What Is a Stablecoin, and Is It Really Stable?

Imagine you sell your design work to a client in another country. They pay you in ADA. On Monday the payment is worth 1,000 euros. By Friday, when you want to pay your rent, it is worth 870. The next week it might be worth 1,150. Nice if it goes up, scary if it goes down, and very hard to plan a life around.

This is the problem stablecoins try to solve.

What is a stablecoin?

A stablecoin is a crypto token that tries to keep the same value as normal money, usually one US dollar or one euro. One token should always be worth about one dollar, today, next month and next year.

It moves like crypto: you can send it to anyone in the world, at any hour, from your own wallet. But its price is meant to stay calm, like the money in your bank account.

The question is how a token can stay at one dollar. The answer depends on what is behind it, and there are three main types.

Type 1: backed by real money in a bank

This is the most common type. A company holds dollars or euros, plus very safe things like short US government bonds. For every token it creates, it keeps one dollar in reserve. If you return a token, it should give you one dollar back.

The two biggest stablecoins work like this: USDT from Tether and USDC from Circle. On Cardano, USDM is a dollar stablecoin of this type. It launched in March 2024.

The good part is that the idea is simple. The weak part is trust. You trust that the company really has the money, that the bank holding it is safe, and that the company will give it back.

Type 2: backed by other crypto

Here no bank account is needed. Instead, people lock crypto, such as ADA or ETH, in a smart contract (a program on the blockchain). Because crypto prices move a lot, the system asks for much more value than it creates. You might lock 150 or 200 dollars of crypto to create 100 dollars of stablecoin.

On Cardano, Djed works like this. Its reserve in ADA is supposed to stay between 400% and 800% of the Djed coins in circulation. If ADA falls a lot, the reserve has room to fall before Djed is in danger.

This type is closer to the spirit of crypto, because the rules are in public code and no single company holds the money. But if the price of the crypto behind it crashes very fast, the system can still come under stress.

Type 3: “algorithmic”, backed mostly by promises

Some stablecoins tried to stay at one dollar with only clever rules and a second token, without enough real reserves. The famous example is UST on the Terra blockchain. In May 2022 it lost its dollar value within a few days, and tens of billions of dollars of savings were gone.

UST is the reason many people now ask a simple question first: “What exactly is behind this coin, and can I check it?”

Has a “safe” stablecoin ever failed?

Yes, for a short time. In March 2023, the American bank Silicon Valley Bank failed. Circle had 3.3 billion dollars of USDC reserves in that bank. On 11 March, USDC fell below 87 cents, as CNBC reported. A few days later the US government protected the bank’s deposits, and USDC went back to one dollar.

People who waited got their full dollar back. People who sold in panic that weekend did not. For a few days, a coin backed one to one by real dollars was not worth one dollar. The lesson: “backed” is only as good as the place where the backing sits.

The risks people forget

Even when a stablecoin keeps its price, there are other things to know.

• It can be frozen. Tether and Circle can block an address so its tokens cannot move. They do this for stolen money and for addresses on sanctions lists. It helps against crime, but it also means a company has a switch over your coins.
• It still loses value to inflation. A dollar stablecoin is a dollar. If prices rise 3% a year, it buys 3% less, just like cash. I wrote about this in Why Money Loses Value Over Time.
• Interest is not normal. In the EU, the MiCA rules for stablecoins have applied since 30 June 2024, and issuers of e-money tokens are not allowed to pay you interest. If someone offers you high interest on a stablecoin, ask where that money comes from.
• Your keys, your coins. A stablecoin on an exchange belongs to the exchange until you withdraw it. In your own wallet, you are responsible for your seed phrase. See What Is a Seed Phrase if you are new to this.

So what are stablecoins good for?

Used with care, they are useful:

• sending money abroad quickly, with low fees, on a Sunday night;
• getting paid in crypto without the price risk of ADA or Bitcoin;
• keeping some value in dollars when your local money is losing value fast;
• using apps on a blockchain, for example to trade or lend, with a calm unit of account.

They are not a way to get rich. A stablecoin is designed to go nowhere, and that is the point.

How I think about them

I see stablecoins as a bridge. One side is the old money system, with banks and companies. The other side is open blockchains, where anyone can send value without asking permission. Most stablecoins today stand with one foot on each side, and that is both their strength and their weak spot.

For holding value long term, I prefer things that no single company can freeze or print. For paying an invoice next Tuesday, a good stablecoin is often the better tool. Both can be true at the same time.