# Stablecoins

> Stablecoins are crypto tokens designed to hold a steady value, usually $1. Learn how fiat backed, crypto backed and algorithmic stablecoins work, and their risks.

Source: https://learn.tradelabsai.com/crypto/stablecoins/  
Track: Crypto · Level: Beginner · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Stablecoins", https://learn.tradelabsai.com/crypto/stablecoins/

Stablecoins are cryptocurrencies designed to keep a stable value, usually one US dollar. They let traders move money between exchanges quickly, park funds without leaving crypto, settle trades on decentralised platforms and send dollars across borders. The largest, Tether (USDT) and USD Coin (USDC), together have well over $150 billion in circulation. Stablecoins are the cash of the crypto economy, but how safely they hold their peg depends entirely on what backs them.

## Types of stablecoins

| Type | How it holds its value | Examples | Main risks |
|---|---|---|---|
| Fiat backed | Reserves of cash, Treasury bills and similar assets held by the issuer | USDT, USDC | Reserve quality, issuer and banking risk, freezes |
| Crypto backed (overcollateralised) | Users lock more crypto than the stablecoins they mint | DAI (now USDS) | Collateral crashes, smart contract bugs |
| Algorithmic | Supply expands and contracts by code, often using a sister token | TerraUSD (UST), which failed | Death spirals when confidence breaks |
| Synthetic or delta neutral | Backed by crypto hedged with derivatives | Ethena's USDe | Funding rates, exchange and basis risk |

## How fiat backed stablecoins work

1. A customer sends $1 million to the issuer.
2. The issuer mints 1 million stablecoins and holds $1 million in reserves.
3. The customer can redeem stablecoins for dollars, and the issuer burns them.

Arbitrage keeps the price near $1: if USDC trades at $0.99, approved customers buy it and redeem for $1; if it trades at $1.01, they mint new coins and sell them.

## When stablecoins break

**Example: The USDC depeg and TerraUSD collapse**
In March 2023, Circle disclosed that $3.3 billion of USDC's reserves were held at Silicon Valley Bank, which had just failed. Over a weekend, USDC fell as low as about $0.88. When US authorities guaranteed SVB deposits, USDC returned to $1 within days.

TerraUSD's failure in May 2022 was permanent. UST relied on an algorithm linked to the LUNA token rather than reserves. When large withdrawals began, UST lost its peg, LUNA's supply exploded as the system minted it to defend the peg, and both collapsed toward zero, erasing roughly $40 billion of value. See [Altcoins](https://learn.tradelabsai.com/crypto/altcoins/).

## Regulation

Regulators have moved to set rules for stablecoins:

- **European Union:** the Markets in Crypto Assets regulation (MiCA) set reserve and licensing requirements, in force for stablecoins from mid 2024.
- **United States:** the GENIUS Act, signed in July 2025, created a federal framework for payment stablecoins, requiring full reserves in cash and short term Treasuries and regular disclosures.

## How traders use stablecoins

| Use | Detail |
|---|---|
| Base currency | Most crypto pairs trade against USDT or USDC |
| Moving between exchanges | Faster than bank transfers |
| Collateral | Margin for perpetual futures. See [Perpetual Futures](https://learn.tradelabsai.com/crypto/perpetual-futures/) |
| DeFi | Lending, liquidity pools, yield. See [DeFi Basics](https://learn.tradelabsai.com/crypto/defi-basics/) |
| Prediction markets | Polymarket uses USDC on Polygon. See [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/) |

## Risks to understand

- **Reserve risk:** are the reserves real, liquid and fully backing the coins? Look for attestations and audits.
- **Issuer and banking risk:** reserves held at failing banks, as in the USDC case.
- **Freezes and blacklists:** issuers can freeze coins at specific addresses, often at the request of law enforcement.
- **Smart contract and bridge risk** for stablecoins on multiple chains. See [Bridge and Smart Contract Risk](https://learn.tradelabsai.com/crypto/bridge-and-smart-contract-risk/).
- **Depeg risk in stress,** especially for algorithmic and synthetic designs.
- **Counterparty risk** at exchanges holding your stablecoins. See [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/).

## Frequently asked questions

### What is a stablecoin?

A cryptocurrency designed to keep a stable value, usually $1, through reserves, crypto collateral or algorithms.

### Are stablecoins safe?

It depends on the design and issuer. Fully reserved, regulated stablecoins are generally safer than algorithmic ones, but all carry some risk of depegging, freezes or issuer failure.

### What is the difference between USDT and USDC?

Both are dollar stablecoins backed by reserves. They are issued by different companies, Tether and Circle, with different disclosure practices and regulatory histories.

Next, learn where crypto trades in [Centralized vs Decentralized Exchanges](https://learn.tradelabsai.com/crypto/cex-vs-dex/).

## Continue learning

- Next lesson: [Centralized vs Decentralized Exchanges](https://learn.tradelabsai.com/crypto/cex-vs-dex/)
- Previous lesson: [Blockchain Basics](https://learn.tradelabsai.com/crypto/blockchain-basics/)
- Related: [Blockchain Basics](https://learn.tradelabsai.com/crypto/blockchain-basics/): A blockchain is a shared ledger secured by cryptography and consensus. Learn blocks, hashes, keys, wallets, proof of work and proof of stake, and finality.
- Related: [DeFi Basics](https://learn.tradelabsai.com/crypto/defi-basics/): DeFi offers trading, lending and borrowing through smart contracts instead of banks. Learn the building blocks, where yields come from and the risks.
- Related: [Centralized vs Decentralized Exchanges](https://learn.tradelabsai.com/crypto/cex-vs-dex/): Centralised exchanges hold your funds and match orders; decentralised exchanges trade from your wallet via smart contracts. Compare costs, safety and how each works.
- Related: [How Polymarket Works](https://learn.tradelabsai.com/prediction-markets/how-polymarket-works/): A clear guide to how Polymarket works: Yes and No shares, the order book, USDC, fees, how markets resolve through UMA and Chainlink, and the risks to know.
- Related: [Bridge and Smart Contract Risk](https://learn.tradelabsai.com/crypto/bridge-and-smart-contract-risk/): Smart contract bugs and cross chain bridge hacks have cost crypto users billions. Learn how bridges work, famous exploits, warning signs and how to reduce your risk.
- Related: [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/): Learn the difference between market risk, credit risk and counterparty risk, how each is measured and managed, and real cases from Lehman Brothers to FTX.