Learn / Beginner · Tokens and Stablecoins

What is a stablecoin?

Beginner · Tokens and Stablecoins · about 5 min read

A stablecoin is a crypto token designed to hold a steady price, most often one US dollar. It tries to give you the speed of crypto without the big price swings.

How it stays steady

• Backed by reserves. The company that issues the token says it holds reserves, such as cash and short-term government bonds, to match the tokens in circulation. Usually only large approved customers can swap tokens for dollars directly with the issuer. Most people buy and sell them on exchanges.
• Backed by other crypto. The token is supported by a larger amount of crypto locked in smart contracts.
• Run by an algorithm. Code adjusts supply to try to hold the price. This kind relies on code, not on dollars held in reserve. TerraUSD, an algorithmic stablecoin, lost its dollar value in May 2022 and collapsed.

Why people use them

People use stablecoins to move money between exchanges and wallets, to send money abroad, and to park value in dollars while they decide what to do next. Most people get them through an exchange.

Keep in mind

• Stable does not mean safe. A stablecoin can lose its peg, which means slipping away from one dollar.
• You are trusting the issuer and its reserves, so it is worth knowing who is behind a stablecoin.
• A US dollar stablecoin is still tied to US dollars. If you earn in TT dollars, the exchange rate between the two still affects you.
• Rules for stablecoins differ from country to country and are still changing.

The main types

Ethereum's guide groups stablecoins into four types:

• Fiat-backed. Tied to a currency such as the US dollar and supported by reserves held by the issuer. USDC and USDT are the best-known examples.
• Crypto-backed. Supported by other crypto locked in smart contracts, usually worth more than the coins issued, to absorb price swings. DAI is an example.
• Precious-metal-backed. Tied to an asset such as gold, for example Pax Gold.
• Algorithmic. Not backed by collateral, with a public rule that changes the supply to push the price toward its target.

When the peg slipped: USDC, March 2023

In March 2023, Silicon Valley Bank in the United States collapsed. The issuer of USDC, Circle, said that $3.3 billion of the roughly $40 billion in reserves behind the coin was held at that bank. Holders rushed to sell and the price fell as low as about 88 cents. Circle said USDC remained redeemable one for one, and the price recovered after authorities stepped in to protect the bank's depositors. The episode shows that even a well-known coin backed by cash and bonds depends on where the reserves are held and who can reach them in a crisis.

The size of the fall matched the size of the problem. If about 8 percent of the backing is stuck, the market may price each coin at around 92 cents until it is clear the money will be released.

Reading the fine print

• Reserves. What is held (cash, short-term government bonds), in which banks, and how often it is reported. Ethereum's guide says fiat-backed coins need audits to confirm the reserves are enough.
• Redemption. Who can swap tokens for dollars with the issuer, how fast, and at what fee. Most people can only sell on an exchange, which depends on a buyer being there.
• Issuer. Who runs it, where it is based and which rules apply to it.
• Interest offers. Ethereum's guide warns that earning interest on stablecoins carries risks that users should understand first. A high yield usually means someone is taking a risk with your money.

Stablecoins and TT dollars

The most common stablecoins are tied to the US dollar, not the TT dollar. If you earn and spend in TT dollars, you still carry exchange-rate risk, and every conversion in and out has a cost. A stablecoin also does not make the legal position simpler: Trinidad and Tobago law temporarily prohibits virtual asset business activity until 31 December 2026 unless the business is approved by the TTSEC, so check who you are dealing with.

Common mistakes

• Treating "stable" as "safe" or as a bank deposit. There is no deposit insurance on a stablecoin.
• Chasing a high interest rate without asking where the return comes from.
• Using an algorithmic coin because it has held its price so far.
• Sending a stablecoin over the wrong network.
• Not knowing which company issues the coin you hold.

Try it yourself

No money needed.

1. Choose one fiat-backed stablecoin. On the issuer's website, find its latest reserve report and note the date, what the reserves consist of, and who produced the report.
2. Work out the loss if 8 percent of the reserves for a one-dollar coin were frozen, then compare your answer with the March 2023 low.
3. Write two questions you would ask before using a stablecoin that offers interest.

Key terms

Stablecoin, peg, reserves, issuer, algorithmic stablecoin.

Sources and credits

Types, reserves and risks: ethereum.org, Stablecoins. USDC and Silicon Valley Bank, March 2023: The Block and Reuters via Kitco. Trinidad and Tobago law: TTSEC fact sheet on the 2025 Act. General information, not financial advice.

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