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What is a stablecoin?
A stablecoin is a cryptocurrency designed to hold a steady value, usually one US dollar. Most are backed by reserves of ordinary money held by an issuer; others use crypto collateral, precious metals or smart-contract algorithms.
What it means for you
A fiat-backed stablecoin depends on its issuer: reserves need audits to confirm they exist, and only the issuer redeems tokens for dollars. Different stablecoins hold their value by different mechanisms, so check what backs the one you hold and who can redeem it.
A common mistake: “A stablecoin is always worth exactly one dollar.”
In fact: It trades at market prices, and only approved customers can redeem with the issuer. If the reserves are in doubt or out of reach, the price can fall below one dollar, as one large fiat-backed token's did in 2023.
How it works
For a fiat-backed stablecoin, one company issues tokens on a public blockchain at 1:1 against money it holds in reserves off the chain, and must keep the tokens issued no greater than those reserves. Usually only approved direct customers can mint or redeem with the issuer; everyone else buys and sells on exchanges. Those direct customers hold the market price near one dollar through arbitrage between the issuer's rate and the exchange price. The peg therefore rests on the reserves existing and being reachable: when part of one issuer's reserves was stuck at a failed bank in 2023, its token traded well below one dollar.
An example
Say a dollar stablecoin trades at 0.98 on an exchange. A direct customer of the issuer can buy 100,000 tokens there for $98,000 and redeem them with the issuer for $100,000, before fees. That buying pushes the exchange price back toward 1.00. A retail holder without redemption access can only sell at whatever the exchange price is.
Sources: ethereum.org: Stablecoins, Federal Reserve FEDS Notes: Primary and secondary markets for stablecoins · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.