By What Is a Stablecoin? How USDT and USDC Work
Bitcoin's price moves. Ethereum's price moves. That's the entire selling point for some people and a dealbreaker for others, which is exactly the gap stablecoins were built to fill: a cryptocurrency engineered to hold roughly the same value day after day, usually pegged to the US dollar.
Fiat-backed: the biggest category by far
Tether (USDT) and USD Coin (USDC) are the two largest stablecoins, and both work on the same basic principle: the issuer holds cash and cash-equivalent reserves (like short-term US Treasury bills) roughly equal to the number of tokens in circulation, and in principle will redeem a token for a dollar on request. The peg holds as long as people trust that reserve actually exists and can really be tapped when needed, which is why reserve transparency and regular audits or attestations have become such a big deal in this corner of the industry.
Crypto-backed: collateral you can verify on-chain
Some stablecoins, DAI being the best known example, are backed by other cryptocurrencies locked into a smart contract instead of dollars sitting in a bank. Because crypto collateral is more volatile than cash, these systems typically require significant overcollateralization (locking up more value than the stablecoin issued) and automatic liquidation mechanisms that kick in if the collateral's value drops too close to the line.
Algorithmic: the kind that has actually failed, badly
A purely algorithmic stablecoin tries to hold its peg through code and market incentives alone, without dollar or crypto reserves backing it directly. In May 2022, TerraUSD (UST), one of the largest algorithmic stablecoins at the time, lost its peg and collapsed within days, wiping out tens of billions of dollars and dragging its sister token LUNA down with it. It's become the standard cautionary example in the space, and a big part of why algorithmic designs are viewed with a lot more skepticism today than they were before 2022.
The US now actually regulates these directly
For years, stablecoins operated in the United States without a dedicated federal framework. That changed on July 18, 2025, when President Trump signed the GENIUS Act into law, establishing the first comprehensive federal regulatory regime for what the law calls "payment stablecoins." It requires issuers to hold reserves equal to 100 percent of coins in circulation, sets out licensing and oversight requirements, and explicitly bars these stablecoins from paying interest or yield directly to holders. It's a meaningful shift from the patchwork, state-by-state approach that came before it. See where the actual rulemaking stands for the more current picture, and which major companies are moving on stablecoins as a result.
What they're actually used for
- Moving value between exchanges or wallets without cashing out to a bank account each time.
- A relatively stable place to park funds during volatile markets, without leaving the crypto ecosystem entirely.
- Cross-border payments and remittances, particularly in places where reliable local currency access or banking infrastructure is limited.
- Collateral or a unit of account within decentralized finance applications.
Every Bitcoin private key that will ever exist is generated right here on this site, Satoshi's included. Try for a million years. You still won't find a funded one.
Try the key collider nowStable isn't the same as risk-free
"Stable" describes the price target, not the underlying risk. Reserve quality, issuer solvency, smart contract bugs, and regulatory change can all still affect a stablecoin, UST's collapse being the clearest example of how badly a peg can fail when the design itself is flawed. Worth understanding before treating any stablecoin as equivalent to actually holding dollars.
This explains how stablecoins work structurally, not whether holding any particular one is a good idea. Nothing here is financial advice.