Stablecoins are the backbone of crypto markets — but not all are built the same. Here's how each type stays pegged, and where they can break.
Stablecoins are crypto tokens designed to hold a steady value — usually one US dollar. They are the settlement layer of the whole market: traders park funds in them, DeFi protocols price loans in them, and billions move through them daily. But the word “stable” hides very different designs, with very different risks.
Crypto prices are volatile. Stablecoins let people hold a dollar-equivalent value on-chain without converting back to a bank account — fast, global, and usable inside smart contracts. That makes them the bridge between traditional money and crypto rails.
The largest stablecoins are backed by reserves of real-world assets — cash and short-term government debt — held by a company. Each token is meant to be redeemable for one dollar.
These are backed by other crypto assets locked in smart contracts, deliberately over-collateralised to absorb volatility. If the collateral falls in value, positions are liquidated to keep the system solvent.
These attempt to hold a peg through supply-and-demand mechanisms rather than full backing — expanding and contracting supply automatically.
A peg is maintained by arbitrage. If a fiat-backed stablecoin trades at 99 cents, traders buy it cheaply and redeem it for a full dollar, pushing the price back up. The peg is only as strong as the redemption mechanism behind it — which is why backing and liquidity matter more than the marketing.
For most users, well-audited fiat-backed stablecoins with transparent reserves are the workhorses of the market. Crypto-collateralised options offer more transparency at the cost of complexity. Algorithmic designs promising stability without backing have an unforgiving track record. As with everything in crypto: understand where the value actually comes from before you trust it.