Stablecoins Explained: How They Work and What Can Go Wrong
A stablecoin is a token built to hold a fixed value, usually one US dollar, and it holds that value either because an issuer keeps cash and short-term government debt in reserve against every token in circulation or because code adjusts supply to chase the peg, and it is the second design that has failed most often.
Updated · By RampAtlas Research
Key takeaways
- A stablecoin holds a fixed value either because an issuer keeps reserves against every token or because code adjusts supply.
- TerraUSD, the largest test of the algorithmic design, broke in May 2022 and never recovered its peg.
- An attestation reports on assets at a snapshot date and does not say what the issuer owes anyone other than token holders.
- On March 11, 2023, Circle disclosed that $3.3 billion of the reserves backing USDC was held at Silicon Valley Bank.
- The GENIUS Act, signed into law on July 18, 2025, requires at least one dollar of permitted reserves for every dollar of stablecoins issued.
In this guide
A stablecoin is a token built to hold a fixed value, usually one US dollar, and it holds that value either because an issuer keeps cash and short-term government debt in reserve against every token in circulation or because code adjusts supply to chase the peg, and it is the second design that has failed most often.
That distinction matters more than any other detail on this page. Two tokens can both trade at a dollar and be backed by completely different things, and you only find out which is which when there is a rush for the exit.
Fiat-backed and algorithmic are not variations on a theme
A stablecoin of the fiat-backed kind works like a cloakroom ticket. Someone gives the issuer a dollar, the issuer puts that dollar somewhere safe, and a token is created. Hand the token back and the dollar comes out. USDC and USDT are the two largest tokens of this kind. See USDC and Tether for where each one trades and what it runs on.
An algorithmic stablecoin has no cloakroom. It holds its peg by letting traders swap it against a second, floating token whenever the price drifts, on the theory that arbitrage will pull it back. The design depends entirely on people believing it will keep working.
| Fiat-backed | Algorithmic | |
|---|---|---|
| What backs it | Cash and short-term government debt held in reserve against every token in circulation | Nothing redeemable. A second, floating token that traders swap against |
| How the peg holds | Hand the token back, the dollar comes out | Arbitrage, on the theory that traders will pull the price back |
| Largest examples | USDC and USDT | TerraUSD, which never recovered its peg after May 2022 |
| What it depends on | The issuer being able to reach the reserve | People believing it will keep working |
TerraUSD was the largest test of that theory. The run began in early May 2022, when large holders pulled hundreds of millions of dollars of TerraUSD out of the Anchor lending protocol; by May 11 the paired token LUNA had fallen below one dollar, and within days the pair had destroyed tens of billions of dollars in value (source: MIT Sloan Center for Finance and Policy, "Anatomy of a Run: The Terra Luna Crash"). TerraUSD never recovered its peg.
What sits behind a fiat-backed token
The reserve is the whole product, so it is worth knowing what is in it.
As of September 2026, Circle states that USDC is backed entirely by cash and cash-equivalent assets, held mainly in the Circle Reserve Fund, a US Securities and Exchange Commission-registered money market fund holding cash, short-dated US Treasuries, and overnight Treasury repurchase agreements, with the remainder held as cash at banks (source: Circle transparency page). Circle also says those reserves are held separately from its own operating funds.
Tether states that its tokens are pegged one-to-one with a matching fiat currency, are backed fully by its reserves, and that circulation figures are published daily (source: Tether transparency page, September 2026). The composition of a reserve, not just its size, is what determines how fast an issuer can meet redemptions in a bad week.
An attestation is not an audit
Fiat-backed issuers publish attestations. An attestation is an accounting firm's report on a specific snapshot: on this date, these assets existed and totaled this much. Circle publishes attestations monthly, prepared under standards set by the American Institute of Certified Public Accountants, and discloses reserve holdings weekly (source: Circle transparency page, September 2026).
A depeg can start at the bank, not at the token
On March 11, 2023, Circle disclosed that $3.3 billion of the reserves backing USDC was held at Silicon Valley Bank, which US regulators had closed the previous day. USDC traded as low as roughly $0.87 over that weekend before regulators guaranteed the bank's deposits and the price recovered (source: Circle's March 11, 2023 statement, reported by CNBC and CoinDesk on the same date).
$3.3 billion
USDC reserves held at Silicon Valley Bank
disclosed March 11, 2023
~$0.87
USDC low over that weekend
March 2023, before regulators guaranteed the bank's deposits
37
Chains USDC is natively issued on
Circle multi-chain USDC page, June 2026
Nothing about the token was broken. The reserve existed. What the market doubted for two days was whether the issuer could reach it.
The redemption price and the market price are different prices
You probably cannot redeem directly with the issuer. Circle states plainly that Circle Mint, the account that mints and redeems USDC one-for-one, is not available to individuals, and that individuals reach the token through the secondary market instead (source: Circle Mint page, September 2026).
So the price you get is whatever an exchange or on ramp off ramp provider quotes, including its spread. In calm markets the difference is trivial.
The same name on many chains
Circle states that USDC is natively issued across 37 blockchain networks as of June 2026 (source: Circle multi-chain USDC page). Native issuance means the issuer deploys and controls the token on that chain. The alternative is bridged supply, where a bridge locks the real token on one chain and mints a wrapped token representing it on another.
The rules arrived in 2024 and 2025
| Jurisdiction | Rule | Date |
|---|---|---|
| European Union | Markets in Crypto-Assets Regulation rules for asset-referenced tokens and e-money tokens, the two categories that cover stablecoins | Began to apply June 30, 2024 (source: European Banking Authority) |
| United States | GENIUS Act | Signed into law July 18, 2025 |
In the United States, the GENIUS Act was signed into law on July 18, 2025. It requires issuers to hold at least one dollar of permitted reserves for every dollar of stablecoins issued, limits permitted reserves to items such as cash, deposits at insured banks, short-dated Treasury bills, and repurchase agreements, states that payment stablecoins are not securities or commodities, and states that they are not federally insured. It takes effect on the earlier of 18 months after enactment or 120 days after the federal banking regulators issue final implementing rules (source: Congressional Research Service, "Stablecoin Legislation: An Overview of the GENIUS Act of 2025"). For the wider picture, see United States.
Frequently Asked Questions
Is a stablecoin insured like a bank deposit?
No. The GENIUS Act states expressly that payment stablecoins are not federally insured (source: Congressional Research Service, July 2025). Deposit insurance in the United States covers dollars held at insured banks, not tokens held at an issuer or an exchange.
What is the difference between an attestation and an audit?
An attestation reports on a defined subject at a point in time, such as the assets in a reserve account on one date. A financial statement audit covers a full set of financials for a period, including liabilities. Most stablecoin transparency reporting is attestation, not audit.
Why did USDC trade below a dollar in 2023 if it was fully backed?
Because backing and access are different things. Part of the reserve was at a bank that had just been closed, and until regulators guaranteed those deposits the market did not know whether the issuer could get the money out.
Can I redeem a stablecoin for dollars with the issuer?
Usually not as an individual. Circle limits its mint-and-redeem account to institutional customers and directs individuals to the secondary market. In practice you sell the token on an exchange and withdraw cash.
Does it matter which blockchain my stablecoin is on?
Yes. Fees, confirmation times, and support differ by chain, and native issuance and bridged supply are not the same asset. Always confirm which chain and which version a receiving venue accepts before sending.