What Is a Stablecoin? Definition & Example

A stablecoin is a token engineered to hold a fixed value, nearly always one US dollar. They are the settlement layer of crypto trading: nearly every perpetual contract is margined and settled in stablecoins, and they are how traders hold value between positions without leaving the ecosystem.

Three designs exist, with meaningfully different risk. Fiat-backed stablecoins like USDC and USDT hold reserves of cash and short-term treasuries with a custodian — simple, and dependent on that custodian actually holding what they claim. Crypto-collateralised stablecoins like DAI are backed by over-collateralised crypto deposits, transparent on-chain but exposed to collateral crashes. Algorithmic stablecoins attempt to hold the peg through supply mechanics with little or no backing.

The third category has a poor record. Terra's UST held a $18 billion market cap and lost its peg permanently within days in May 2022, wiping out most of that value and taking a chain with it. The failure mode is a reflexive spiral: the peg slips, confidence falls, the mechanism creates more supply, confidence falls further.

Even fiat-backed stablecoins carry real risk. USDC briefly traded at $0.87 in March 2023 when Silicon Valley Bank — holding part of its reserves — failed. It recovered fully, but a coin held specifically because it does not move had moved 13%, and anyone using it as margin during those hours faced consequences.

Practical guidance: prefer stablecoins with regular attestations of reserves, understand that "stable" describes an intention rather than a guarantee, and avoid concentrating everything in one issuer. When a stablecoin depegs, it happens over hours, not weeks.