Stablecoins

If you read about crypto, you hear about Bitcoin and Ethereum. If you actually use crypto, especially outside the United States and Europe, you are probably using stablecoins. They are the silent giant: most onchain volume, most everyday payments, most cross-border transfers, all denominated in dollars.

A stablecoin is a token designed to be worth exactly one unit of a regular currency, usually the US dollar. One USDC is one dollar. One USDT is one dollar. The idea is to keep the speed, openness, and global reach of crypto while removing the price volatility that makes ETH or BTC awkward for actual transactions.

Why dollars on a blockchain?

For most people in stable economies, "send a dollar" is solved. Banks, cards, apps. For most of the rest of the world, sending dollars is hard, slow, and expensive. International transfers cost 5 to 7 percent and take days. Local currencies inflate. Holding dollars in a local bank often is not even possible.

Stablecoins fix this. A worker in the Philippines can receive dollars from family abroad in minutes for cents. A small business in Argentina can hold a dollar balance without going through the legal contortions a bank would require. A startup in Lagos can pay a contractor in Vietnam without either of them ever touching a bank.

How a token stays at $1

There are three main ways stablecoins maintain their peg. Each comes with its own trade-offs.

1. Fiat-backed (the popular model)

A company holds a real dollar in a bank account for every token it issues. Send them a dollar, they mint a token. Send the token back, they burn it and return your dollar. USDC (issued by Circle) and USDT (issued by Tether) work this way. The peg holds because the issuer always stands ready to redeem one-for-one.

The trade-off: you have to trust the issuer to actually have the dollars and to be willing to redeem them. Reputable issuers publish regular audits. Less reputable ones have, historically, lied.

2. Crypto-backed (the DeFi model)

You lock up more crypto than the stablecoin is worth (say, $150 of ETH for $100 of stablecoin). If the collateral falls below a safety threshold, the system automatically sells it to keep the peg intact. DAI is the most well-known example.

The trade-off: you do not have to trust a company, but the system needs to over-collateralize to absorb crypto's volatility. Capital efficiency is worse, and a fast crash can stress the mechanism.

3. Algorithmic (the experimental model)

No real backing — just code that mints or burns tokens to push the price toward $1. Cheap and decentralized in theory. In practice, almost every algorithmic stablecoin has eventually broken. The most famous failure was UST in 2022, which fell from $1 to a few cents in days and erased tens of billions of dollars.

The market today

USDT is the giant: most volume, most pairs on exchanges, most acceptance globally. USDC is the more conservative challenger, favored in regulated environments. Together they account for the overwhelming majority of stablecoin activity.

What can go wrong

• Issuer insolvency: if the company holding the backing assets fails, the peg can break. (USDC briefly traded to $0.88 during the Silicon Valley Bank crisis in March 2023.)
• Regulatory action: governments can freeze, seize, or block individual addresses or entire issuers.
• Smart contract risk: the token contract or the system around it can have bugs.
• Algorithmic failure: as with UST, a death spiral can erase value almost overnight.
• De-pegging: even a healthy stablecoin can briefly trade above or below $1 in periods of extreme stress.

In practice, the major fiat-backed stablecoins have proven remarkably resilient. But "almost always equal to a dollar" is not "exactly equal to a dollar." Treat them as dollar-substitutes with extra moving parts.

Bitcoin is the dream, but stablecoins are the product.

Once dollars are onchain, you can do things with them that traditional banking would never allow: lend, borrow, swap, earn yield — all without an account or approval. That world is called DeFi, and it is what we look at next.