Crypto 101 · DeFi
Stablecoins Explained: Digital Dollars and How They Stay Stable
Abstract
A stablecoin is a token designed to hold a steady value, usually one US dollar. Some are backed by reserves of dollars and short-term assets held by an issuer, others by on-chain crypto collateral. We explain the types, why stablecoins are so widely used in DeFi, and the risks, including what central-bank researchers say about their limits.
Keywords: stablecoin, USDC, USDT, backing, collateral, peg
1. In plain English
Most cryptocurrencies swing widely in price. A stablecoin is designed not to: one unit aims to stay worth one US dollar. That makes it useful as a unit of account and a place to park value between trades, and it is why so much of DeFi is priced in stablecoins.
They stay stable by being backed. The simplest kind is a token an issuer promises to redeem for a dollar, backed by reserves of cash and similar assets the issuer holds. Others are backed by crypto locked in smart contracts and over-collateralised, so if the collateral falls, there is still enough behind each token [1].
2. Types at a glance
Table 1. Broad kinds of stablecoin.
| Type | Backing | Main risk |
|---|---|---|
| Fiat-backed | Reserves held by an issuer | Trust in the issuer and its reserves |
| Crypto-backed | Excess crypto locked in contracts | Collateral falls fast; contract bugs [1] |
| Algorithmic | Rules and incentives, sometimes little collateral | Loss of peg if confidence breaks |
3. Go deeper: what regulators and central banks say
The BIS's 2025 Annual Economic Report assesses stablecoins against three tests of a sound monetary system, singleness, elasticity and integrity, and concludes that they fall short on several, suggesting they may at best serve a subsidiary role [2]. The Federal Reserve's work on tokenization notes that digital representations of reference assets link crypto markets to traditional ones and can transmit stress between them [3]. Neither says stablecoins are useless; both say to understand what is behind them.
4. Using stablecoins safely
- Know who issues it and what backs it.
- Check which network it is on: the same-named coin can exist on several networks with different addresses.
- Keep a little of the network's own coin for fees.
- Do not treat a stable price as a guarantee.
5. In Scrypt Wallet
Scrypt Wallet supports stablecoins such as USDC and USDT on Solana and Ethereum. They appear under the network's card, and you need a little SOL or ETH to send them. See swaps and AMMs for how to exchange them.
References
- MakerDAO (2017). The Dai Stablecoin System. Whitepaper describing a stablecoin backed by on-chain collateral. https://makerdao.com/whitepaper/DaiDec17WP.pdf
- Bank for International Settlements (2025). Annual Economic Report 2025, Chapter III: The next-generation monetary and financial system. BIS; assesses stablecoins against tests of singleness, elasticity and integrity. https://www.bis.org/publ/arpdf/ar2025e3.htm
- Board of Governors of the Federal Reserve System (2023). Tokenization: Overview and Financial Stability Implications. Finance and Economics Discussion Series 2023-060. https://www.federalreserve.gov/econres/feds/files/2023060pap.pdf
Common questions
Is a stablecoin the same as a bank deposit?
No. It is a token backed by whatever its issuer holds, and it has different protections, risks and redemption terms than a bank account.
Can a stablecoin lose its peg?
Yes. If confidence in the backing falls or markets stress, a stablecoin can trade below its intended value.
General education, not financial, tax or legal advice. Figures are schematic. Protocol parameters are cited to primary sources and can change; verify against the linked source before relying on them.