Key concepts
- A peg is a target maintained by a mechanism, usually redemption and arbitrage, and it holds only while that mechanism works.
- The three broad designs are fiat-backed, crypto-collateralised and algorithmic, and each fails in a different way.
- Holding a stablecoin means holding a claim on an issuer or a contract, which makes it a credit decision rather than a cash holding.
- Yield offered on stablecoin deposits is compensation for risk taken with your money, and it is separate from whether the peg holds.
Stablecoins are the quiet infrastructure of crypto. Most trading pairs are priced in them, most lending markets are built on them, and most people moving between assets pass through one without much thought.
The name does a lot of work, and not all of it honestly. A stablecoin is a token that aims to hold a steady value, usually one unit of a national currency. Aiming is not the same as achieving, and the difference between the two is the whole subject of this lesson.
What a peg actually is
A peg is a target, not a law of nature. Nothing in the software forces a token to trade at a particular price. What holds a peg is a mechanism that makes it profitable for someone to push the price back when it drifts.
Typically that means redemption. If a holder can reliably exchange one token for one unit of the underlying currency, then any dip below the target creates a buying opportunity, and arbitrage closes the gap. The peg holds because the mechanism holds.
Turn that around and the important implication appears. If the mechanism is impaired — redemptions suspended, collateral inaccessible, the arbitrage route blocked — the price is free to move, and it can move quickly.
Three broad designs
- Fiat-backed. A company holds reserves off-chain and issues tokens against them. Simple to understand, and entirely dependent on that company's solvency, honesty, banking access and willingness to redeem.
- Crypto-collateralised. Users lock volatile crypto in a smart contract and mint stablecoins against it, deliberately over-collateralised so that a fall in the collateral's value does not immediately break the peg. The system is transparent on-chain but exposed to sharp market moves, oracle failures and contract bugs.
- Algorithmic. The peg is defended by supply mechanics rather than by assets held in reserve. These designs depend on continued demand to function, and the historical record of the category is poor.
Hybrids exist, and marketing frequently blurs which category a token belongs to. The question worth asking is always the same: if I want my money back, from whom, and what could stop them paying?
Holding one is a credit decision
This is the part most guides skip. When you hold a fiat-backed stablecoin, you are not holding dollars. You are holding a claim on an issuer, and its value depends on that issuer's ability and willingness to honour it.
That is a credit decision, the same kind of judgement you would make about any counterparty. Deposit insurance generally does not apply. A stablecoin balance is not a bank account, however much the interface resembles one.
The reasonable response is not fear but due diligence: read the issuer's own disclosures, look at what the reserves are said to consist of and who verifies them, check what the redemption terms are for someone in your position, and consider whether concentrating everything in one issuer is a risk you are being paid to take.
What they are genuinely useful for
Stablecoins solve real problems. They let you step out of a volatile position without leaving the crypto system, they settle far faster than bank transfers across borders, and they give DeFi protocols a unit of account that does not swing while a loan is outstanding.
They also make trading pairs practical. Pricing every asset against every other asset would fragment liquidity hopelessly, so venues price nearly everything against a small number of stable units instead. Our stablecoins coverage follows how that plumbing develops.
Risks that do not show up in the price
A stablecoin can trade at target and still carry serious risk. Smart contract flaws, blacklisting and freeze functions, regulatory action against an issuer, chain-specific bridged versions that are not the real thing, and concentration of reserves in a single institution are all live concerns that a flat price chart hides completely.
Yield is its own trap. When a platform offers a return on stablecoin deposits, that return comes from somewhere — lending, leverage, or subsidy. A tempting APY is a description of risk taken on your behalf, and the peg holding tells you nothing about whether the borrower repays.
Treat stablecoin exposure as a position with counterparty risk, sized deliberately like any other. The framework for doing that sits in portfolio and risk management.
Frequently asked questions
Is a stablecoin the same as holding cash?
No. Cash in a regulated bank account is generally covered by deposit protection up to some limit and is a direct claim on a supervised institution. A stablecoin is a token representing a claim on an issuer or a smart contract, usually without such protection. It may behave like cash day to day, and that resemblance is precisely what makes the distinction easy to forget when it matters most.
Why do stablecoins sometimes trade slightly off their target?
Small deviations are normal and reflect ordinary supply and demand on individual venues, especially when trading is thin or when many people want to buy or sell at once. Arbitrage usually closes those gaps quickly. A sustained or widening deviation is a different signal entirely: it suggests the market doubts the redemption mechanism, and it deserves attention rather than the assumption that it will simply revert.
Is it safer to spread holdings across several stablecoins?
Spreading reduces exposure to any single issuer failing, which is a real benefit. It does not remove shared risks, since several stablecoins may rely on the same banking partners, the same collateral assets, the same blockchains or the same regulatory regime. Diversifying helps most when the underlying dependencies genuinely differ, so it is worth checking what each one actually relies on rather than counting names.