Stablecoins 101: What They Are, How They Fail, and How to Use Them Safely

Last updated: Aug 2025 • Education only, not financial advice.

What is a stablecoin?

Stablecoins are a type of cryptocurrency designed to maintain a stable value by being pegged to a reserve asset—most commonly the U.S. dollar, but sometimes other fiat currencies, commodities like gold, or even a basket of assets. They act as a bridge between the speed and flexibility of digital assets and the price stability of traditional money.

People use stablecoins for many reasons: to send remittances across borders in minutes, to trade between cryptocurrencies without touching a bank account, or to store value temporarily during market volatility.

How stability works

• Fiat-backed reserves: Coins like USDC and USDT are backed 1:1 by reserves such as cash and short-term government bonds. Issuers hold these reserves in banks or custodians and provide regular attestations.
• On-chain mechanics: Some stablecoins use smart contracts to manage issuance and redemption, keeping the peg through market incentives and arbitrage.
• Algorithmic models: A small category relies purely on code and market dynamics to maintain value—these are high risk and have a history of failure (e.g., TerraUSD in 2022).

Key risks

• Issuer/Reserve risk: The entity behind the stablecoin may mismanage reserves, lack transparency, or face legal/regulatory action.
• De-peg events: Market panic, liquidity shortages, or reserve freezes can cause the coin to trade below (or above) its intended value.
• Chain/Bridge risk: If a stablecoin is moved across blockchains using a bridge, vulnerabilities in that bridge’s smart contracts could lead to loss of funds.

Practical safety checklist

• Before moving a large amount, send a small test transaction to confirm the address and network.
• Stick to stablecoins from issuers with audited reserves and a strong track record of redemptions.
• Separate your hot wallet (for daily use) from your cold storage (for savings).
• Double-check the blockchain network before sending to avoid irreversible mistakes.

When to use (and when not to)

Stablecoins can be highly useful for fast, low-cost transactions—such as paying freelancers abroad, sending remittances, or parking funds during crypto market swings. However, they are not risk-free and should not be treated as long-term savings accounts. Unlike bank deposits, most stablecoins are not insured by government agencies, and redemption depends on the issuer’s solvency.

Last updated: Aug 2025 • Education only, not financial advice.