In one minute
- What: A stablecoin is a token designed to track a target price (often 1 USD) with minimal volatility.
- Why: Easier pricing, payments, and DeFi actions without riding crypto price swings.
- How: Different designs: fiat-backed (cash/treasuries), crypto-backed (over-collateralized), and algorithmic/hybrid (rules & incentives). Each has trade-offs.
Heads up: Educational only — not financial advice. Stablecoins can still de-peg (trade away from $1). Always test with small amounts.
The peg: how it stays near $1
Redemption arbitrage (simple idea)
- If price < $1: Arbitragers buy on the market and redeem for $1 of reserves, making a profit — price moves up.
- If price > $1: Arbitragers mint new tokens for $1 of collateral and sell above $1 — price moves down.
- Works best when redemptions are reliable and liquidity is deep.
Over-collateral & interest
- Crypto-backed models require deposits worth more than the stablecoin minted (e.g., $150 collateral for $100 stablecoin).
- The system may tweak interest/fees to encourage minting or repayment, nudging supply toward the peg.
If redemption breaks or collateral trust falters, the peg can wobble — sometimes severely.
Main types (plain English)
Fiat-backed
- Issued by a company that holds assets like cash and short-term treasuries.
- Typically redeemable 1:1 by approved users (subject to KYC/limits).
- Pros: Simple, usually tight peg in calm markets.
- Trade-offs: Bank/custodian risk, blacklisting/freeze controls, regulatory dependence, trust in attestations.
Crypto-backed
- Minted by locking crypto as collateral in smart contracts.
- Over-collateralized to absorb price drops; positions can be liquidated if under-collateralized.
- Pros: On-chain transparency; less reliance on banks.
- Trade-offs: Volatility risk, liquidation cascades, dependency on oracles and governance.
Algorithmic / hybrid
- Use rules, incentives, or paired tokens to manage supply/demand.
- Some keep data off-chain or rely on market makers.
- Pros: Capital efficiency when stable.
- Trade-offs: History shows higher de-peg risk if confidence breaks.
Reserves, reports, and transparency
- What to look for: Breakdown of reserves (cash vs treasuries vs other), where they’re held, and who audits/attests.
- Attestation vs audit: Attestations are snapshots by an accounting firm; full audits are deeper but less frequent. Language matters.
- Redemption terms: Fees, minimums, who is eligible, and settlement times. Retail users often redeem via exchanges instead of the issuer.
- Blacklisting & freezes: Some fiat-backed coins can freeze specific addresses (compliance). That’s useful for law enforcement but reduces censorship resistance.
How people actually use stablecoins
Everyday payments
Pay contractors, split bills, or move funds across borders more quickly than bank wires (network fees still apply).
DeFi building block
Quote prices, provide liquidity, post collateral, earn yield in lending markets or liquidity pools.
Trading base
Use a stable unit to avoid pricing every trade in volatile coins.
Caution: yields & “earn” products
- “Yield” usually comes from lending markets, liquidity provision, or issuer revenue sharing.
- Risks include loan defaults, smart-contract bugs, de-pegs, and program rule changes.
- High APY often = high risk. Understand where the yield comes from and what can break.
Bridges & multi-chain versions
- Some stablecoins are natively issued on multiple chains (official contracts on each).
- Others appear as wrapped versions via bridges (lock on Chain A → mint on Chain B).
- Gotchas: Wrapped versions depend on the bridge’s security; tickers can look similar but be different contracts. Always verify the contract address from official docs.
Risks & how to manage them
- De-peg risk: Market price drifts from $1. Mitigation: prefer liquid, widely integrated coins; diversify; monitor issuer updates.
- Counterparty risk (fiat): Bank/custodian failure or policy changes.
- Oracle/liquidation risk (crypto-backed): Price feed issues can cause bad liquidations.
- Smart-contract risk: Bugs in collateral or bridge contracts.
- Regulatory risk: Rules can change by country; listings can be added/removed.
- Freeze/blacklist risk: Issuer-controlled tokens can freeze funds for compliance.
- Liquidity risk: Thin markets → slippage on large moves.
- Operational risk: Wrong network, wrong token address, or phishing sites.
Simple checklists
Before using a stablecoin
- Official contract address verified?
- Understand the model (fiat-backed / crypto-backed / algo-hybrid)?
- Read redemption terms and fees (if applicable)?
- Comfortable with freeze/blacklist controls (if any)?
- Liquidity healthy on your chain/exchange?
Before chasing yield
- Know where the yield comes from (lending, LP fees, incentives)?
- Understand liquidation/oracle risk if deposited as collateral?
- Smart contracts audited and battle-tested?
- Diversify; avoid parking everything in one protocol.
Educational content only. Do your own research.
Common mistakes to avoid
- Assuming $1 is guaranteed: Pegs can break temporarily or severely.
- Using the wrong token: Adding a wrapped look-alike instead of the official version.
- Ignoring redemption limits: Retail users may not have direct redemption access; use liquid venues.
- Bridging everything at once: Test small amounts; bridges add risk.
- Storing seeds in the cloud: Use safe backups; never share seed phrases.
Quick glossary
- Peg: Target price (e.g., $1) the stablecoin aims to track.
- Redemption: Swapping tokens with the issuer/protocol for collateral at par (rules apply).
- Attestation: An accountant’s statement about reserves at a point in time.
- Over-collateralization: Holding collateral worth more than issued tokens to absorb swings.
- De-peg: When market price moves away from the target value.
- Wrapped token: Representation of an asset bridged to another chain.
More crypto topics
Types of crypto
Coins vs tokens, utility, governance, and stablecoins.
Layer 1 blockchains
Base networks that handle transactions and security (e.g., Bitcoin, Ethereum, Solana).
Layer 2s
Scaling networks that batch/compress transactions and settle to an L1.
Smart contracts
Programs on a blockchain that run exactly as coded once triggered.
dApps
Apps that use smart contracts instead of centralized servers.
DeFi
Lending, DEXs, and yield in smart-contract form.
Decentralization
Spreading power so no single party controls the system.
Wallets & keys
Public addresses, private keys, and seed phrases explained.
Gas & fees
Why transactions cost money and why fees change.
Consensus basics
How nodes agree on the ledger without a central authority.
Mining vs staking
How PoW and PoS secure networks and issue new coins.
On-chain vs off-chain
What happens directly on the blockchain vs elsewhere.
Privacy coins
Coins that hide sender, receiver, and/or amounts (e.g., Monero, Zcash).
Oracles
Services that bring real-world data on-chain for smart contracts.
Exchange tokens
Tokens issued by trading platforms for fees, rewards, or governance.
Stablecoins
Tokens designed to track a stable value like the US dollar.
NFTs
Unique digital items with provable ownership on a blockchain.
Ordinals
Bitcoin inscriptions that attach data (like images) to individual satoshis.
Tokenization of assets
Turning real-world assets (like art or Treasuries) into on-chain tokens.
Bitcoin: store of value?
Why some view BTC like “digital gold” rather than day-to-day money.