Stablecoins are crypto tokens designed to track the value of another asset, most commonly a fiat currency such as the US dollar. Traders use them as a settlement asset, a way to move value between platforms and a bridge between traditional money and on-chain markets.
Fiat-backed stablecoins
A fiat-backed stablecoin is issued against a pool of reserve assets. The issuer is responsible for managing those reserves and processing redemptions under its terms. The quality, liquidity and transparency of the reserves therefore matter.
Crypto-backed stablecoins
Some stablecoins use crypto assets as collateral and rely on over-collateralisation, smart contracts and liquidation rules to maintain their target value. Their risks are different from those of an issuer-backed token: market volatility and protocol design become central.
Why traders use stablecoins
- Quoting crypto prices in a familiar unit
- Moving value between exchanges or wallets
- Settling trades without using a bank transfer for every transaction
- Accessing on-chain lending, trading or payment applications
Where the risks are
Issuer and reserve risk
For issuer-backed tokens, users depend on the issuer’s reserve management, banking relationships and redemption process.
Depegging risk
A stablecoin can trade above or below its target during market stress, liquidity shortages or loss of confidence. The size and duration of a deviation can vary.
Smart-contract and network risk
On-chain tokens also depend on smart contracts and the blockchain networks on which they circulate. Bridged versions can introduce additional technical and counterparty layers.
Regulatory and access risk
Rules, availability and redemption access differ across jurisdictions and can change. A token that is widely tradable is not necessarily directly redeemable by every holder.
What to check before holding a stablecoin
- Who issues it and under what legal entity
- What the reserve policy says
- How frequently reserve information is published
- Who can redeem directly and under what conditions
- Which networks the token uses
- Whether your platform supports withdrawals on the network you need