In this guide
A stablecoin is a cryptocurrency designed to track a reference value, commonly one US dollar. Its price stays near that target only if the arrangements behind it continue to work: reserves, redemption, collateral management or another stabilization mechanism.
That distinction explains why two tokens both described as digital dollars can have very different risks. Before comparing their prices, identify what each token represents, what supports it and how a holder can get out.
What a stablecoin's peg actually means
A peg is a target relationship between a token and another asset. For a dollar stablecoin, the target is usually $1 per token. The target is not a rule forcing every exchange transaction to occur at exactly that price. Buyers and sellers still trade in markets, where liquidity and confidence affect execution.
Reference currency matters. A token tracking dollars does not promise a fixed value in euros or another local currency. Similarly, a token linked to gold is tracking a commodity whose dollar price changes. Always finish the phrase “stable relative to” before treating different products as substitutes.
How minting, redemption and arbitrage support the price
In a basic reserve-backed model, an issuer creates tokens when it receives eligible funds and removes tokens when it processes redemptions. The supply expands or contracts with those flows.
Consider a simplified example, excluding fees. If an eligible participant can buy a dollar token for $0.99 and redeem it for $1, that difference creates an incentive to buy and redeem. If it trades at $1.01, creating tokens at $1 and selling them creates the opposite incentive. This activity, called arbitrage, helps pull the price toward its target.
The important word is “can.” The trade depends on access, cost and confidence that redemption will settle. A nominal dollar of backing is less useful to someone who cannot convert the token when needed. Research published by the Bank for International Settlements emphasizes these operational dependencies.
The main stablecoin designs
Fiat reserve-backed tokens
These tokens rely on assets held outside the blockchain. “Dollar-backed” need not mean a stack of dollar notes for every token. Circle describes USDC reserves as cash and cash equivalents, including short-dated US Treasury holdings and overnight Treasury repurchase agreements. It publishes reserve information and monthly independent assurance reports.
Tether states that its tokens are backed by its reserves. Its reserve disclosures need to be read on their own terms; sharing a dollar target with USDC does not make the reserve portfolios identical. The Coins Rate guide to Tether and USDT explains that particular issuer's structure.
A practical comparison starts with the assets, their liquidity and who holds them. Then read the reporting date and scope. A report describing reserves at specified dates is different from continuous visibility into every operational risk. Circle separately identifies its corporate financial auditor, illustrating why reserve assurance and company financial statements should not be treated as interchangeable documents.
Collateralized onchain systems
A protocol can create stablecoins against assets held through smart contracts. Overcollateralization means the posted collateral is worth more than the debt it supports. The extra margin is intended to absorb market movements.
If collateral falls below a protocol's threshold, liquidation can sell it to repay debt. Sky's explanation of USDS describes collateralized vaults, automated auctions and a separate Peg Stability Module that exchanges USDS and USDC. Its backing also includes assets beyond volatile cryptocurrencies, so calling it simply “crypto-backed” leaves out important dependencies.
Liquidation is a process, not an assurance of a perfect outcome. Sky's risk documentation acknowledges bad debt, price changes and operational problems. A mechanism can be transparent onchain while still relying on accurate prices, available buyers and other financial assets. Our explanation of blockchain oracles introduces the systems that bring outside data into smart contracts.
Algorithmic mechanisms
Algorithmic designs use programmed incentives and supply adjustments to influence price. Some depend heavily on a companion token rather than reserves that can be paid out in the reference currency. Hybrid designs can combine collateral with algorithmic features.
The weakness is circular support: confidence in one token may depend on demand for another token within the same system. If both lose buyers, issuing more of the companion token may fail to restore the peg. Chainlink's educational material describes this potential spiral and the importance of reliable price inputs. The presence of software does not create an independent source of value.
Synthetic dollars and commodity tokens
Not every dollar-targeting product fits neatly into the first three groups. Ethena describes USDe as a synthetic dollar, with backing that includes crypto assets and offsetting short futures positions. A short position is designed to gain when the referenced asset falls, helping offset movements in the held asset.
Ethena's documentation also describes lending and other backing strategies. That makes the operational questions broader than whether cash sits at a bank: the derivatives, custody arrangements, counterparties and strategy mix matter. Its direct minting and redemption channels are restricted to approved counterparties.
Gold-backed tokens are different again. Paxos says each PAXG token represents one fine troy ounce of gold held in custody. Its dollar value follows gold, so it is not a substitute for a token targeting one dollar. The distinction is useful even when both appear under a broad stablecoin category.
Why a backed token can still depeg
A depeg is a departure from the intended reference value. It can reflect doubts about backing, difficulty reaching redemption, problems with the trading venue or stress in another asset supporting the system.
USDC provided a concrete example in March 2023. Circle said $3.3 billion of its reserves were deposited at Silicon Valley Bank. On March 12, after US authorities announced protection for the bank's depositors, Circle said the funds would become available when banks opened. Its announcement described the dollar depeg closing. The episode illustrates that confidence in access to reserves matters alongside the stated amount of reserves.
Do not assume every deviation has the same explanation or eventual outcome. A brief trading imbalance, a blocked redemption channel and a permanent collateral shortfall are different problems. The displayed discount alone cannot tell a reader which one is happening.
Redemption, custody and network risks are separate
Selling a token on an exchange is different from redeeming it with its issuer. Circle's USDC terms require an eligible Circle Mint account in good standing for direct redemption. A holder who lacks that access may depend on another provider to convert tokens into money.
The same terms describe address blocking, unsupported token copies and blockchain disruption. Holding a token in a personal wallet therefore does not remove every issuer or network dependency. A bridged version can introduce another layer between the holder and the original asset.
Yield products add further exposure. Supplying a stablecoin to a lending vault changes the transaction: the holder is now also relying on a borrowing market, contract and withdrawal mechanism. Sky's risk documentation distinguishes holding its base token from lending and other products, and warns that exits can be delayed or limited by liquidity. The guide to ways people earn cryptocurrency places those returns in their wider risk context.
A useful order for checking a stablecoin
- Identify the exact asset and its reference target. Similar names are not evidence of identical backing.
- Read the mechanism: reserves, collateral, algorithms, hedges or a combination.
- Inspect the most recent backing disclosure, including its date and what the reviewer actually examined.
- Find your exit route. Distinguish issuer redemption from a sale through an intermediary.
- Check the network and token version, particularly where bridging or wrapping is involved.
- Separate the base token from any additional lending, savings or rewards product.
These checks answer a more useful question than whether a stablecoin recently traded at $1: what has to keep working for its holder to receive the value they expect?