What Is a Stablecoin? Types, Depegs & Risks

What Is a Stablecoin?

A stablecoin is a crypto asset designed to maintain a relatively stable value compared with a reference asset or group of assets. The most common reference is a traditional currency such as the U.S. dollar — a dollar-referenced stablecoin may attempt to maintain a market value near $1.00 per token.

A stablecoin's name does not guarantee that its market price will remain stable. Stablecoins can lose their intended value, become illiquid or fail entirely. The Financial Stability Board has noted that the term does not itself imply that an asset's value will remain stable.

Why Are Stablecoins Used?

Stablecoins are commonly used to move funds between trading platforms, quote crypto trading pairs, hold value between trades, make blockchain-based payments, transfer dollar-referenced value, provide collateral, participate in decentralized finance, or settle transactions through blockchain networks.

A stablecoin is not necessarily equivalent to cash in a bank account. Its protections, redemption process, backing, liquidity and legal treatment can differ.

How Do Stablecoins Maintain Their Value?

Fiat-Backed Stablecoins

A fiat-backed stablecoin is designed to be supported by reserves such as cash, bank deposits, U.S. Treasury securities, short-term government instruments, or other liquid assets. Users depend on the issuer's reserve management, custody arrangements, disclosures and redemption process.

Crypto-Backed Stablecoins

A crypto-backed stablecoin may use other crypto assets as collateral. Because crypto collateral can be volatile, these systems may require overcollateralization, automated liquidations, price oracles, smart contracts and governance mechanisms — introducing collateral, liquidation, oracle and smart-contract risks.

Commodity-Referenced Stablecoins

Some tokens are designed to track commodities such as gold. These assets may depend on the issuer, storage arrangements, audits or attestations, redemption terms, custodian solvency, and the accuracy of ownership claims.

Algorithmic Stablecoins

Algorithmic stablecoins attempt to maintain a target price using automated supply changes, market incentives, linked assets or protocol rules. These designs can fail if confidence and demand decline faster than the mechanism can restore the target price.

What Is a Stablecoin Depeg?

A depeg occurs when a stablecoin moves materially away from its intended reference value. For a dollar-referenced stablecoin, examples could include trading at $0.99 temporarily, falling to $0.90 during a liquidity crisis, trading above $1.00 because of unusual demand, or permanently losing its intended peg.

A depeg can be caused by questions about reserve quality, redemption delays, banking or custodian problems, smart-contract vulnerabilities, collateral losses, market panic, insufficient liquidity, failed economic incentives, regulatory action, or exchange disruptions.

Stablecoin Risks: A Due-Diligence Checklist

Before using a stablecoin, evaluate:

Who issues or controls it?
What supposedly backs it?
Where are the reserves held?
How frequently are reserves reported?
Can users redeem directly?
Are redemptions restricted?
Which blockchain networks support it?
Can the issuer freeze addresses?
Has it previously lost its peg?
How much trading and redemption liquidity exists?

Stablecoin FAQs

What is a stablecoin?

A stablecoin is a crypto asset designed to maintain a relatively stable value compared with a reference asset, commonly the U.S. dollar.

Is a stablecoin the same as the U.S. dollar?

No. A dollar-referenced stablecoin is a crypto asset designed to track the dollar. It is not necessarily a bank deposit, physical currency or direct claim against the U.S. government.

Can a stablecoin lose its value?

Yes. Stablecoins can depeg because of reserve concerns, insufficient liquidity, failed collateral, smart-contract vulnerabilities, redemption problems, regulatory actions or loss of market confidence.