Glossary · S
Stablecoin
A cryptocurrency designed to maintain a stable value, typically pegged 1:1 to the US dollar. Stablecoins come in three main types: fiat-backed (USDC, USDT — backed by cash in bank accounts), crypto-backed (DAI — backed by overcollateralised crypto), and algorithmic (USDe — backed by delta-neutral derivatives positions).
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How Stablecoin works in practice
A stablecoin is a token designed to hold a stable value, almost always one US dollar. What actually holds the peg differs completely between designs, and that mechanism — not the ticker — determines what the asset is worth in a crisis.
Worked example
A fiat-backed stablecoin holds cash and Treasuries with a custodian and redeems at par. A crypto-backed one is minted against over-collateralised volatile positions defended by liquidations. A delta-neutral one holds a hedged derivatives position. All three quote at $1.00 in calm markets and behave very differently in stressed ones.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Treating all stablecoins as interchangeable dollars. They carry issuer risk, collateral risk, and regulatory risk in different proportions, and several have broken their peg permanently. A stablecoin at $0.97 has lost 3% of principal.
Stablecoin: common questions
- What is Stablecoin?
- A cryptocurrency designed to maintain a stable value, typically pegged 1:1 to the US dollar. Stablecoins come in three main types: fiat-backed (USDC, USDT — backed by cash in bank accounts), crypto-backed (DAI — backed by overcollateralised crypto), and algorithmic (USDe — backed by delta-neutral derivatives positions).
- How does Stablecoin work in practice?
- A stablecoin is a token designed to hold a stable value, almost always one US dollar. What actually holds the peg differs completely between designs, and that mechanism — not the ticker — determines what the asset is worth in a crisis.
- Can you give an example of Stablecoin?
- A fiat-backed stablecoin holds cash and Treasuries with a custodian and redeems at par. A crypto-backed one is minted against over-collateralised volatile positions defended by liquidations. A delta-neutral one holds a hedged derivatives position. All three quote at $1.00 in calm markets and behave very differently in stressed ones.
- What do people get wrong about Stablecoin?
- Treating all stablecoins as interchangeable dollars. They carry issuer risk, collateral risk, and regulatory risk in different proportions, and several have broken their peg permanently. A stablecoin at $0.97 has lost 3% of principal.