Stablecoins are the part of crypto that doesn’t show up in the price-tracking apps. They don’t swing 40% overnight. They don’t make headlines because someone got rich. They just sit there, supposedly worth one US dollar. And yet the total stablecoin market crossed $321 billion in 2026, Visa’s stablecoin settlement program hit a $4.5 billion annualized run rate by January 2026, and the US Congress passed the first federal law specifically designed to regulate them. That’s not boring — that’s infrastructure. Here’s how stablecoins actually work, why some of them blow up spectacularly, and what a 2025 US law changes about all of it.
The simple version: what a stablecoin is
A stablecoin is a cryptocurrency designed to track a stable value — almost always one US dollar, though euro- and other currency-pegged versions exist. The point is that one token should always be worth roughly $1.00, no matter what Bitcoin or Ethereum is doing.
That stability is useful in a way volatile cryptocurrencies aren’t. If you want to move money across borders, pay a supplier in another country, or just park funds in the crypto ecosystem without exposure to price swings, a stablecoin gives you a way to do that without converting back to a bank account first.
But “it tracks a dollar” raises an immediate question: what actually makes it worth a dollar? The answer depends on the type — and the differences matter a lot.
Fiat-backed stablecoins: the straightforward kind
The simplest model is direct: a company takes your dollar, holds it (or something equivalent, like a short-term US Treasury bill), and issues you one token. When you want out, you hand back the token and get your dollar. The peg holds because the reserves exist.
USDT (Tether) and USDC (Circle) are the dominant examples. Together they account for roughly 93% of the stablecoin market. USDT carries about $182 billion in circulation as of early 2026; USDC around $77 billion. Both publish regular attestations — third-party accounting firm confirmations that the reserves back the outstanding supply.
The mechanism is the most transparent of all stablecoin designs: every token in circulation should correspond to a real-world dollar-equivalent held somewhere verifiable. That’s the promise. Whether any given issuer fully delivers on it is a question of audit quality, reserve composition, and institutional trust — which is exactly why regulation became unavoidable.
The practical risk here: you’re trusting a private company. If the issuer mismanages reserves, gets hacked, faces regulatory action, or simply lies about its books, the peg can break. This is counterparty risk, and it’s real.
Algorithmic stablecoins: the kind that keeps blowing up
The other major design tries to maintain a peg without holding a full reserve of real-world assets. Instead, it uses software rules and a related token to absorb supply and demand pressure.
The logic sounds elegant in a whitepaper. The practice has been a disaster. I’ve read enough of these whitepapers to notice that the words “elegant mechanism” and “reflexive collateral” in the same sentence should function as an exit sign.
The most documented example is TerraUSD (UST), which collapsed in May 2022. UST maintained its dollar peg through a mechanism tied to a sister token called LUNA: holders could always burn one UST to mint one dollar’s worth of LUNA, and vice versa. This created algorithmic arbitrage pressure that was supposed to keep UST at $1.00.
What happened instead: selling pressure on UST triggered the burn-LUNA mechanism at scale. LUNA supply hyperinflated. As LUNA’s price collapsed, confidence in UST collapsed with it. More holders rushed for the exit. The spiral fed itself until both tokens were worth fractions of a cent. Approximately $60 billion in market value evaporated in days. Tens of thousands of retail holders saw life savings disappear.
This is called a “death spiral,” and it’s the structural risk built into algorithmic stablecoins that rely on reflexive collateral. When the collateral is itself a token whose value depends on confidence in the system, a loss of confidence becomes self-fulfilling. It’s not a bug in the code — it’s a flaw in the economic design.
There have been others before and after UST. The pattern tends to repeat: novel mechanism, rapid growth, sudden depeg, total loss. Anyone pitching you an algorithmic stablecoin with exceptional yield should trigger immediate skepticism.
The GENIUS Act: the US finally built a rule book
For years, stablecoin issuers operated in a regulatory gray zone in the United States. The GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act), signed into law on July 18, 2025, created the first federal framework specifically for payment stablecoins.
The core requirements:
- 100% reserve backing. Issuers must hold high-quality liquid assets — primarily US Treasury bills and cash — equal to outstanding stablecoin supply, on a one-to-one basis.
- Regular attestations. Monthly public attestations by independent accounting firms, plus annual audits.
- Regulated issuers only. Only entities with federal or approved state charters — OCC-chartered non-bank issuers, subsidiaries of insured depository institutions — can legally issue payment stablecoins in the US.
- Anti-money-laundering rules. Issuers are treated as financial institutions under the Bank Secrecy Act, subject to Know Your Customer (KYC) requirements and transaction monitoring.
The GENIUS Act doesn’t cover algorithmic stablecoins the same way — it targets payment stablecoins with explicit reserve backing. Implementation by federal agencies (the OCC, FDIC, and Federal Reserve) is ongoing, with full rules expected to be in force before January 2027.
What this means practically: fiat-backed stablecoin issuers operating in the US now face real compliance obligations. Transparency requirements are rising. Whether that improves the ecosystem or simply pushes less-regulated activity elsewhere remains to be seen. But the era of operating without a rule book is ending.
