The shortest possible definition

A stablecoin is a token that lives on a blockchain and is designed to trade at a stable reference price. The reference is almost always one US dollar; in a small number of cases it is one euro, one pound, one yuan, or one ounce of gold. The word "stable" describes the design goal, not a guarantee. Stablecoins can and do drift from the peg, sometimes for hours, occasionally for days, rarely forever.

Different stablecoins hold the peg in different ways. The differences are the most important thing to understand. Roughly:

  • Fiat-backed. The issuer holds dollars (or T-bills, or money-market funds) one-for-one against each coin in circulation. USDT and USDC.
  • Crypto-collateralised. The protocol holds other crypto (mostly ETH and USDC) at a ratio higher than one-to-one, and mints stablecoin against it. DAI / USDS.
  • Algorithmic. No external collateral, or only partial collateral. The peg is supposed to be held by trading mechanics involving a second token. UST / Luna is the classic failure.
  • Commodity-backed. Backed by physical gold, silver, or another commodity held in a vault. PAXG, XAUT.

The remainder of this primer takes each family in turn, explains how the peg works, and points at the most useful examples and the most informative failures.

Family one · Fiat-backed stablecoins

Fiat-backed tokens are the familiar exchange and payment form. Their supply changes, and any market-share comparison needs a dated dataset defining which tokens are included. The mechanism matters more here than an undated market total.

How the peg works

The mechanic is straightforward. The issuer (Tether for USDT, Circle for USDC) accepts dollars from approved counterparties, parks the dollars in a reserve, and mints an equivalent quantity of stablecoin to the depositor. When a counterparty sends stablecoin back, the issuer burns it and returns dollars. Arbitrage does the rest: if USDC trades below 1.00 on an exchange, a counterparty buys it cheap and redeems for a dollar at Circle, banking the difference. If it trades above, a counterparty deposits dollars at Circle, mints USDC at par, and sells.

That arbitrage needs accessible reserves, an open redemption route and counterparties willing to use it. During the SVB weekend in March 2023, uncertainty about a reserve-bank deposit and banking access put USDC under pressure. Recovery followed the depositor-protection announcement and reopening of banking access; it was not just an ordinary weekend delay.

The dominant examples

USDT (Tether). Tether's fiat-token issuer is Tether International, S.A. de C.V., in El Salvador. Read its quarterly reserve assurance for Treasury exposure and other asset categories. For use on an exchange or payment route, check the actual contract, network and liquidity rather than assuming the ticker guarantees support.

USDC (Circle). Circle issues USDC under the terms applicable to the holder's location. Its reserve includes the BlackRock-managed Circle Reserve Fund and bank cash. Circle Internet Group listed on the NYSE in June 2025, and its 2025 Form 10-K includes audited consolidated financial statements. Corporate audits and reserve attestations are distinct.

The full side-by-side reading lives in the USDT vs USDC report. The short version: USDC is more transparent on a line-by-line basis, USDT has a longer track record of surviving market shocks.

Smaller fiat-backed coins worth knowing

FDUSD. First Digital Labs is the brand of FD121 (BVI) Limited. Its issuer status is separate from First Digital Trust's Hong Kong custody role. Binance offered FDUSD conversion during the BUSD wind-down, but that history does not establish an HKMA licence or a current trading discount.

PYUSD. PayPal USD is issued by Paxos Trust Company, N.A. under OCC supervision. PayPal supplies the brand and a distribution channel; availability depends on the account and country.

TUSD. TrueUSD is associated with Techteryx. Before using it, check its current issuer terms, reserve disclosures and an executable exit quote. An old supply estimate cannot establish current liquidity or safety.

BUSD. Binance USD, issued by Paxos. NYDFS ordered Paxos to stop minting new BUSD in February 2023. The token wound down over about eighteen months and is no longer the working dollar inside Binance.

EURC. Circle's euro-referenced stablecoin. Picked up market share after MiCA changed the European rules in 2024.

Where fiat-backed coins fail

Two main failure modes:

Banking-rail failure. If the bank holding the reserves goes down on a weekend, the redemption channel closes and arbitrage cannot work. SVB / USDC, March 2023.

Issuer regulatory action. If a regulator stops the issuer from minting new coins, the existing supply must wind down. NYDFS / BUSD, February 2023.

There are also "soft" failure modes — reserve composition that includes harder-to-verify assets, attestation gaps, jurisdictional opacity. None of these have produced a permanent depeg yet for the major fiat-backed coins, but they are the reasons readers care about which attestation, which auditor and which regulator.

Family two · Crypto-collateralised stablecoins

Smaller family, dominated by one design: MakerDAO's DAI (now also USDS under the Sky brand).

How the peg works

Collateralised borrowing locks assets against debt under asset-specific limits. Liquidation is meant to protect the system if a position becomes unsafe, but sharp price moves or failed auctions can exhaust the buffer. Peg-stability modules and real-world asset arrangements use different mechanisms; not every unit is minted through a vault with the same collateral ratio.

The system is partially decentralised — the rules sit in on-chain governance — and partially dependent on USDC. During the SVB weekend in March 2023, DAI also traded below its dollar target: its exposure to USDC transmitted stress from one stablecoin to the other. The peg recovered as USDC recovered. MakerDAO has since diversified collateral further into US Treasury bill positions and similar real-world assets, reducing but not eliminating the USDC dependency.

The example

DAI / USDS. DAI and USDS are distinct tokens in the Maker/Sky ecosystem, connected by a conversion mechanism. Their backing combines protocol collateral with other arrangements; use current documentation to identify the token and route you intend to use.

