A stablecoin is a cryptocurrency designed to maintain a consistent price relative to another asset, usually the U.S. dollar. Said another way, a perfectly effective stablecoin pegged to the dollar will always be worth $1. This behavior differs dramatically from traditional cryptocurrencies like bitcoin and ethereum, which are known for their volatility.
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Stablecoins maintain their value by holding collateral or by using computer algorithms to force price stability by manipulating supply and demand.
Some currencies are better at this than others. Stablecoins do occasionally fall below their target values, both temporarily and permanently. An extended dip below the target value is called depegging, an event that undermines trust in the currency’s issuer and, sometimes, in the entire crypto economy.
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Stablecoins are categorized by the method they use to hold their value. They may be collateralized by another asset such as the U.S. dollar, gold, or crypto. Or, they may rely on automated market manipulation.
Fiat-collateralized stablecoins, or fiat-backed stablecoins, use reserves of a government-issued paper currency (or fiat), like the U.S. dollar, as collateral. Ideally, the issuer deposits the reserves with an independent custodian so they can be monitored and audited.
Well-known fiat-backed stablecoins are:
Commodity-backed stablecoins are collateralized with hard assets, such as gold, silver, oil, or real estate. As an example, one token of Pax Gold (PAXG-USD) is backed by one fine troy ounce of gold. The stablecoin’s pricing corresponds with the gold spot price (^XAU) against the U.S. dollar in real time.
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PAXG is one of the best-known commodity-backed stablecoins, but other top options are:
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Crypto-backed stablecoins may peg their values to the dollar or another paper currency, but they use cryptocurrencies as collateral. To maintain price stability, crypto-backed stablecoins often overcollateralize — for example, holding enough $2 of collateral for every $1 of stablecoin value in circulation.
Popular crypto-backed stablecoins include:
Non-collateralized stablecoins, or algorithmic stablecoins, use complex computerized rules to keep prices stable. Some have reserves in smart contracts that execute automatically to manage supply and demand.
Algorithmic stablecoins have historically been prone to depegging. That may be why they’re less popular than collateralized currencies. Ampleforth (AMPL-USD) is one option that expands and contracts supply automatically to keep its price stable. Owners of AMPL may see their token counts adjusted daily as these supply changes are implemented.
Cryptocurrencies became popular in part because they operate outside the control of a governing body, and they can be used easily, quickly, cheaply, and privately in global transactions.
However, legacy cryptocurrencies are challenging to use as a medium of exchange. Rapid and dramatic value changes create risk for buyers and sellers. As an example, a shop owner who accepts bitcoin may see profits disappear before the currency can be converted into dollars.
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But stablecoins seek to blend the efficiency and privacy of crypto with price stability for improved transactional utility. “Stablecoins were never designed to be investments,” explained Vi Powils, crypto investor and CEO of World of Women. “Their purpose is to stay stable and act as a medium of exchange.”
Use cases for stablecoins include:
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Several countries have enacted stablecoin legislation, including the U.S., Japan, the EU, and Hong Kong. In the U.S., stablecoins are governed by the GENIUS Act, signed into law by President Trump in July 2025.
The GENIUS Act defines collateral, disclosure, and marketing rules for stablecoin issuers. Notably, stablecoins must be 100% backed by U.S. dollars, short-term Treasurys, or another liquid asset. Issuers must also disclose the balance and composition of their reserves monthly. Additionally, issuers must comply with anti-money laundering regulations.
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Even with collateral protocols and government oversight, stablecoins are still riskier than cash reserves denominated in U.S. dollars. The primary risk is value loss or depegging. But secondarily, some traders are concerned with the centralization aspect of stablecoin collateralization.
Depegging can result from poor collateral management or, in the case of non-collateralized currencies, ineffective algorithmic controls. Additionally, any stablecoin can be shaken from its target value by a significant economic event.
In March 2023, USDC depegged temporarily after its issuer confirmed that billions in collateral were deposited with the recently collapsed Silicon Valley Bank. USDC is fully backed by cash and cash equivalents.
Algorithmic stablecoin Terra Classic USD (LUNC-USD) experienced a more significant depegging in May 2022. Terra’s stability mechanism involved a complex relationship with another token called LUNA. Unfortunately, when traders lost confidence in Terra, it forced a massive expansion of LUNA supply, ultimately causing both currencies to collapse.
Powils pointed out that the lack of legal protections increases the severity of a collapse. With U.S. cash deposits, FDIC insurance steps in if the bank collapses. You don’t have that safety net with stablecoins. “If the company collapses, your money vanishes,” said Powils.
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Cryptocurrency is rooted in the concept of decentralization, where no single regulating body or authority oversees the system. The network is essentially controlled by its users.
Collateralized stablecoins have an element of centralization because the issuer must control the reserves. This raises privacy concerns and introduces the risk of fraud or manipulation. Privacy concerns came to the forefront in June 2025, when Tether froze $700 million of USDT assets as part of an official U.S. investigation into potentially illegal activities.
As measured by market capitalization, the top five stablecoins are Tether (USDT-USD), USDC (USDC-USD), Ethena USDe (USDe), Dai (DAI-USD), and World Liberty Financial USD (WLFI33251-USD), according to CoinMarketCap.
Bitcoin is not a stablecoin. It’s an uncollateralized cryptocurrency known for its volatility.
Yes, stablecoins pegged to the U.S. dollar can occasionally be worth more or less than $1 each. These changes are often temporary and minor.
Stablecoins can be very risky, even when they’re collateralized. These currencies can experience temporary or permanent value changes, and extended depegging events can create sizable losses for investors.
