A stablecoin is a crypto token designed to keep a steady price, usually $1, by tying its value to a reference asset such as the US dollar, short-term government debt or gold. It moves on a blockchain like any other token, but it is meant to hold its value the way cash does. In late October 2026 about $302.6 billion of dollar-pegged stablecoins were in circulation (DefiLlama, 25 October 2026). Two tokens make up roughly 84% of that: Tether's USDT at about $182.4 billion and Circle's USDC at about $71.7 billion.
The newest development is regulatory. On 21 October 2026 the US Office of the Comptroller of the Currency (OCC) finalised the first federal banking rule that puts the GENIUS Act, the US stablecoin law, into practice. The Act and the rule take effect on 18 January 2027.
How a stablecoin holds its price
Every stablecoin needs a way to bring its market price back to the peg when it drifts. There are two main approaches.
Redemption against reserves. The issuer holds assets worth at least as much as the tokens in circulation and swaps tokens for dollars at 1:1. If the token trades at $0.99, an eligible holder can buy it and redeem it for $1, which pushes the price back up. If it trades above $1, new tokens can be issued at $1 and sold. USDC works this way. Circle says most USDC reserves sit in the Circle Reserve Fund, an SEC-registered government money market fund managed by BlackRock, and the rest is cash held mostly at large banks. A Big Four accounting firm provides monthly third-party assurance on those reserves.
Overcollateralised loans on a blockchain. Users lock crypto in a smart contract and mint stablecoins against it. The locked collateral must be worth more than the stablecoins minted. If its value falls below the liquidation threshold, the protocol sells it at an automated auction to cover the debt.
A worked example: minting and redeeming a fiat-backed stablecoin
- A customer that is eligible for direct redemption sends $100 to the issuer.
- The issuer adds $100 to its reserves and mints 100 tokens to the customer's wallet.
- The tokens can then be transferred on-chain to anyone, at any time.
- To exit, a holder returns 100 tokens to the issuer, which burns them and pays out $100 from reserves.
Most retail holders never deal with the issuer directly. They buy and sell on secondary markets, so in practice the peg depends on arbitrage by the firms that can redeem.
The main types of stablecoin
| Type | What backs it | Example | Main weak point |
|---|---|---|---|
| Fiat-backed | Cash, short-term Treasuries, money market funds | USDT, USDC | Issuer, bank and custody risk |
| Crypto-backed | Overcollateralised crypto locked in smart contracts | USDS, DAI | Collateral crashes, code bugs |
| Commodity-backed | Physical commodities, usually gold | PAX Gold (PAXG) | Tracks gold's price, not a dollar |
| Synthetic or algorithmic | Hedged crypto positions, or supply rules with little or no collateral | USDe (synthetic); TerraUSD (failed algorithmic) | Market structure and confidence |
Fiat-backed
This is the largest group by far. Under the US GENIUS Act, payment stablecoins sold in the US need 100% reserve backing in liquid assets, and issuers must publish the composition of their reserves every month (White House fact sheet, 18 July 2025).
Crypto-backed: USDS and DAI
DAI was launched by MakerDAO. In 2024 MakerDAO rebranded as Sky and introduced USDS as DAI's successor. Sky's developer documentation describes a converter that swaps DAI and USDS at a fixed 1:1 ratio with no fees, and says fees can never be switched on for that route. Both tokens draw on the same issuance system. In late October 2026 DefiLlama showed about $6.8 billion of USDS and $4.7 billion of DAI in circulation.
Commodity-backed: PAX Gold
Paxos says each PAXG token is backed by one fine troy ounce of gold from a London Good Delivery bar. The gold is held in LBMA vaults in London, in the custody of Paxos Trust Company, which the OCC regulates. Holders can redeem tokens for US dollars at the market price, and Paxos says redemption into physical bars is also possible. PAXG is "stable" only relative to gold, so its dollar price moves with the gold price.
Synthetic dollars and algorithmic designs
Ethena's USDe is backed by crypto assets paired with matching short futures positions, so gains and losses on the two sides largely cancel out. Its revenue comes mostly from funding payments in perpetual futures markets. Ethena itself says USDe "is not the same as a fiat stablecoin like USDC or USDT" and calls it a synthetic dollar. DefiLlama showed about $4.6 billion of USDe in late October 2026.
Purely algorithmic stablecoins try to hold the peg by expanding and shrinking supply, with little or no collateral behind them. The best-known failure is TerraUSD (UST). According to the US Securities and Exchange Commission, UST lost its dollar peg in May 2022, and UST and its sister tokens fell close to zero, wiping out about $40 billion in market value. In 2024 a jury found Terraform Labs and Do Kwon liable for fraud, and they agreed to pay more than $4.5 billion.
What stablecoins are used for
- Trading collateral and settlement. On crypto markets, traders often hold stablecoins rather than bank dollars between trades. Many derivatives contracts are also priced and settled in them.
- On-chain lending and borrowing. Decentralised lending protocols accept stablecoin deposits and lend them out against crypto collateral. Rates there float with demand.
- Transfers across borders. A stablecoin moves wherever the blockchain runs, at any hour. The costs that remain are network fees plus whatever it costs to get in and out of local currency.
- Holding dollars outside the dollar system. In countries with high inflation, some people use dollar stablecoins as a substitute for a dollar bank account. That leaves them exposed to the issuer and to local rules.
Risks to understand
- De-pegging. Even well-reserved stablecoins can slip off the peg. On 11 March 2023 Circle said $3.3 billion of USDC's roughly $40 billion of reserves was stuck at the failed Silicon Valley Bank. USDC fell as low as $0.88 that day, then recovered after US authorities guaranteed deposits at the bank (contemporary reports).
