What Is a Stablecoin?

The short version

A stablecoin is a cryptocurrency that’s supposed to be worth exactly $1. Always.

Unlike Bitcoin, which might be worth $40,000 today and $35,000 tomorrow, one USDC or USDT should always be worth one US dollar. That’s the whole point.

Think of it as a digital dollar that lives on the internet and can move anywhere in seconds.

Why anyone would want this

Regular dollars are annoying to move around. Want to send $500 to your friend in another country? That’ll be 3-5 business days and $40 in fees. Want to move money on a Sunday? Banks are closed. Want to pay a freelancer in the Philippines? Hope you enjoy wire transfer paperwork.

Stablecoins fix this. They’re:

Fast. Transfers take seconds or minutes, not days.

Cheap. Fees are often under $1, sometimes under a penny.

Always on. No bank hours. No weekends. No holidays.

Borderless. Same experience whether you’re sending to someone across the street or across the world.

How they stay stable

This is where it gets interesting. There are three main approaches:

1. Backed by real dollars

The simplest version. You give the company $100, they mint 100 tokens. The dollars sit in a bank account. When you want out, they burn the tokens and give you the dollars back.

USDC and USDT work this way. In theory, every token is backed by a real dollar (or equivalent) sitting in a reserve.

The catch: you have to trust the company running it. Are the dollars actually there? Are they really as safe as they claim? This is why audits and transparency matter.

2. Backed by other crypto

Instead of dollars, some stablecoins are backed by cryptocurrency. You lock up $150 worth of ETH and borrow $100 worth of stablecoins. The extra collateral protects against price swings.

DAI is the main example. It’s decentralized, meaning no single company controls it. Smart contracts enforce the rules automatically.

The catch: it’s more complicated, and if crypto prices crash hard enough, things can break.

3. Algorithmic (don’t)

These try to maintain stability through supply and demand mechanics. No real backing. Just math.

We’re not going to spend much time on these because the most famous one, Terra/UST, collapsed in 2022 and vaporized $40 billion. The math didn’t work when it needed to.

If someone offers you high yields on an “algorithmic stablecoin,” run.

Why you might care

You don’t need to be a crypto trader to find stablecoins useful:

Sending money abroad. If you regularly send money to family overseas, stablecoins can be dramatically cheaper than traditional remittances.

Getting paid. Freelancers working with international clients increasingly get paid in stablecoins. Faster and cheaper than wire transfers.

Saving (sort of). Some platforms pay 4-5% interest on stablecoins. Better than most savings accounts. But also riskier, so don’t confuse it with an FDIC-insured account.

Trading. If you’re into crypto, stablecoins let you move to “cash” without actually leaving the crypto ecosystem.

What can go wrong

Stablecoins aren’t perfectly safe. Here’s the honest version:

The peg can break. In March 2023, USDC briefly dropped to $0.87 when Silicon Valley Bank collapsed and Circle had $3.3 billion stuck there. It recovered when the government stepped in, but it was a reminder that “stable” is a goal, not a guarantee.

Companies can fail. If the company behind a stablecoin goes bankrupt, good luck getting your dollars back. This is why transparency and regulation matter.

Reserves might not be what they claim. Tether has paid fines for misrepresenting its reserves. This doesn’t mean it’s going to collapse, but it means you’re trusting a company with a spotty track record.

They’re not FDIC insured. If something goes wrong, there’s no government backstop.

So which one should you get?

The short answer: USDC for most people.

It’s backed by real dollars, audited monthly, and run by a company that works with regulators instead of hiding from them. It’s the boring, reliable choice.

Read our full comparison to see how all the options stack up.

The bottom line

Stablecoins are digital dollars that move at internet speed. They’re useful for sending money, getting paid, and parking value without dealing with bank nonsense.

They’re not perfectly safe. But neither are banks, really. The key is understanding what you’re using and why.

If you want the safest option, go with USDC. If you need something specific, compare your options. If you want to understand the risks, read about what can go wrong.