The risks include smart contracts, governance, collateral correlation and off-chain counterparties. On-chain operation does not make a protocol immune to legal action or eliminate the banking dependencies of assets it holds.

Family three · Algorithmic stablecoins

This is the family that produced the most spectacular failure in crypto history.

How the peg was supposed to work

An algorithmic stablecoin tries to hold one dollar without holding one dollar of off-chain collateral per coin. Supply expands and contracts according to code. The most famous design — Terra's UST — used a second token (Luna) as the elastic absorber. When UST traded above one dollar, the protocol let arbitrageurs burn one dollar of Luna to mint one UST and sell it; when UST traded below, the protocol let them burn one UST and mint one dollar of Luna and sell that. In theory the supply of Luna stretched to absorb shocks.

The design relies on buyers for newly minted Luna. UST exits can increase Luna supply, depress its price and require still more issuance for later exits. That is the death spiral. A comparison of the two market capitalisations does not supply a precise trigger or prove solvency.

The Luna / UST failure, in five lines

  • May 2022: withdrawals from Anchor and UST selling put pressure on the peg. Anchor was a deposit protocol, not an exchange order book.
  • LFG deploys reserve resources to support UST, but the intervention does not restore a durable peg.
  • UST exits create more Luna while selling pressure reduces the value of that companion token.
  • Validators halt the Terra chain amid governance-security concerns, adding an operational obstacle to exits.
  • The original peg fails. Later token reorganisations do not restore the original holders' dollar promise.

The Luna collapse rewrote how every regulator looks at algorithmic designs. MiCA explicitly restricts the structure. US federal proposals reference the episode by name. Several smaller algorithmic designs that survived 2022 (FRAX, USDD, USDN) have either moved toward collateral-backed structures or shrunk to insignificance.

Where they sit today

Algorithmic stablecoins are largely a closed chapter as of 2026. A handful of experiments persist — Ethena's USDe is the most-discussed, with a hedge-based design that sits somewhere between crypto-collateralised and algorithmic — but the category is small, novel and concentrated in DeFi-native use cases. For most readers, the practical takeaway is simpler: if a stablecoin pays you double-digit yield and the white paper talks more about token mechanics than about reserves, treat it with the suspicion the Luna story deserves.

Family four · Commodity-backed stablecoins

The smallest family. Tokens backed by physical commodity, usually gold.

PAXG. Pax Gold, issued by Paxos, represents one fine troy ounce of allocated London Good Delivery gold. Its dollar value moves with gold. Read the allocation and redemption terms rather than treating it as a stable dollar balance.

XAUT. Tether Gold. Same structural design as PAXG, issued by Tether. Smaller supply, similar use.

Commodity-backed tokens provide commodity exposure rather than a working dollar. Their market price can diverge from the underlying asset when liquidity, market hours or redemption access differ. Vault custody and the token's trading price are separate risks.

What makes any peg actually hold

Across all four families, three ingredients hold the peg in normal weather:

  1. Arbitrage incentive. Somebody with capital must find it profitable to push the price back toward the reference. The smaller the gap and the friction, the more reliable this is.
  2. An open redemption channel. The arbitrageur must be able to exchange the token for the underlying (dollar, T-bill, ETH, gold) without delay. When the channel closes — bank weekend, regulator action, protocol pause — the peg can slip.
  3. Reserve confidence. Read reserve attestations, financial audits and on-chain records for their different scopes. Circle has audited corporate statements; an on-chain balance does not prove the legal enforceability of an off-chain asset.

These conditions support the peg, but they do not form a formula for the size of a price move. Liquidity, available capital and confidence can interact abruptly under stress.

How to think about which one fits which job

The four families are not interchangeable, but for most readers the practical question is narrower: which fiat-backed coin for which purpose. The short answer, from the cornerstone comparison:

  • Day-to-day trading on a global venue: USDT.
  • Day-to-day operations on a US-regulated venue: USDC.
  • Yield in DeFi: USDC (default collateral in most lending markets).
  • Cross-border via Tron: USDT (the only choice with material liquidity).
  • Long-term cold storage: a mix. Holding only one issuer concentrates risk in one corporate counterparty.

For the longer treatment with twelve scenarios and the underlying reasoning, see the USDT vs USDC report. For the questions a new holder usually asks at this point, see the 20-question FAQ.

Five risks the primer should not skip

If this is the first stablecoin piece you have read, the following five risks are worth carrying away from the page.

Depeg risk. A market discount can cause a realised loss even if the price later recovers. USDC's SVB episode and the associated pressure on DAI show why a dollar target is not a guaranteed exit price.

Issuer freeze risk. Both Tether and Circle can and do freeze addresses in response to law-enforcement requests and OFAC sanctions. If your address is associated with a sanctioned counterparty, the coins held there can be locked, possibly permanently.

Venue risk. If you hold stablecoin on an exchange, you hold an IOU from the exchange rather than the on-chain token itself. The FTX collapse in November 2022 wiped out customer balances of every kind, including stablecoins. Self-custody removes this risk but adds others.

Smart-contract risk. DAI and other DeFi-native designs depend on smart contracts being free of exploitable bugs. The DeFi space has a long history of contract failures, including major incidents at protocols that had been audited. The largest DAI-relevant incidents have been resolved without permanent loss to DAI holders themselves, but the risk is non-zero.

Regulatory risk. Where you live changes the picture more than people expect. MiCA changed which stablecoins you can hold on EU exchanges. Hong Kong's ordinance is reshaping which tokens are licensable in HK. US legislation has been in motion through 2025-2026. The answer to "is this safe to hold" is partly a function of your jurisdiction's current rules and partly of where those rules are heading.

What to read next

If you want the deep comparison between the two coins you will actually hold: