What Are Stablecoins? How They Hold $1

Disclosure: This article is information and opinion, not financial advice. Figures are approximate as of mid-2026. See our full disclaimer.

The most-used product in crypto is the one designed not to move.

Stablecoins sit at roughly $320 billion in circulating supply, moved something like $9 trillion in transfers over the past year, and account for the majority of all crypto trading volume. Every time our flow coverage mentions “stablecoin inflows” as a demand signal, this is what we mean: the dry powder of the entire market.

And yet most people using them can’t answer the only question that matters: what actually makes a token worth $1? There are three different answers. Two have survived every stress test so far. One erased $40 billion in a week. Knowing which is which is the whole game.

The short version

A stablecoin is a token pegged to a stable asset, almost always the US dollar. The peg holds through one of three mechanisms: fiat reserves at a custodian (USDT, USDC), crypto collateral locked above 1:1 in smart contracts (DAI/USDS), or an algorithm minting and burning supply (Terra’s UST, which collapsed in 2022). Since 2025, US and EU law requires major issuers to hold 100% reserves with regular audits.

The three ways a token holds $1

Fiat-backed, about 84% of the market. A company holds actual dollars and Treasury bills, mints one token per dollar, and redeems on demand. Tether’s USDT (~$185 billion, dominant in trading and emerging markets) and Circle’s USDC (~$76 billion, the institutional favorite) run this model. The peg holds because arbitrage works: if the token dips to $0.99, someone buys it and redeems for $1.00 until the gap closes.

Crypto-collateralized. Instead of a company holding dollars, smart contracts hold crypto worth more than the tokens issued, typically 150%+ collateral. DAI and its successor USDS pioneered this. No bank account to freeze, but the overcollateralization exists because the collateral itself is volatile.

Algorithmic. No reserves at all: an algorithm mints and burns supply against a paired asset to hold the peg. If that sounds like a perpetual motion machine, the market agrees with you now. It didn’t in early 2022.

When the peg broke: three lessons, paid for in public

Terra’s UST, May 2022. The largest algorithmic stablecoin held its peg beautifully, until redemptions outran confidence and the death spiral kicked in. Roughly $40 billion evaporated in days. The lesson was mechanical, not moral: a peg backed by nothing but incentives fails exactly when incentives flip. The algorithmic category has never recovered, and in my view, shouldn’t.

USDC, March 2023. The clean, audited, regulated one. Then Silicon Valley Bank failed over a weekend with $3.3 billion of Circle’s reserves inside, and USDC traded down to about $0.87 until Monday, when regulators backstopped the bank and the peg snapped back. Lesson: fiat-backed means bank-exposed. The reserves are only as safe as where they sit.

USDT’s wobbles. Tether has briefly traded a few cents off during panics (2018, and the week Terra died) and recovered each time via redemptions. Its long-running controversy was reserve transparency, which regulation has since forced forward. Lesson: liquidity depth matters, and so does being able to see the backing.

Notice the pattern: the depegs weren’t random. Each one traced exactly to the mechanism’s known weak point. Stablecoins don’t fail mysteriously. They fail on schedule, at their design’s weakest joint, when stress arrives.

The 2025-26 shift: from gray zone to audited instrument

This part is genuinely new. The US GENIUS Act, signed in July 2025 with implementation rules that took effect on July 18, 2026, requires 100% reserve backing and regular audits for dollar stablecoins, and opened a path for banks to issue their own. Europe’s MiCA imposed its own reserve and licensing regime, and Japan just cleared global stablecoins for everyday payments under strict audit rules.

Practically, the era of “trust us, the reserves exist” is ending. A major stablecoin in 2026 is closer to a money market fund with a blockchain wrapper than to the wildcat instruments of 2021. That’s most of why institutions finally showed up.

What they’re actually for

Three real uses. Trading and parking: exiting a volatile position without exiting crypto, which is why supply growth reads as market dry powder. Payments and remittances: moving dollars across borders in minutes for cents, the use case quietly rivaling card networks in volume. And DeFi plumbing: the settlement layer most of decentralized finance runs on.

What they’re not: an investment. A stablecoin’s job is to be boring. The moment someone offers you a fat yield on one, our standing rule applies with full force: diagram where the yield comes from in one sentence, or you’re the yield. Celsius paid double digits on stablecoins right up until it didn’t.

The risks that remain

Issuer risk: you hold a company’s IOU, not dollars. Reserve location risk: see the SVB weekend. Depeg-under-stress risk: rare for the majors now, never zero. And no deposit insurance: a stablecoin is not a bank account, whatever the interface suggests. For meaningful amounts held long-term, the self-custody logic applies to stablecoins exactly as it does to everything else.

FAQ

What keeps a stablecoin at exactly $1?

Arbitrage against redemption. If the token trades below $1, buyers purchase it cheap and redeem it with the issuer for a full dollar, closing the gap; above $1, new tokens get minted and sold. This works as long as redemption is credible, which is why reserves and audits are the entire ballgame.

Are stablecoins safe to hold?

The major fiat-backed ones (USDT, USDC) have held their pegs through severe stress and now operate under 100% reserve and audit requirements in the US and EU. Safe-er, not risk-free: you carry issuer risk, reserve-location risk, and no deposit insurance. History’s serious failures were concentrated in the algorithmic category.

What’s the difference between USDT and USDC?

Both are fiat-backed dollar tokens. USDT (~$185B) dominates trading liquidity and emerging-market usage; USDC (~$76B) is the institutional and regulated-finance favorite, growing faster in percentage terms since US regulation arrived. Many active users simply hold both for different jobs.

Why did Terra’s UST collapse if stablecoins are stable?

UST was algorithmic: no reserves, just a mint-and-burn mechanism tied to the LUNA token. When large redemptions hit in May 2022, the mechanism required minting enormous amounts of LUNA, crashing its price and destroying the very asset backing the peg. Roughly $40 billion was erased, and the failure discredited the entire algorithmic category, not stablecoins as a whole.