Key Points

  • Stablecoins aim to track a reference value, usually $1, but they can still depeg during stress.
  • There are four main types: fiat-backed, commodity-backed, crypto-collateralised, and algorithmic.
  • The safest way to judge a stablecoin is the redemption path and reserve quality, not market cap.
  • Some stablecoins can be frozen or blocked at the issuer level, and some carry smart contract risk.
  • If you want quick definitions for terms used here, check the Crypto Glossary page.

Quick Answer

Stablecoins are crypto tokens designed to hold a stable value, most commonly by tracking the US dollar. Some are backed by cash and short-dated government assets, some by commodities like gold, some by overcollateralised crypto, and some by algorithms. They are useful for trading, moving funds, and reducing volatility exposure, but they are not risk-free. The key checks are reserve quality, redemption, issuer controls, and how the coin behaves during stress.


Stablecoins matter because they act like the “cash rail” of crypto. They let traders move between assets without constantly touching banks. The main risks are depegs, weak reserves, limited redemption, smart contract failures, and issuer controls like freezes. A stablecoin is only as strong as the backing and the ability to redeem at par when markets get ugly.

What Are Stablecoins?

A stablecoin is a token that aims to track a reference value, usually $1.

It does that in one of two broad ways:

  • Redeemable backing: you can redeem the token for underlying assets, and arbitrage keeps the peg close.
  • Market mechanism: supply and incentives attempt to maintain the peg without reliable redeemable backing, this is higher risk.

Stablecoins are widely used for:

  • Trading and settlement: moving between exchanges and pairs quickly.
  • On-chain activity: collateral, lending, and payments in DeFi.
  • Payments and transfers: moving value across networks, often faster than bank rails.

They can still break. “Stable” is the goal, not a guarantee.

1 U.S. dollar banknote
Photo by Kenny Eliason / Unsplash

The Four Main Types Of Stablecoins

Investors usually lump stablecoins into four buckets.

Fiat-Backed Stablecoins

These aim to be redeemable 1:1 for dollars (or similar), backed by cash and cash-like assets.

  • What to look for: reserve reporting, custody, redemption terms, and where reserves are held.
  • Main risks: issuer risk, bank and custody concentration, redemption limits, and regulatory freezes.

Commodity-Backed Stablecoins

These track a commodity, usually gold.

  • What to look for: audited storage, clear redemption rules, and who holds title to the underlying.
  • Main risks: custody, redemption friction, and counterparty exposure.

Crypto-Collateralised Stablecoins

These are backed by crypto locked in smart contracts, typically overcollateralised.

  • What to look for: collateral quality, liquidation design, and stress performance during drawdowns.
  • Main risks: smart contract risk, oracle risk, liquidation cascades, and governance risk.

Algorithmic Stablecoins

These attempt to manage supply and demand to hold a peg without robust redeemable backing.

  • What to look for: hard evidence of stress survivability, not just a mechanism description.
  • Main risks: reflexive spirals, bank-run dynamics, and sudden peg loss.

The point here is not to promote any coin, it is to give you context for what you will actually see in the market.

  • USDT: one of the biggest stablecoins. On 2 February 2026, it showed a market cap around $185 billion on CoinMarketCap’s snapshot.
  • USDC: another major stablecoin. Glassnode showed a market cap around $73.7 billion on 16 February 2026.
  • DAI: commonly treated as a decentralised stablecoin backed by crypto collateral and smart contracts. Many exchanges label it “algorithmic”, but the practical risk set is smart contract, collateral, and liquidation design.
  • BUSD: not a “current” growth coin anymore. Paxos stopped issuing new BUSD on 21 February 2023 after direction from NYDFS, and it moved into wind-down mode.

If a page lists “popular stablecoins” but ignores the redemption and issuance reality, treat it as outdated.

Why Stablecoins Can Still Depeg

A stablecoin can trade below $1 even if the long-term intent is to redeem at $1.

Common causes:

  • Redemption friction: if it is hard, slow, or expensive to redeem, the peg can drift.
  • Reserve doubts: markets discount the coin if reserve transparency is weak.
  • Liquidity crunch: sellers overwhelm buyers during stress.
  • Smart contract stress: liquidations, oracles, and bridge risk can break confidence.
  • Issuer controls: freezes or compliance actions can fragment liquidity.

The lesson from past failures is simple, assume a run is possible, and design your usage around that reality.

brown wooden clothes pin on brown wooden stick
Photo by Glen Carrie / Unsplash

Regulation Is Not Optional Anymore

Stablecoins are increasingly treated as regulated products in major jurisdictions.

In the EU, MiCA sets a framework covering crypto-assets and includes specific rules for stablecoin-like categories (asset-referenced tokens and e-money tokens), with requirements around authorisation, disclosure, and supervision.

This matters because:

  • Issuers may need to restrict access in some regions.
  • Redemption and reserve rules can become stricter.
  • Some coins can become less liquid on certain venues depending on compliance.

The takeaway is not fear, it is awareness, your “safe” stablecoin choice depends on where you live and where you plan to use it.

A Simple Stablecoin Safety Checklist

Use this every time, especially before parking meaningful size.

  • Reserve Quality: Are reserves cash and short-dated government assets, or something riskier.
  • Redemption Path: Can you redeem at par, how fast, what fees, what minimums.
  • Transparency: Is there consistent reporting and independent verification.
  • Issuer Controls: Can tokens be frozen, blacklisted, or clawed back.
  • Venue Risk: If held on an exchange, your risk becomes exchange solvency, not stablecoin design.
  • Chain And Bridge Risk: A “stablecoin” bridged into another network inherits bridge failure risk.
  • Stress History: How did it behave during sharp risk-off periods.

If any of these are unclear, size down or pick a simpler alternative.

Common Traps To Avoid

  • Chasing yield on “stable” coins: extra yield usually means extra risk, often leverage, rehypothecation, or weak collateral.
  • Holding bridged stablecoins as “cash”: bridging adds another failure point.
  • Assuming stablecoins avoid rules: many stablecoins and venues are subject to compliance controls and restrictions.
  • Ignoring redemption: if you cannot redeem, you are relying on market liquidity.

Mini FAQs

Are Stablecoins The Same As Dollars In A Bank?
No. A stablecoin is a token with a peg mechanism and a set of risks. Bank deposits have a different legal and regulatory framework, and stablecoins can depeg.

Which Stablecoin Type Is Usually The Safest For Beginners?
Fiat-backed coins with strong reserve transparency and a clear redemption path are typically the simplest to reason about. Still check issuer controls and venue risk.

Is DAI Algorithmic Or Collateralised?
It is best understood as crypto-collateralised with smart contract mechanics. Many platforms label it “algorithmic”, but the practical risks are collateral quality, liquidations, and smart contract design.

Why Was BUSD Removed From “Top Stablecoins” Lists?
Paxos stopped issuing new BUSD on 21 February 2023 after direction from NYDFS, it moved into a wind-down phase rather than expansion.

Can A Stablecoin Be Frozen?
Some can, depending on issuer design and compliance controls. If you need censorship resistance, that is a different design trade-off than “stable price”.

Join Alpha Insider

If this guide helped you understand stablecoins without relying on hype, the next step is learning how these “cash rails” interact with cycle timing, risk conditions, and on-chain flows.

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This guide is for education only, not financial, investment, legal, accounting, or tax advice. Nothing here is a recommendation to buy, sell, or use any product or service. Cryptoassets are high risk and stablecoins can depeg. Availability, restrictions, and tax treatment vary by country. Verify information independently and make your own decisions.