What Are Stablecoins?

A dollar-referenced stablecoin generally aims for one token to trade near one US dollar. The market price can move above or below that target because trading occurs across venues with changing supply and demand.

A credible creation and redemption process can encourage arbitrage. Eligible participants may create tokens when market prices are high or redeem them when prices are low, but access, fees, delays, and minimum sizes affect how tightly that mechanism works.

Fiat-backed issuers state that tokens are supported by reserves such as bank deposits, short-term government securities, or other cash-equivalent assets. Users depend on the issuer, reserve custodians, banking access, redemption policies, and the quality of financial reporting.

Reserve composition matters because assets differ in liquidity, credit risk, and price stability. An attestation reports specified information at a point in time; it is not identical to a full financial audit and does not eliminate operational risk.

Crypto-backed stablecoins use onchain collateral and often require collateral worth more than the stablecoins issued. Smart contracts monitor positions and may liquidate collateral when its value falls below required levels.

Other systems rely more heavily on incentives, paired tokens, or supply adjustments. These mechanisms can fail when confidence and liquidity disappear together. The label algorithmic describes a mechanism, not a guarantee of stability.

A depeg occurs when market price moves materially away from the target. Causes can include reserve concerns, blocked redemptions, banking disruption, thin liquidity, collateral losses, smart-contract failures, or broad market stress.

Some issuers can freeze addresses or block redemptions under their terms. Onchain versions can also depend on bridges, wrapped assets, governance systems, and external price feeds. Each dependency adds a separate failure mode.

• Review who issues or governs the token and who can redeem directly.
• Check reserve or collateral disclosures and their limitations.
• Distinguish the native token from bridged versions on other networks.
• Do not treat price stability as equivalent to deposit insurance or a bank guarantee.

Stablecoins can act as quote currencies on exchanges, settlement assets for onchain applications, and transfer instruments across supported networks. Their usefulness depends on acceptance, liquidity, transaction costs, and reliable access to the underlying infrastructure.

Comparing stablecoins requires more than checking which one stayed closest to a dollar yesterday. Reserve structure, redemption rights, legal jurisdiction, contract controls, network support, and market depth all shape risk.