A stablecoin is a cryptocurrency designed to hold a fixed value, almost always one US dollar, by backing each token with reserves of cash and short-dated government debt. Stablecoins are the plumbing of the crypto market: traders park money in them between positions, exchanges quote prices against them, and increasingly they move dollars across borders faster and more cheaply than banks.
How the peg works
The largest stablecoins are fully reserved: for every token issued, the issuer holds roughly one dollar of Treasury bills, repo or bank deposits, and stands ready to redeem tokens at par. The peg holds because arbitrage makes it profitable to correct deviations. If the coin trades at 99 cents, arbitrageurs buy it and redeem at one dollar; at $1.01, they mint new coins and sell. This works only while redemption is credible, which is why reserve quality and attestation matter more than technology.
Where it breaks
Pegs fail in two ways. Reserve-backed coins can suffer bank-run dynamics if reserves are impaired or redemption is suspended: the 2023 episode in which a major stablecoin briefly traded at 88 cents after reserves were caught in a failed bank showed how fast confidence moves. Algorithmic stablecoins, which tried to hold the peg with incentive mechanisms rather than assets, failed catastrophically: the 2022 Terra collapse erased tens of billions and remains the defining case study of reflexive de-pegging.
Why they matter beyond crypto
Stablecoin issuers have become significant buyers of US Treasury bills, linking crypto demand to money markets. Regulators treat the sector as a payments and financial-stability question rather than a crypto niche, and legislation in major jurisdictions now defines reserve, audit and licensing requirements. In stress, flows between stablecoins and bank deposits can transmit crypto shocks into the traditional system, and vice versa.
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