What is a stablecoin? A plain guide to dollar-pegged crypto

A stablecoin is a cryptocurrency built to hold one steady value, almost always a single US dollar. You can send it across the world in minutes, like any crypto token. Its price is meant to stay near $1, not swing the way bitcoin does. Most stablecoins keep that promise by holding real dollars and short-term government debt in reserve, one dollar of assets for every coin in circulation.

That simple idea now moves real money. As of 1 October 2026, stablecoins were worth more than $290 billion in total, according to CoinGecko. Traders park cash in them between bets. Workers send money home with them. Businesses are starting to settle invoices in seconds instead of days.

How a stablecoin holds its value

The job of a stablecoin is to be boring. One coin, one dollar, every day. To make that stick, the issuer holds assets it can sell fast when people want their money back. Buy a fiat-backed stablecoin and the company takes your dollar and keeps it, or buys a Treasury bill with it. Cash out and it hands the dollar back, then removes your coin from circulation. This is called minting and redeeming.

A peg also holds because traders defend it for profit. If a big stablecoin slips to 99 cents, arbitrage traders buy it cheap and redeem it for a full dollar, pocketing the gap. That buying pushes the price back toward $1. The mechanism is not magic. It works only while people trust the coin can really be swapped for a dollar.

Redeeming is the pressure valve. As long as holders believe they can swap the coin for a real dollar at any time, few of them rush to. The promise itself keeps most people calm. Take that belief away and you get a bank run, the same dynamic that has toppled lenders for centuries.

The main types of stablecoin

Not every stablecoin works the same way. Three main designs exist, and they differ in what stands behind the coin. One holds cash. One holds other crypto. One holds almost nothing and leans on code. Their safety records are not equal.

Fiat-backed coins are the common kind. Tether (USDT) and USD Coin (USDC) both sit here. The issuer keeps reserves of cash and short-term US government debt, aiming for a dollar of assets per coin. You trust the company to hold the money and let you redeem. That trust is the whole model.

Crypto-backed coins take a different route. Instead of dollars, they lock up other cryptocurrencies as collateral. Because crypto prices move, these coins are over-collateralized: you might lock $150 of ether to borrow $100 of the stablecoin. MakerDAO's DAI is the best-known example. The extra buffer absorbs normal price swings.

Algorithmic coins are the riskiest design. They hold little or no hard collateral and try to keep the peg with code, trading a second token to expand or shrink supply. When demand holds up, the system works. When faith drains out, it can fail fast.

What backs the biggest stablecoins

Two coins dominate. Tether's USDT was worth about $183.8 billion on 1 October 2026, and Circle's USDC about $74.1 billion, according to CoinGecko. Together they hold most of the value in every stablecoin combined. Both say each coin is backed by reserves held mostly in cash and US Treasury bills.

Backing is only as good as the proof behind it. The two issuers publish regular reports on what their reserves hold, and US law now forces monthly disclosure for coins sold in the country. Even so, a stablecoin is not a bank deposit. Neither coin comes with government deposit insurance. If an issuer failed, there would be no FDIC backstop for the people holding its coins.

Transparency has improved under pressure. Big issuers now keep the bulk of reserves in US Treasury bills and cash at banks, the assets the new law favors. Outside accounting firms check those holdings on a set schedule. These are attestations, not full audits, which is a gap some critics still point to. A monthly report is a snapshot, not a live feed, so what you see is where the money sat on one day. Read the report, not the marketing.

What the new US rules require

For years stablecoins grew with almost no federal rulebook. That changed in 2025. On 18 July 2025, President Donald Trump signed the GENIUS Act, the first US federal law written for payment stablecoins. Its full name is the Guiding and Establishing National Innovation for U.S. Stablecoins Act. The law sets who may issue a dollar stablecoin and what must sit behind it.

On reserves, the rules are strict. Issuers must hold at least one dollar of safe assets for every coin, in cash, bank deposits and short-term Treasury securities, kept apart from the company's own funds. They cannot lend those reserves into risky trades. They also cannot pay holders any interest or yield. Firms with more than $10 billion in coins outstanding fall under federal oversight, while smaller issuers can choose a state regime that mirrors the federal one. Regulators are still writing the detailed rulebook the law ordered.

Other places are writing their own rules. The European Union and several Asian financial hubs now license crypto firms, and the details differ sharply from one country to the next. A coin you can buy in one place may be barred in another.

Where people actually use stablecoins

Day to day, most stablecoins never touch a shop. Traders use them as a home base. They sell bitcoin into a stablecoin to lock in a price without cashing out to a bank, then buy back in later. On many exchanges, stablecoins are the main way to price and settle trades.

Payments are the fast-growing use. Sending a stablecoin across the world can cost cents and clear in minutes, which beats a bank wire that takes days and charges more. Companies have started using them to move money between countries and settle with partners. One recent case saw SoFi and Mastercard move billions of dollars over stablecoin rails instead of the old banking pipes.

Lenders and apps use them as well. Across decentralized finance, stablecoins are the main unit people borrow, lend and earn fees in, because a loan priced in a steady coin is easier to manage than one priced in a swinging token. Exchanges quote most trading pairs against them. That makes them core plumbing for a large slice of crypto, well beyond a place to park cash.

In countries with high inflation, some people hold dollar stablecoins to keep savings in dollars when local banks make that hard. That use is real. It is also where the risk bites hardest, because the people leaning on it can least afford a coin that breaks.

The risks worth knowing

A stablecoin is a promise, and promises can break. The clearest warning came in May 2022. TerraUSD, an algorithmic coin that held its peg by trading with a sister token, lost that peg and collapsed. A run began on 7 May 2022 after large withdrawals from a lending app that had paid depositors a yield of 19.5%. Within days, the Terra-Luna collapse wiped out more than $40 billion, according to The Block.

That coin held almost no hard collateral, and most big stablecoins today are backed far better. Even so, a fully backed coin can still wobble if traders doubt the reserves or if the bank holding them runs into trouble. The coin is only as safe as the assets behind it and the firm that manages them.

There are plainer risks too. You get no deposit insurance, so if the issuer fails you are a creditor, not a protected saver. US law now bars issuers from paying you interest, so a coin sitting in your wallet earns nothing by itself. And a coin is only as useful as the exchange or wallet you hold it in. Check which coin you are buying. USDT and USDC are not the same product, and smaller coins can carry bigger risks.

None of this makes stablecoins useless. For many people they are the easiest way to hold and move dollars on a phone, especially where banks are slow or out of reach. Just know what you own. A stablecoin is a company's IOU dressed as cash, handy and quick, but only as sound as the firm and the rules behind it. Pick the coin with care, because the name on the token tells you whose promise you are trusting.