- Issuer and reserve risk. The token is only as good as the assets behind it and the issuer's ability to pay out. The safeguards are frequent independent reports and, under the US law, a legal priority for holders.
- Collateral and code risk. Crypto-backed and synthetic designs depend on liquidations, hedges and smart contracts working under stress.
- Access and redemption limits. Direct redemption is often restricted to verified customers above a minimum size. Everyone else relies on market liquidity.
- Regulatory risk. A token may be restricted or delisted in some places if it does not meet local rules. The EU already does this under MiCA.
What kind of stablecoin are you holding?
Answer two questions about a token to see how it holds its peg, where it is weak and what to check first.
What does the issuer or protocol say backs the token?
- Cash, short-term Treasuries or money market funds → next question
- Crypto locked in smart contracts → Crypto-backed
- Physical gold → Commodity-backed
- Crypto paired with short futures positions → Synthetic dollar
- Supply rules with little or no collateral → Algorithmic
Can you redeem tokens with the issuer yourself?
- Yes, I am a verified customer above the minimum size → Fiat-backed, with direct redemption
- No, I buy and sell on secondary markets → Fiat-backed, exit through the market
You can swap tokens for dollars with the issuer at 1:1, so your exit depends on the reserves and on the issuer being able to pay out. Check who reports on the reserves and how often (look for monthly reports from a named, independent firm), plus minimum sizes, fees and eligibility. For US payment stablecoins after 18 January 2027, check for permitted-issuer status; in the EU, check for MiCA authorisation.
Most retail holders are in this position. The peg depends on arbitrage by the firms that can redeem, and you rely on market liquidity. Even well-reserved tokens can slip: on 11 March 2023 USDC fell as low as $0.88 before recovering. Check the reserve reports and how the token has behaved in past de-pegs.
The locked collateral must be worth more than the stablecoins minted, and if it falls below the liquidation threshold the protocol sells it at an automated auction. The main weak points are collateral crashes and code bugs, because liquidations and smart contracts have to work under stress.
A gold-backed token is stable only relative to gold, so its dollar price moves with the gold price. Check where the gold is held, who has custody and what the redemption terms are.
Crypto assets are paired with matching short futures positions so gains and losses largely cancel out, and revenue comes mostly from funding payments in perpetual futures markets. Its issuer says it is not the same as a fiat stablecoin. It depends on hedges working under stress.
The peg rests on expanding and shrinking supply, with little or no collateral behind it, so it depends on market structure and confidence. The best-known failure, TerraUSD, lost its dollar peg in May 2022 and about $40 billion in market value was wiped out.
This sorts a token by what backs it and how you can exit, using the article's categories only; it cannot verify any specific token's reserves, rate its safety or tell you whether to hold it.
Regulation: where things stand in October 2026
United States: the GENIUS Act
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (Public Law 119-27) was signed on 18 July 2025. The Senate passed it 68-30 on 17 June 2025 and the House 308-122 on 17 July 2025. According to the White House fact sheet and an April 2026 White House research note, the Act:
- requires 100% reserves held only in specified assets: US dollars, Federal Reserve notes, funds at certain insured or regulated depository institutions, certain short-term Treasuries, Treasury-backed reverse repurchase agreements and money market funds;
- requires monthly public disclosure of reserve composition;
- puts holders' claims ahead of all other creditors if an issuer becomes insolvent;
- bans issuers from claiming that their stablecoins are backed by the US government, federally insured or legal tender;
- subjects issuers to the Bank Secrecy Act, which means anti-money-laundering and sanctions compliance;
- prohibits issuers from paying holders "any form of interest or yield". The research note says the Act does not explicitly cover affiliate or third-party arrangements.
Latest step (21 October 2026): The OCC issued its final rule for permitted payment stablecoin issuers and foreign issuers under its jurisdiction, and for certain custody activities. It sets standards for reserve backing, redemption and risk management. Bank Secrecy Act, anti-money-laundering and sanctions rules will come later in a separate rulemaking with the Treasury. The rule appeared in the Federal Register on 23 October 2026. Both the rule and the Act take effect on 18 January 2027. Other agencies are still writing their parts of the rules.
European Union: MiCA
Under the Markets in Crypto-Assets Regulation (MiCA), the rules for e-money tokens (single-currency stablecoins) and asset-referenced tokens have applied since 30 June 2024. The rest of the regulation has applied since 30 December 2024. The European Banking Authority told firms to stop offering non-compliant tokens from 30 June 2024. Tokens classed as "significant" face extra requirements and direct EBA supervision.
Stablecoin vs CBDC
A stablecoin is a liability of a private issuer. A central bank digital currency (CBDC) is central bank money in digital form. The Bank for International Settlements describes a retail CBDC as a digital form of central bank money for everyday payments. A dollar stablecoin is not legal tender, and US law bars issuers from presenting it as legal tender.
Can you earn interest on stablecoins?
Not from a US-regulated issuer: the GENIUS Act bans issuers from paying holders interest or yield. Yield is available elsewhere, for example from lending protocols, staked versions of tokens such as Sky's sUSDS, or synthetic dollars. Each of these adds its own risks on top of the stablecoin. How the OCC will treat reward programmes offered by third parties is still being worked out.
How to check a stablecoin before holding it
- What backs it? Fiat reserves, crypto collateral, hedged positions or nothing.
- Who reports on the reserves, and how often? Look for monthly reports from a named, independent firm.
- Who can redeem, and on what terms? Check minimum sizes, fees and eligibility.
- Which regulator, if any? For US payment stablecoins after 18 January 2027, check for permitted-issuer status. In the EU, check for MiCA authorisation.
- How has it behaved under stress? Look at past de-pegs and how fast it recovered.
Market figures are point-in-time readings from one aggregator (DefiLlama) and change daily. Rulemaking under the GENIUS Act is still in progress.
