
The word "stablecoin" covers designs that share an objective and almost nothing else.
Fiat-backed
The issuer takes a dollar, holds it, and issues a token. Redeem the token and you get the dollar back. Value comes from the reserve, and the peg holds because arbitrage makes it hold: if the token trades at 99 cents, someone buys it and redeems for a dollar until the discount closes.
This is the dominant model — Tether's USDT and Circle's USDC are both fiat-backed and together account for the large majority of stablecoin supply.
The whole design rests on the reserve actually being there, in assets that can actually be sold at par, and on redemption actually working. Those are questions about a company, not about a blockchain. What are the reserves held in — cash, short-term treasuries, commercial paper, loans? Who audits or attests to them, how often, and to what standard? Who can redeem directly, and at what minimum size? Most retail holders cannot redeem at all; they sell on an exchange, which means their exit depends on a buyer existing rather than on the reserve.
Crypto-collateralised
Rather than holding dollars, these lock cryptocurrency in a smart contract and issue stablecoins against it. Because the collateral is volatile, the position is overcollateralised — often $150 or more of collateral for every $100 issued. If collateral value falls toward the threshold, the position is liquidated automatically and the stablecoin repaid.
MakerDAO's DAI is the long-running example. The advantage is transparency: the collateral is visible on-chain and verifiable by anyone, with no company to trust. The costs are capital inefficiency and dependence on liquidations working during exactly the conditions that make them hard — a sharp fall, congested networks, and thin liquidity all at once.
Algorithmic
These attempt a peg with no meaningful collateral, using a mechanism that expands and contracts supply, typically by allowing conversion between the stablecoin and a companion token whose price floats.
The mechanism works while demand is stable or growing. It relies on the companion token retaining value, and that value derives largely from confidence in the peg — a circularity that is fine until it is tested.
Terra's UST failed in May 2022, losing its peg and taking roughly $40 billion of value with it in days. As UST fell, the mechanism minted enormous quantities of the companion token LUNA, collapsing its price, which removed the only thing supporting UST. The feedback loop ran to zero in about seventy-two hours. Earlier and later algorithmic designs have failed the same way. The category has not recovered, and treating any uncollateralised peg as safe would require a considerably better argument than has yet been offered.
What actually breaks a peg
Stablecoins depeg for a small number of recurring reasons, and knowing which one is occurring tells you whether it matters.
Doubt about the reserve. If holders question whether the assets exist or can be liquidated at par, they sell first and ask later. USDC briefly traded near 87 cents in March 2023 after Circle disclosed that several billion dollars of reserves sat at Silicon Valley Bank during that bank's failure. The peg recovered within days once the deposits were guaranteed — the reserve was real, and the discount reflected uncertainty about access rather than existence.
Redemption friction. A peg is enforced by arbitrage, and arbitrage requires that redeeming actually works. If redemption is suspended, restricted to large institutional holders, or slowed, the mechanism that closes a discount stops operating and the discount persists.
Liquidation failure. For collateralised designs, a fall fast enough that liquidations cannot clear leaves the system undercollateralised. Network congestion during volatility makes this worse, because that is precisely when liquidation transactions compete for block space.
Reflexive collapse. The algorithmic failure mode: the peg depends on confidence, confidence depends on the peg, and once the loop reverses there is nothing underneath it.
The regulatory dimension
Stablecoins are the part of crypto that most resembles banking, and regulators have converged on that view. The European Union's MiCA framework imposes reserve, redemption and reporting requirements on issuers; several jurisdictions in Asia have licensing regimes; and the United States has moved toward a federal framework for payment stablecoins.
The direction of travel is broadly the same everywhere: high-quality liquid reserves, segregated from the issuer's own assets, with regular reporting and a legal right of redemption. That is likely to make regulated stablecoins safer and to squeeze out issuers who cannot meet the standard — including, in some jurisdictions, restricting which stablecoins can be offered to residents at all.
For holders, the practical implication is that issuer domicile and regulatory status are now part of the risk assessment, and that a stablecoin available today may not be available in your country tomorrow.
Yield on stablecoins
Stablecoins pay nothing by themselves. Any yield offered on them is compensation for a risk you are taking, and identifying which risk is the entire exercise.
Lending on a platform means credit risk — you are exposed to borrowers defaulting and to the platform's own solvency. Several lenders paying attractive rates on stablecoin deposits failed in 2022, and depositors became unsecured creditors. Providing liquidity in a decentralised exchange pool means smart contract risk and, if the pool pairs different stablecoins, exposure to one of them depegging. Yields well above short-term government rates are not free money; they are a spread being paid for something, and the something is usually the possibility of not getting the principal back.
Practical guidance
Know which model you hold. Fiat-backed, crypto-collateralised and algorithmic are different instruments with different failure modes, and the ticker does not tell you which is which.
For fiat-backed coins, read the reserve reporting. Issuers publish attestations at varying frequency and detail; the composition of reserves and the auditor's identity are both informative.
Do not hold everything in one. Concentration in a single issuer means a single company's problem is your problem, and diversification here is essentially free.
Treat a small discount as a signal rather than a bargain. A stablecoin at 99.5 cents may be a temporary dislocation, or it may be the market pricing information you do not yet have. Buying a depeg has worked and has also gone to zero.
And remember that a stablecoin is not a bank deposit. There is no deposit insurance, no lender of last resort, and no guarantee. It is a claim — on a company, or on a smart contract — that has held its value so far.
Coinvilo tracks stablecoin prices, market caps and volumes alongside the rest of the market. This article is educational and is not financial, investment or tax advice.