Quick take
- Most stablecoins aim to track the US dollar, but they do it in very different ways.
- Reserve-backed coins depend on the issuer; crypto-backed coins depend on collateral; algorithmic coins have failed spectacularly.
- New laws in the EU and US are setting rules for issuers, but holders still carry risk.
Why stablecoins exist
Crypto prices swing, and moving money between banks and exchanges is slow. Stablecoins give traders a dollar-like unit that lives on the blockchain, can move at any hour and can be used as the other side of almost every trade.
Type 1: backed by reserves
An issuer holds cash and short-term government debt and creates one token per dollar deposited. USDT (Tether) and USDC (Circle) are the largest. Their stability depends on the quality of the reserves, the issuer's honesty and its ability to process redemptions quickly. USDC briefly fell to about $0.88 in March 2023 when some of its reserves were stuck at the failed Silicon Valley Bank, before recovering once the deposits were secured. Our USDT guide looks at Tether in detail.
Type 2: backed by crypto
These coins are created when users lock up more crypto than the value of the stablecoins they borrow, for example $150 of ether for $100 of stablecoins. If the collateral falls too far, it is sold automatically. The design is transparent but can come under strain in sharp crashes.
Type 3: algorithmic
These try to hold their peg with code and incentives rather than full reserves. The best-known example, TerraUSD, collapsed in May 2022, falling far below $1 within days and wiping out tens of billions of dollars of value. It remains the clearest lesson that "stable" is a goal, not a guarantee.
Comparing the designs
| Design | Examples | Main risk |
|---|---|---|
| Reserve-backed | USDT, USDC | Issuer, reserves, banks holding reserves, freezes |
| Crypto-backed | DAI and similar | Collateral crashes, smart-contract bugs |
| Algorithmic | TerraUSD (failed) | Loss of confidence leading to collapse |
Regulation is arriving
The EU's MiCA rules require stablecoin issuers serving EU users to be authorised and hold reserves under strict conditions. In 2025 the United States passed its first federal stablecoin law, the GENIUS Act, setting reserve and licensing requirements for issuers. These rules reduce some risks but do not turn stablecoins into insured bank deposits.
Practical points
- Keep large balances in a form you understand, and spread risk across issuers if you hold stablecoins at all.
- Check which network you are sending on; see how to buy USDT safely.
Common questions
Which stablecoin is safest?
None is risk-free. Reserve-backed coins with frequent, independent reporting on high-quality reserves are generally considered more robust than algorithmic designs.
Do stablecoins pay interest?
The coins themselves generally do not. Platforms offering interest on stablecoins are lending or investing them, which adds that platform's risks.
Sources
- Circle, USDC reserve reports
- European Union, Markets in Crypto-Assets Regulation (MiCA)