Stablecoins: how they work and what can go wrong

USDT, USDC and other stablecoins aim to hold $1. The different types, why they matter and the risks behind them.

A stablecoin is a crypto token designed to keep a steady value, usually one US dollar. Stablecoins let people move dollars on a blockchain without the price swings of Bitcoin.

The main types

• Backed by reserves: USDT and USDC hold cash, Treasury bills and similar assets. They're the biggest and most used.
• Backed by crypto: DAI and similar coins are backed by more crypto than they issue, managed by smart contracts.
• Algorithmic: they try to hold $1 using code and incentives instead of reserves. Several have collapsed, the best known being TerraUSD in 2022.

What can go wrong

• De-pegging: the price can slip below $1 if people doubt the reserves, as USDC briefly did in March 2023.
• Freezes: issuers of reserve-backed stablecoins can freeze tokens at specific addresses.
• Rules: regulation is changing in many countries and can affect which stablecoins are available.

Spreading holdings across more than one well-known stablecoin, and keeping an eye on their price, lowers the risk.