Stablecoin

Stablecoins are digital assets engineered to hold a steady value by tracking a reference asset, most often the US dollar, rather than trading freely like Bitcoin or Ethereum. Instead of speculating on price swings, holders use them as a low-volatility unit of account and medium of exchange within crypto markets.

Three main designs achieve the peg: fiat-collateralized coins hold cash and short-term government debt in reserve for every token issued; crypto-collateralized coins lock up other digital assets, often on Ethereum, in over-collateralized smart contract vaults; and algorithmic coins rely on supply adjustments or arbitrage incentives rather than reserves. Fiat-backed models dominate the market by a wide margin.

Stablecoins function as the settlement layer of crypto trading: they provide the base pair on most exchanges, let traders exit volatile positions without touching a bank, and move value across borders in minutes. In decentralized finance they serve as collateral, loan currency, and liquidity-pool assets. In the United States, the GENIUS Act signed in 2025 established the first federal framework requiring licensed issuers to hold fully backed, segregated reserves and honor redemption rights, with implementing rules from the OCC, FDIC, and Treasury moving through rulemaking in 2026.

The main risk is a depeg, when a coin trades away from its target value because reserves are insufficient, illiquid, or mismanaged, or because an algorithmic mechanism fails under stress, as happened to TerraUSD in 2022. Reserve transparency, audit quality, and issuer solvency remain the key factors investors weigh before trusting a stablecoin.