Stablecoin
A token built to keep a steady price, usually one US dollar, so it can move like crypto without its price moving like crypto.
Bitcoin’s price changes every minute. A stablecoin is meant not to: one token, one dollar. How it keeps that promise depends on what stands behind it.
- Reserves. A company issues a token for each dollar it receives and holds reserves against it, mostly cash and short-term government debt. The token stays at a dollar as long as people trust they can turn it back into one. USDT, issued by Tether, and USDC, issued by Circle, work this way.
- Other crypto. The token is created against a larger amount of other crypto, locked as collateral and sold if its value falls too far.
- An algorithm. No reserves, only a mechanism meant to hold the price at a dollar. TerraUSD worked this way. It lost its peg in May 2022 and fell close to zero, according to the SEC.
What to check
For a stablecoin backed by reserves: who issues it, what the reserves are, who checks them and how often, and who can hand a token back for a dollar. And whether the issuer can freeze tokens: most can, because the token’s own contract lets the issuer block an address.
A stablecoin isn’t a bank deposit, and holding one usually pays nothing: the interest the reserves earn goes to the issuer.