Stablecoin
Also known as: USDT, USDC, Fiat-backed token, Digital dollar
A dollar that settles like crypto: the token that pegs itself to fiat and quietly became the plumbing of the entire digital-asset market.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A stablecoin is a crypto token built to be worth exactly one dollar — or one euro — at all times. It travels the way Bitcoin does: anywhere in the world in minutes, at any hour, with no bank in the middle. What it is built not to have is Bitcoin's price chart.
The main design is very simple. For every token out there, the issuer holds one real dollar — mostly in short-term US government bills — and promises to swap any token back for that dollar on demand. Tether (USDT) and Circle (USDC) do this on an enormous scale. Between them they account for most of the tokens outstanding, which makes stablecoin issuers together one of the larger holders of US government debt — more of it than most countries hold.
Why would anyone want a dollar in this form? Traders need one: almost every crypto trade has cash on one side, and most Bitcoin changes hands against USDT rather than actual dollars. Savers in Argentina, Turkey or Nigeria use them to hold dollars their own banks cannot offer them. And sending money abroad this way takes minutes and costs cents, against an industry that charges a percentage.
a paymentsomething deliveredonly if a condition is metnot a payment
The peg is a promise by an issuer, backed by reserves you do not hold and usually redeemable only by parties who are not you.
How coins come into being
- Direct partners → The issuer Only approved counterparties deal with the issuer directly.
- The issuer → The reserves Typically in short-term government paper and bank deposits — which is where the issuer's own risk lives.
How you get one
- You → Direct partners From an exchange or another holder, at whatever price it trades at — which is near one dollar, not one dollar by law.
If you want dollars back
- You → The issuer Most holders cannot redeem with the issuer at all and must sell on a market instead. The peg then depends on somebody else's arbitrage.
If the reserves are impaired
- The reserves → You A stablecoin briefly traded well below a dollar in March 2023 because part of its reserve sat at a bank that had just failed.
- Asset class
- Digital assets (payment/settlement)
- Instrument type
- Token redeemable (or not) for fiat at par
- Traded
- 24/7 on-chain and on every crypto exchange
- Typical users
- Traders (settlement leg), emerging-market savers, DeFi
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketmatters
- Creditdecides it
- Liquiditymatters
- Fundingbarely applies
- Operationaldecides it
What decides it here. The peg is a promise by an issuer, backed by reserves you do not hold and usually redeemable only by parties who are not you.
3 · IntermediateHow it works in practice
The three architectures
- Fiat-backed (USDT, USDC): off-chain reserves of T-bills, repo and cash; the token is an IOU on the issuer. Simple, dominant — and dependent on reserve quality and honest attestation.
- Crypto-collateralised (DAI/USDS): on-chain vaults over-collateralised with volatile assets. Transparency by construction, at the cost of capital efficiency:
- Algorithmic: no collateral — the peg maintained by an arbitrage loop against a sister token. Terra's UST proved the design reflexive: in May 2022 the loop ran in reverse and the token, its sister coin and the ecosystem built on them collapsed together within days. The category is, deservedly, near-extinct.
How the peg actually holds
Not by decree — by arbitrage. Authorised participants can mint at $1.00 and redeem at $1.00 with the issuer. Token trades at $1.002 on an exchange → mint and sell; trades at $0.997 → buy and redeem. The peg is as tight as this loop is fast and open:
What the symbols mean
- Pa price, or a present value
- cthe coupon rate
where the costs \(c\) include fees, minimums, KYC friction and — decisively — redemption confidence. Widen redemption doubt and the band widens with it.
4 · AdvancedPricing & valuation
Money-market economics in a token wrapper
A fiat-backed stablecoin is structurally a constant-NAV money market fund that keeps the yield: reserves earn ~5% in bills at 2023–24 rates while tokens pay 0%, making float the business model — the largest issuers have reported profits that would flatter a mid-sized bank, on a headcount smaller than one of its branches. The seigniorage invites competition: yield-passing rivals, tokenised MMFs (BlackRock's BUIDL), and exchanges demanding revenue shares. Regulation pushes the other way — the US GENIUS Act (2025) and EU's MiCA both prohibit paying interest on payment stablecoins, fencing them off from deposits and funds, and mandate HQLA-style reserves, redemption at par, and (MiCA) volume caps for non-euro coins.
Run dynamics and reserve design
The 2008 money-fund playbook maps one-to-one: par claim, first-mover advantage, opaque assets. Differences that matter:
- 24/7 secondary vs. banking-hours primary: the token trades continuously but redemption settles through banks — every stress episode (USDT May 2022: $10bn redeemed in days; USDC/SVB) is an interaction between these two clocks.
- Reserve composition history is the credit story: Tether once held ~50% commercial paper and an undisclosed loan book; post-2021 settlements with US authorities pushed it to overwhelmingly T-bills — reserve attestations (not full audits, still) became the market's key disclosure document.
- On-chain observability cuts both ways: DAI's collateral is verifiable block by block; but on-chain runs are also frictionless — no queue at the branch, just a swap.
Macro footprint
- Bill-market demand: stablecoin float is now a policy-relevant buyer of short Treasuries; BIS work shows measurable flow effects on bill yields from large mint/redeem waves.
- Dollarisation channel: USDT is de facto retail dollar infrastructure across the global south — extending dollar dominance through channels no US agency controls, a fact both US strategy papers and emerging-market capital-control regimes have noticed.
- Settlement collateral: perpetual futures margin, DeFi collateral, and increasingly conventional cross-border B2B payments all clear in stablecoins — the "cash leg" of a parallel settlement system that runs alongside the conventional one.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Stablecoin in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Stablecoin beside any other instrument →
Where this instrument shows up elsewhere
- EasyExplain It Out LoudPrepA four-sentence template that fits every instrument on this site, twelve products written out in it, and a drill for…
- MediumTerra, 2022Case StudiesA coin held at a dollar by an arbitrage against a second coin it could print
- MediumWhich Desk Trades WhatPrepEleven trading seats and six that sit next to them: what each one actually touches, the single number it lives by,…