A stablecoin is a crypto token built to hold one steady price, most often one U.S. dollar per coin, instead of swinging the way bitcoin does. It holds that price by holding backing assets and standing ready to redeem coins on request. The promise, not the code, is where the risk lives.
L4 News publishes information, not investment advice. That caution matters doubly here: a stablecoin is as much an IOU as it is software, and crypto assets — stablecoins included — can lose most or all of their value quickly if confidence in the backing fails.
How does a stablecoin stay at one dollar?
Reserves and arbitrage do the work. The issuer holds assets behind every coin and redeems coins for a dollar each on request. If the market price slips to 99 cents, traders buy coins and redeem them at par for a penny of profit each, and that buying pushes the price straight back toward one dollar.
Think of the peg like a thermostat that switches on whenever the room drifts from the set temperature. The analogy breaks down fast: a thermostat has unlimited cycles, while redemptions only work while reserves last. If everyone redeems at once and the reserve runs dry, the thermostat breaks.
What actually backs a fiat-backed stablecoin?
Usually cash plus short-term U.S. Treasury bills. Issuers publish what stands behind the coins, typically in monthly attestation reports reviewed by accounting firms. Treasury bills are popular because they are liquid, carry low credit risk, and pay interest — which is how many issuers earn their revenue.
As of 2025, the two largest dollar stablecoins by circulation were Tether's USDT and Circle's USDC. Tether's reserve reports as of 2025 showed the bulk of backing in Treasury bills and cash equivalents; Circle publishes monthly attestations with a similar mix. Size is not safety, but transparency at least lets outsiders check the drawer.
In the United States, the rules changed in 2025. The GENIUS Act, a federal payment stablecoin law signed in July 2025, requires issuers to back payment stablecoins fully with permitted assets such as cash and short-term Treasuries, to publish monthly reserve disclosures certified by company executives, and it prohibits algorithmic payment stablecoins altogether.
What are collateralized and algorithmic stablecoins?
Not every stablecoin holds dollars. Crypto-collateralized coins are backed by other crypto locked in smart contracts, usually overcollateralized — more collateral than coins issued — because the collateral itself swings in price. Algorithmic stablecoins hold no external assets at all; they rely on code that mints and burns tokens to steer price back toward the peg.
Overcollateralization works like a margin buffer. The best-known example has long been the DAI token, issued by the Maker protocol, which as of 2025 remained the reference case for a crypto-collateralized dollar coin. If the locked collateral falls in price, the protocol liquidates it to keep the ratio healthy — a mechanism that can add selling pressure in exactly the moments markets are falling.
Algorithmic coins skip the collateral and keep the steering. The peg depends on market participants believing the mechanism will absorb selling. Under stress, that belief is the only reserve — which is why these designs attract the sharpest regulatory suspicion, and why the GENIUS Act bars them from the U.S. payment lane.
What happened to TerraUSD in May 2022?
TerraUSD (UST) was an algorithmic stablecoin that held its peg by letting holders swap each UST for one dollar's worth of a sister token, LUNA. In May 2022 confidence broke, the swap mechanism printed LUNA at hyperinflation speed, and both tokens collapsed — erasing tens of billions of dollars within days, per 2022 reporting.
Demand for UST had been built on the Anchor protocol, which advertised yields around 20 percent on UST deposits. Money arrived to farm that rate; the analogy to a bank paying above-market interest to stay alive is imperfect, but the direction is right. When large withdrawals began, the mint-burn mechanic could not absorb them.
The sequence is worth remembering because it was a design failure, not a hack. Each UST redeemed minted new LUNA, the LUNA supply exploded, its price crashed toward zero, and the two tokens dragged each other down — a failure loop now called a death spiral. Regulators on three continents cited Terra when writing the rules that followed.
What is depeg risk, and how does it show up?
A depeg is any stretch where the token trades away from its target — 97 cents, $1.04. Small, brief depegs happen often and usually close quickly through arbitrage. The dangerous kind arrives when holders doubt the reserves: redemptions accelerate, the issuer sells assets under pressure, and the peg can break entirely, as Terra showed.
Even well-backed coins have wobbled. In March 2023, Circle disclosed that $3.3 billion of USDC's reserves were trapped at the failed Silicon Valley Bank, and USDC briefly traded below 90 cents. It recovered over a weekend after U.S. regulators guaranteed the bank's deposits — a reminder that a stablecoin is a claim on an issuer's portfolio, and portfolios can freeze.
Depeg risk is really three risks wearing one coat: credit risk (does the issuer own what it claims), liquidity risk (can assets be sold fast enough to meet redemptions), and market risk (do those assets hold value). Monthly attestations address mainly the first of the three.
Who regulates stablecoins now?
More regulators than in 2022. In the United States, the GENIUS Act signed in July 2025 requires payment stablecoin issuers to hold full reserves in permitted assets, publish monthly certified disclosures, and operate under federal or state licensing. In the European Union, the MiCA regulation has governed stablecoin issuers since December 30, 2024, with reserve and redemption requirements.
What the new rules do not do is remove the economics. Regulation raises the floor on reserve quality and disclosure; it does not insure your coins, and it does not make a stablecoin a bank deposit. If an issuer fails, holders line up as creditors against whatever remains.
Where do people actually use stablecoins?
Mainly as parking and plumbing. Traders use them as a steady unit between trades; people in countries with volatile currencies or hard-to-reach banking use them as a dollar substitute; payment firms test them for faster settlement. Blockchain analytics firms reported through 2025 that major stablecoins were settling tens of billions of dollars in daily transfer volume.
The table below summarizes the three designs and how each one fails.
| Design | Backing | Peg maintained by | Main failure mode |
|---|---|---|---|
| Fiat-backed (USDT, USDC) | Cash and short-term Treasuries | Redemption plus arbitrage | Reserve quality, issuer credit, runs |
| Crypto-collateralized (DAI) | Locked crypto, overcollateralized | Liquidations that restore ratios | Collateral crash, cascade liquidations |
| Algorithmic (Terra/UST) | No external assets | Mint-burn code and confidence | Death spiral — May 2022 |
What should a newcomer take from all this?
Three sentences. A stablecoin is a promise backed by a portfolio, not a magic dollar. The peg holds while redemption works and trust lasts. Reading an issuer's attestation reports — and remembering that no stablecoin carries deposit insurance — is the honest homework behind holding any of them.
For more context, read What Basel bank rules mean for crypto.
For more context, read bitcoin treasury company.
