Basics · 5 min read
What is a stablecoin (and why they can depeg)
A plain-English guide to stablecoins: what keeps them at $1, the main types (cash-backed, crypto-backed, synthetic, algorithmic) and why they sometimes lose their peg.
Education, not financial advice. Rates change; DeFi carries smart-contract and depeg risk. Do your own research.
The short version
A stablecoin is a crypto token designed to stay worth a fixed amount, almost always one US dollar. It moves on a blockchain like any other token, so you can send it anywhere in minutes, but its price is meant to stay flat instead of swinging like bitcoin or ether.
People use stablecoins to hold dollars inside crypto, to trade, to send money, and to earn interest by lending them out. That last one is what most of StableRate tracks.
What keeps it at $1?
The “peg” holds because people trust they can swap the coin for a dollar’s worth of something. If it trades at $0.99, traders buy it cheap and redeem it for $1; if it trades at $1.01, they create new coins and sell them. That arbitrage pulls the price back. It only works while the backing is really there and redemptions keep working.
The main types
- Fiat-backed (for example USDC, USDT, PYUSD): a company holds cash and short-term government bonds and lets approved customers redeem coins for dollars. You are trusting the issuer, its banks and its reports on its reserves.
- Crypto-backed (for example DAI/USDS, GHO, crvUSD): created by borrowers who lock up more crypto than the stablecoins they mint. If the collateral falls too far, it gets sold automatically. You are trusting the code and the collateral.
- Synthetic or strategy-backed (for example USDe): hold crypto and hedge its price with derivatives so the total stays near $1. The hedge can earn or cost money depending on market conditions.
- Algorithmic: try to hold the peg mainly with incentives and a sister token rather than solid reserves. This design has failed badly before.
Many coins mix approaches, and some now hold tokenized treasury bills (real-world assets, or RWAs). The peg monitor lists the backing type for each coin we track.
Why stablecoins depeg
A depeg is when a stablecoin trades meaningfully away from $1. Common causes:
- Reserve trouble. In March 2023, USDC briefly fell to roughly $0.88 after Circle said part of its reserves was held at Silicon Valley Bank, which had just failed. It recovered once the deposits were made safe.
- A broken design. In May 2022, the algorithmic stablecoin TerraUSD (UST) lost its peg and collapsed toward zero within days.
- Collateral crashes or bad debt in crypto-backed coins, if liquidations can’t keep up.
- Strategy losses in synthetic coins, for example if hedging costs stay high for a long time.
- A run. If many holders try to exit at once, even a solid coin can wobble on exchanges while redemptions catch up.
Small moves of a fraction of a cent are normal. Bigger gaps that last are the warning sign.
How to check a stablecoin
- Who issues it, and what backs it? Is that published and independently checked?
- How big is it, and how long has it held its peg? Bigger and older is not a guarantee, but it has survived more.
- Has it depegged before, and how fast did it recover?
- Can you get out easily? Look at how much trades each day and on which exchanges.
Watch the live numbers on the peg monitor.