Stablecoins aim to track the value of another asset, often the U.S. dollar. That peg can fail. Reserves, redemption terms, market liquidity and financial stress all affect whether a token stays close to its target. Ethereum’s stablecoin explainer describes common designs and their trade-offs. For related beginner guides, visit the BlockBriefing Learn hub.
What is a stablecoin?
A stablecoin is a digital token designed to track the value of another asset, often a currency such as the US dollar. People use stablecoins to move value between platforms, settle blockchain transactions or hold a dollar-linked token without using a traditional bank transfer for every transaction. A target value is an objective, not a guarantee.
Fiat-backed stablecoins
Fiat-backed stablecoins are intended to be supported by reserves such as cash, short-term government securities or other assets described by the issuer. Users should review the issuer’s reserve reports, redemption terms, legal structure and the jurisdictions where the token is supported. Reserve quality and transparency can vary.
Crypto-collateralized stablecoins
Some stablecoins use other crypto assets as collateral, often with overcollateralization and automated liquidation rules. These systems can be transparent on-chain, but they remain exposed to volatile collateral prices, software vulnerabilities, governance decisions and periods of market stress.
Why some stablecoins lose their peg
Some designs try to maintain a target price through supply changes, incentives or links to other tokens rather than relying entirely on conventional reserves. Such mechanisms can fail under severe pressure. Even reserve-backed tokens can trade above or below their intended peg when liquidity is limited, redemption access is constrained or confidence falls.
What to check before holding a stablecoin
Stablecoins can be used for transfers, trading pairs and decentralized finance, but the token, blockchain network and receiving address must all be compatible. Before sending funds, confirm the network, fees and address. Review issuer documentation and the risks of the platform you use. A stablecoin is not automatically insured, risk-free or redeemable by every holder in every country.
Frequently asked questions
Can a stablecoin lose its $1 peg?
Yes. Stablecoins can trade below or above their target value, and some have experienced serious depegging events.
Are all stablecoins backed by cash?
No. Models differ, and some rely on crypto collateral or algorithmic mechanisms. Check the specific issuer’s documentation.
Related Learn guides
Continue learning with these related explainers: What Is Decentralized Finance (DeFi)?; What Is Crypto Market Cap? A Beginner’s Guide; Crypto Transaction Fees Explained for Beginners.
Editorial note
Information is provided for educational purposes and can become outdated. Verify technical details against official documentation, understand the risks involved, and never share wallet recovery phrases or private keys.
