What is a stablecoin?
DefinitionA stablecoin is a cryptocurrency designed to keep a steady price, usually 1 US dollar per token, by being backed by reserves or collateral. USDT and USDC are the best-known examples.
How a stablecoin keeps its peg
A stablecoin keeps its peg because large holders can redeem tokens with the issuer for the asset behind them. When the market price drifts below 1 dollar, traders buy cheap tokens to redeem at full value; when it rises above, new tokens are issued and sold. This arbitrage pulls the price back toward the target.
The peg is only as strong as what backs it. If people start to doubt the reserves or the ability to redeem, the price can slip.
Types of stablecoins
Stablecoins differ in what stands behind each token:
- Fiat-backed: the issuer holds cash and short-term government debt in reserve, as with USDT and USDC
- Crypto-backed: tokens are created against more crypto collateral than they are worth, locked in smart contracts
- Algorithmic: supply is managed by code with little or no reserve; several such designs have collapsed
- Commodity-backed: tokens linked to a physical asset, such as tokenized gold
Why people use stablecoins
People use stablecoins to hold a dollar-value balance without a foreign bank account, to send money across borders in minutes, to pay merchants and to park funds between trades. The same stablecoin often exists on several networks, such as USDT on Tron, TON, Ethereum and BNB Smart Chain.
In Waletifi you can hold USDT on several of these networks and see the balance in your local currency, with the exact USDT amount beside it.
Risks to understand
Stable does not mean risk-free. Before you rely on a stablecoin, understand these risks:
- Depeg risk: a stablecoin can trade below its target when confidence in its reserves falls.
- Issuer risk: centralized issuers can freeze tokens at specific addresses.
- Network risk: sending on the wrong network can lose the funds.
- Inflation: a dollar stablecoin still loses purchasing power as the dollar does.