Where stablecoins are actually used
The honest answer: stablecoins see more use as financial plumbing than as consumer products.
Cross-border payments and remittance. Traditional international wire transfers charge 2–7% in combined fees, FX spreads, and intermediary costs, and can take days. A stablecoin transaction settles in seconds at a fraction of the cost. Actual payment volume reached roughly $390 billion in 2025, more than double 2024 levels — the Federal Reserve published a detailed note on stablecoin cross-border payment mechanics and implications in March 2026. B2B supplier payments, freelancer payments, and remittances to countries with limited banking access are all active use cases.
Settlement infrastructure. Financial institutions and payment processors use stablecoins to settle transactions between themselves faster and more cheaply than through correspondent banking networks. Visa’s stablecoin settlement program is one public example; Mastercard acquired stablecoin infrastructure firm BVNK in early 2026 for the same reason.
DeFi and on-chain applications. Within the crypto ecosystem itself, stablecoins function as the stable unit of account. Decentralized finance protocols, trading platforms, and lending markets use them constantly because participants need a non-volatile asset to transact with. Ethereum hosts approximately $170 billion in stablecoins — around 60% of the global supply — reflecting its role as the dominant DeFi platform.
Dollar access in high-inflation economies. In countries experiencing severe local currency inflation, dollar-pegged stablecoins provide access to dollar stability without requiring a US bank account. This is a significant real-world use case that doesn’t fit neatly into the “crypto as investment” narrative — it’s about financial access.
None of this requires you to think of stablecoins as an investment or a way to make money. They’re closer to a payment rail or a savings account in dollar terms — with different risks than a bank account, but serving some of the same functions.
The risks you shouldn’t skip
Depeg. Any stablecoin can lose its peg. The risk is highest for algorithmic designs, but fiat-backed stablecoins have also depegged temporarily under stress. USDC briefly fell to $0.87 in March 2023 when Silicon Valley Bank — which held a portion of Circle’s reserves — failed. It recovered, but the event illustrated that “always worth $1” is a promise, not a physical law.
Counterparty risk. With fiat-backed stablecoins, you’re trusting the issuer. If the company holding your reserves is insolvent, defrauds customers, or gets shut down by regulators, your tokens may not be redeemable at face value. Regular attestations reduce this risk but don’t eliminate it. Stablecoin balances are generally not FDIC-insured.
Smart contract risk. Stablecoins live on blockchains and often interact with smart contracts. Bugs in that code have been exploited before, draining funds. The GENIUS Act doesn’t insure you against this.
Regulatory risk. The regulatory landscape is still being built. An issuer that’s compliant today could face new requirements, enforcement actions, or be forced to restrict redemptions for certain users.
Scam vectors. As with all crypto, stablecoins are used in scams — “yield farming” schemes that promise extraordinary returns on stablecoin deposits, fake platforms that accept stablecoin deposits and disappear, and approval phishing attacks that drain stablecoin wallets. The dollar denomination makes them feel safer; that feeling is exactly what scammers exploit. “Stable” is a description of the peg design, not a risk rating — and every time I’ve watched a new wave of people discover stablecoins, a fresh batch of scammers is already waiting at the on-ramp.
If you keep crypto — including stablecoins — on a platform you don’t control, you’re trusting that platform completely. The same principle applies here as with any crypto: “not your keys, not your coins.” Exchanges and custodians have failed before.
FAQ
Is a stablecoin the same as regular crypto? It’s a type of cryptocurrency, but the design goal is different. Most crypto (like Bitcoin) has a floating price. Stablecoins are built to maintain a fixed price — usually $1. That makes them less speculative but introduces a different set of risks (counterparty, depeg, regulatory).
Are stablecoins safe? Safer than volatile cryptocurrencies in terms of price swings, but not risk-free. Depeg events have happened — including with the largest stablecoins. They’re also not FDIC-insured. The GENIUS Act is building a compliance framework, but it doesn’t make stablecoins equivalent to a bank deposit. Understand what you’re holding before you hold it.
What happened to UST / TerraUSD? UST was an algorithmic stablecoin that maintained its dollar peg through a mechanism tied to a sister token called LUNA. In May 2022, selling pressure triggered a death spiral: UST depegged, the algorithm minted LUNA in massive quantities, LUNA collapsed, and both tokens became effectively worthless. About $60 billion in market value was wiped out. It’s the most studied example of why algorithmic collateral designs carry existential risk.
Does the GENIUS Act mean stablecoins are now regulated like banks? Not exactly. The GENIUS Act created a specific federal framework for payment stablecoins — 100% reserves, regular audits, licensed issuers. But stablecoin holders don’t have the same protections as bank depositors (no FDIC insurance, no lender-of-last-resort backstop). The law raised the floor significantly; it didn’t make stablecoins equivalent to a savings account.
For the broader context on how cryptocurrencies work at a technical level, start with What Is Cryptocurrency? and What Is a Blockchain?. And if you want to understand the scams that most commonly target crypto users — including stablecoin-specific fraud — see the guide on how to avoid crypto scams. All crypto explainers are in the Crypto section. About the author — Theo is a developer who has followed crypto since the early days and writes about it without the hype. Not a financial advisor; just here to explain how things work.