A stablecoin is a token designed to hold a fixed value, almost always one US dollar. It exists because crypto rails are useful and crypto prices are not: you can settle a trade, move money between exchanges, or hold a dollar balance in a country with a collapsing currency, without ever touching a bank wire.
The category crossed $300 billion in outstanding supply in 2025, which makes it one of the largest holders of short-term US government debt in the world. That scale is exactly why the question “are they safe” stopped being academic.
What they are actually used for
Most stablecoin volume is not people saving in them. It is trading settlement — the quote currency for most pairs on most venues — plus moving balances between platforms without a banking day getting involved, collateral inside DeFi, cross-border payments, and dollar access where dollars are otherwise hard to hold.
Three designs, three failure modes
Fiat-backed. The issuer holds cash and short-term Treasuries and redeems tokens at par. This model dominates the market. It fails when the reserves are not what they were said to be, or when the bank holding them fails — which is not hypothetical: a major fiat-backed coin briefly traded near $0.87 during the March 2023 US banking scare, then recovered within days once the reserves were confirmed accessible.
Crypto-backed. Overcollateralised with volatile assets locked in contracts — typically well over $1 of collateral per $1 issued. It fails when the collateral falls faster than liquidations can process, or when the collateral is itself another stablecoin.
Algorithmic. Backed by a mechanism rather than assets. TerraUSD’s 2022 collapse erased roughly $40 billion in days and effectively ended the design class. Treat any coin whose peg depends on demand for a second token it issues as a trade, not a dollar.
Reading a depeg correctly
Not all wobbles mean the same thing. The question is whether redemption at $1 still functions. If it does, a discount is a liquidity event and arbitrage closes it. If redemption is impaired, the market price is telling you something structural. Cents-level deviations on a reserve-backed coin during market stress are normal; a coin that cannot be redeemed at par is not a stablecoin any more, whatever the ticker says. More on the mechanics in our note on depegs.
What changed in 2026
The GENIUS Act, the first major US federal law aimed at stablecoins, requires payment stablecoins to be backed one-for-one by cash and short-term Treasuries, mandates monthly public disclosure of reserve composition, and puts issuers under KYC and anti-money-laundering obligations. Federal regulators were required to publish implementing rules by 18 July 2026, with the Act taking full effect in early 2027.
What it does: makes reserve quality a legal requirement instead of a marketing claim, and pushes algorithmic designs to the margins. What it does not do: turn a stablecoin into a bank deposit. There is no deposit insurance behind these tokens. If the issuer fails you are a creditor, not an insured depositor — and the rules apply to US issuers, not to every token quoting a dollar.
A short checklist before you hold one
- Recent attestations. Monthly, from a named accounting firm, with the reserve composition broken out. An attestation is weaker than a full audit but its absence is disqualifying.
- Who can actually redeem. Direct redemption is usually limited to large verified counterparties. Everyone else exits through the market, which is why liquidity matters as much as backing.
- Which chain you are holding. A bridged version of a stablecoin is a claim on a bridge, not on the issuer. They trade under the same name and are not the same asset.
- Freeze capability. Compliant issuers can freeze addresses. That is a feature when it recovers stolen funds and a risk when it is your address.
- Yield. A stablecoin paying you interest is lending your dollars to someone. That is a different product with a different risk than simply holding one.
Nothing here is financial advice. See our risk disclaimer.