What is stablecoin?
A token designed to hold a fixed value, usually one US dollar, by being backed by reserves or by algorithmic mechanisms.
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In this entry
A token designed to hold a fixed value, usually one US dollar, by being backed by reserves or by algorithmic mechanisms.
USDT and USDC are the largest. Stablecoins are used to move between assets without cashing out to fiat and are regulated differently across jurisdictions.
For a buyer they show up in two roles: as the quote currency most crypto pairs are priced in, and as the thing you hold between trades. Both roles make the backing question practical rather than academic.
How it works
Three designs dominate, and they fail in different ways.
Fiat-backed tokens hold cash and short-term government debt against every unit issued, and redeem at par with the issuer. The risk is the reserve and the issuer, not the market. See fiat backed stablecoin.
Crypto-backed tokens are minted against collateral worth more than the debt, with liquidations that unwind a position when the ratio falls. The risk is a fast market move outrunning the liquidation machinery. See over collateralization.
Algorithmic tokens hold the peg by expanding and contracting supply against another asset, with no external reserve. Several have failed completely, and the category exists mainly as a cautionary one. See algorithmic stablecoin.
Regulation now separates these explicitly in several places. In the European Union, Regulation (EU) 2023/1114, known as MiCA, distinguishes an e-money token, which references a single official currency, from an asset-referenced token, which references anything else, and imposes reserve and authorization requirements on issuers (source: Regulation (EU) 2023/1114). In the United States, the GENIUS Act established a federal framework for payment stablecoin issuers in 2025. Which tokens a venue can offer you increasingly depends on which of these categories an issuer falls into.
Example
Illustrative. A dollar-referenced token trades at $0.998 rather than $1.000. That is a 20 basis point discount, which sounds trivial and is the same order of magnitude as an entire round trip's spread on a liquid market. Moving $10,000 through it costs $20 relative to par. During a genuine loss of confidence the same token has no arithmetic floor at all: the price is whatever the market pays, and redemption at par is only available to whoever the issuer permits to redeem, which is usually not a retail holder.
Why it matters when you buy
Most crypto pairs are quoted against a stablecoin rather than against your currency, so buying often means passing through one, and its price against your currency is part of your cost. The fee comparison shows the fiat rails each venue supports, and the guide on stablecoins covers the designs in more detail. The stablecoin yield risks guide covers what happens when one pays interest.
Related terms
- fiat backed stablecoin — the reserve-backed design
- algorithmic stablecoin — the design that has failed repeatedly
- depeg — what happens when the price breaks
- e money token — the European regulatory category
- proof of reserves — the evidence an issuer can publish
- peg — the target itself
Questions
Are stablecoins safe to hold?
They carry issuer, reserve, and regulatory risk rather than price risk in normal conditions. Whether a specific one is appropriate depends on its backing and its issuer, both of which the issuer publishes.
Why do prices on exchanges use stablecoins instead of dollars?
Because moving actual dollars requires banking rails and licenses in every jurisdiction, while a token moves on a chain. That convenience is why most pairs are quoted against one. See trading pair.
Do stablecoins pay interest?
Some products built on them do, and that yield comes from somewhere, usually lending or a hedged position. The token itself paying nothing and a platform paying you for depositing it are different arrangements. See yield bearing stablecoin.
Guides that use this term
- Crypto Tax in Australia: CGT, Records, and the ATO
In Australia the Australian Taxation Office treats a crypto asset as a capital gains tax asset, so disposing of it by selling, swapping, or spending it is a CGT event, while tokens you receive from activities such as staking are treated as income when you receive them.
- Crypto Tax in Canada: How the CRA Treats Cryptocurrency
In Canada a crypto disposal produces either a capital gain or business income, and where it is a capital gain the Income Tax Act makes one half of that gain taxable and adds it to your income for the year at your marginal rate.
- Crypto Tax in Germany: The One-Year Rule and Everything Around It
Germany taxes privately held crypto as a private sale transaction under section 23 of the Einkommensteuergesetz, which means a gain is taxable only where less than one year passed between acquisition and disposal, and even then stays free of tax if your total private sale gains for the calendar year came to less than 1,000 euros.
- Crypto Tax in the United Kingdom: Capital Gains, Income, and Reporting
In the United Kingdom you pay Capital Gains Tax when you dispose of cryptoassets by selling them, exchanging them for a different cryptoasset, spending them, or giving them away, and you pay Income Tax on tokens you receive from activities such as staking, with gains above the annual tax-free allowance reported through Self Assessment.
- How to Send Crypto Across Chains Without Losing It
Moving crypto between chains means either routing it through an exchange that accepts deposits on one network and withdrawals on another, or using a bridge that locks the asset on the source chain and issues a wrapped version on the destination, and in both cases the mistake that costs people money is picking the wrong network on the send screen.