Stablecoins explained: crypto that tries to stay at one dollar

A StablecoinA coin built to stay at one dollar. is a crypto token designed to hold a steady value, usually one US dollar, so you can move dollar-like money on a blockchain without the wild price swings. Whether it actually stays at one dollar depends entirely on what backs it and who you trust to honour it.

That last part is the whole game. “Stable” is a goal printed on the label, not a guarantee.

Why stablecoins exist at all

Regular crypto is famously jumpy. The CFTC notes that virtual currencies are more volatile than traditional currencies. That makes them awkward for everyday jobs like paying a friend, pricing a product, or parking money for a week.

Stablecoins solve that by keeping the blockchain part (fast, global, open at all hours) while pinning the price to something boring. People use them to:

• Step out of a volatile coin without cashing out to a bank.
• Send dollar-like value across borders, any day of the week.
• Pay inside apps and smart contracts that need a predictable unit.
• Act as the payment rail for software, including the AI agents covered in AI and crypto.

How a stablecoin holds its price

There are three broad designs, and they fail in different ways.

Reserve-backed (fiat-backed). A company holds real-world assets, typically cash and short-term government debt, and issues one token for each dollar of reserves. You trust that the reserves exist and that you can redeem. Circle, which issues USDC, says on its transparency page that USDC is “always redeemable 1:1 for US dollars,” that most reserves sit in an SEC-registered government money market fund with the rest mainly as cash at large banks, and that a Big Four accounting firm provides monthly third-party assurance on the reserves.

Crypto-backed. The token is backed by other crypto locked in a smart contract, usually more than the stablecoin’s face value to absorb price drops. No company holds dollars, but if the collateral crashes fast enough, the cushion can run out.

Algorithmic. The token tries to hold its peg with code and incentives, often by minting and burning a sister token, rather than holding full reserves. This is the design with the most dramatic failure on record.

The TerraUSD lesson

TerraUSD, also called UST, was a large algorithmic stablecoin. In its February 2023 press release charging Terraform Labs and its CEO, the SEC described UST as a so-called “algorithmic stablecoin” that supposedly maintained its peg to the dollar. In May 2022, the SEC says, UST depegged and the price of it and its sister tokens plummeted to close to zero.

The SEC also alleged that Terraform and its CEO misled investors about the stability of UST. The point for you is not the court case. It is that “stable” in a name tells you nothing about the mechanism, and that a design depending on confidence can unwind very quickly once confidence goes.

What US law now covers

On July 18, 2025, the White House announced that the President signed S. 1582, the GENIUS Act (“Guiding and Establishing National Innovation for U.S. Stablecoins Act”), which provides for the regulation of payment stablecoins.

That is a meaningful change in the US, because it brings dollar stablecoins used for payments into a federal framework. It is also not a magic shield. Laws take time to implement through regulator rules, they apply to specific kinds of issuers, and they do nothing for a token issued outside their reach. When a platform says a stablecoin is “regulated”, ask by whom and under what rule.

How to judge a stablecoin before you use it

You do not need to audit anything yourself. You need to ask five plain questions and notice when the answers are fuzzy.

1. What backs it? Cash and short-term government debt, other crypto, or an algorithm? The answer predicts how it fails.
2. Who publishes reserve reports, and how often? Look for regular reports checked by an outside accounting firm, published on the issuer’s own site.
3. Can holders redeem, and who exactly? Direct redemption is not always open to everyone, so read the issuer’s terms. If you cannot redeem, you rely on selling on an ExchangeA company that swaps your dollars for crypto, and back. .
4. How deep is the market? A coin with good LiquidityHow easily you can sell without moving the price. is easier to swap at close to a dollar under stress.
5. Where is it held? A stablecoin on an exchange account also carries that exchange’s risk. In your own wallet, it carries your security risk instead.

The risks that remain, even with a good one

• Depeg risk. Even reserve-backed coins can trade below a dollar briefly during a panic.
• Issuer risk. The company can freeze tokens, change policies, or fail.
• Platform risk. The CFTC warns that some cash-market platforms lack critical customer protections and that there is no assurance of recourse if your currency is stolen.
• Wrong network. Many stablecoins exist on several blockchains. Sending to an address on the wrong network can mean the money is very hard or impossible to recover.
• Scams that ask for stablecoins. Scammers like them because they move fast and feel “safe”. The FTC says only scammers demand payment in cryptocurrency.

What to do next

• Go back to first principles with what is cryptocurrency.
• See how stablecoins power machine payments in AI and crypto.
• Learn the warning signs before you move money with how to spot crypto scams.