What is a stablecoin?

How can a crypto stay close to one dollar when prices around it swing up and down? The secret lies in the mechanism that supports its link to the reference value, known as the peg.

Think of a digital token circulating on a blockchain. In a reserve-backed model, the issuer holds assets, such as cash and short-term government bonds, to back the tokens it issues. If the token corresponds to one dollar, being able to redeem it close to that value helps keep its price there. Direct redemption, however, may come with conditions and may not be available to every holder.

Not all stablecoins work this way. Some are backed by other crypto locked up as collateral, often worth more than the tokens issued. Others use algorithmic mechanisms and financial incentives to adjust their supply. There are also combinations of these models, with different risks.

Why it matters

Stablecoins are used for transferring value, trading on exchanges and decentralized finance (DeFi) apps. They let you hold value on a blockchain without being exposed to the same swings as a crypto like Bitcoin. Network fees and the risks of the specific stablecoin still apply, of course.

We believe the key question isn’t just “how stable does the price look?” but “what backs it and how does redemption work?”. The name alone doesn’t answer that.

What to watch out for

A stablecoin can lose its link to the reference price, which is called a depeg. Insufficient reserves, problems accessing them or failures in its mechanism can shake its stability. Also, some issuers can freeze tokens at specific addresses.

If you count your money in euros, there’s one more detail: a dollar stablecoin tracks the dollar, not the euro. So its value in euros changes with the exchange rate, even if it holds its dollar peg perfectly.