Stablecoins
Lesson 30 of 39 in the course “Crypto”. Free, with animations and a quiz.
A coin pegged to the dollar
A stablecoin is a crypto coin that tries to hold a price of $1. The peg means 1 coin ≈ 1 dollar. The best known are USDT and USDC. They are handy for keeping "cash" inside crypto, moving money between exchanges and buying other coins. The picture shows the normal state: the price stays around $1.00.
What holds the peg
Option 1: reserves. The issuer, the company that creates the coin, holds dollars and similar assets such as US government bonds and promises 1-to-1 redemption. That is how USDT and USDC work. Option 2: an algorithm, where program rules and another token hold the price. These have historically broken more often. Key point: a stablecoin is not a bank deposit and has no deposit insurance.
De-peg: when the peg breaks
A de-peg is when a stablecoin's price moves away from $1, usually down, as in the picture. It happens when people doubt the reserves and sell in a rush. Examples from history: in 2022 the algorithmic UST lost its peg and fell almost to zero. In 2023 USDC dipped below $0.90 for a couple of days because of trouble at a bank holding part of its reserves, then returned to $1.
How to use them without overdoing it
People use stablecoins to step out of a volatile coin without moving money to a bank, and to trade pairs like BTC/USDT. But there is always risk, and the logic matches the picture: the more you bet on one card, the harder the hit if it fails. Do not keep all your money in one stablecoin. Also note: the issuer can freeze coins at a specific address.
Check yourself
- What is a stablecoin for?
Correct answer: Holding about $1 of value inside crypto. A stablecoin is pegged to the dollar, so people use it to hold value and move money inside crypto without going through a bank. - What is a de-peg?
Correct answer: A stablecoin's price breaking away from $1. A de-peg means the peg broke and the price moved away from $1, usually down, like UST in 2022. - What is the sensible way to hold stablecoins?
Correct answer: Split it across several stablecoins. Any stablecoin can lose its peg or be frozen. If your money is split, one de-peg will not hit all of it.