What are stablecoins?
What stablecoins are and why they exist
If you're wondering about stablecoins, they're a type of cryptocurrency created to follow the value of something familiar and stable, usually a currency like the US dollar or the euro.
A peg means there's a set target price, and either a company or a system tries to keep each token near that value. You might use stablecoins to move funds across blockchain systems, to leave cash parked between crypto trades, or to send payments across borders without switching back and forth to your bank account. Stability is a goal, not a certainty. There have been times when stablecoins lost their peg quickly. Looking for euro-pegged coins? There's a full article on euro stablecoins.
How stablecoins try to keep their peg
With fiat-backed stablecoins (that is, those tied to government money), the issuer keeps reserves, cash in banks, government bills, or similar assets. You typically get one token for every real unit held, and sometimes you can redeem your token for that underlying currency. Whether the peg holds depends on the reserves: their size, the type of assets, and how transparent the reporting is.
Crypto-backed stablecoins work differently. Here, smart contracts lock away more crypto assets (collateral) than the value of tokens issued, aiming to stay safe even if prices drop. There are also algorithmic stablecoins, where software automatically adjusts how many tokens exist. Some algorithmic models haven't held up, TerraUSD's collapse in 2022 made global headlines for that reason.
Why people use stablecoins and what the risks are
People often turn to stablecoins for quick international transfers, to avoid moving in and out of bank currencies, or to stay out of volatile coins during market swings. They're a fixture in decentralized finance (DeFi), where you might see them used as collateral or set aside as a stable value. If you're comparing options, major stablecoins like USDT and USDC are covered in our USDT vs USDC guide.
Risks? The main ones are that reserves may fall short of what issuers claim, redemptions could take longer than promised or face restrictions, authorities could step in, or the peg could break if markets panic. Trades and conversions might involve fees or poor exchange rates, so you could lose value even if the dollar peg holds.
Frequently asked questions
Are stablecoins regulated?
Regulation is evolving and isn’t the same everywhere. In the European Union, stablecoin issuers and their partners must meet the Markets in Crypto-Assets Regulation (MiCA) requirements. You should always check your own country’s financial regulator register to confirm if the stablecoin or platform in question is legally allowed to operate where you live.
Is a stablecoin the same as cash in a bank?
No, a stablecoin isn’t the same as holding euros or dollars in a bank account. The stablecoin’s value depends on the assets backing it, the smart contracts (code that handles rules) running it, and the issuer’s willingness and ability to redeem it. Bank deposits in the EU have deposit guarantee schemes for amounts up to a defined ceiling, but stablecoins aren’t protected like that. Getting your cash out can also take time or face restrictions. Need details on converting? There's a separate page on cashing out to a bank account.