Stablecoins Explained: Types, Risks and How the $1 Peg Holds

A stablecoin is a cryptocurrency engineered to always be worth one dollar. That sounds boring next to Bitcoin — until you learn that one of the largest ever fell from $1 to ten cents in six days, and another briefly slid to 87 cents while still being fully backed. The gap between those two stories is the whole subject.

This guide explains stablecoins the way a trader actually needs to understand them: the four types and how each one holds its peg, what really happened in the two most famous depegs, how USDT and USDC differ on risk, and what the 2026 rules changed for you as a holder. If you are still getting your bearings, start with our structured crypto fundamentals course and read this alongside it.

What is a stablecoin, and how does it stay at $1?

A stablecoin is a crypto token designed to hold a fixed value, almost always one US dollar, by being tied to a reserve asset. It stays near $1 through a redemption promise: if the coin trades below a dollar, traders buy it cheap and redeem it for a full dollar, and that buying pushes the price back up.

That promise is the entire game. A coin does not stay at $1 because it is labelled "stable" — it holds because enough people believe they can always swap it for a real dollar. When that belief cracks, the peg goes with it. And how the promise is kept depends entirely on the type, which is where the risk lives.

Sources: KuCoin stablecoin liquidity report, May 2026; Kaiko via Bitcoin.com, March 2026; Bitget Academy / ScienceDirect Terra spillover study, 2022.

Read those three numbers together and the picture is clear: stablecoins are now the plumbing of crypto, but the "stable" label hides very different machines underneath. The next section opens them up.

The four types of stablecoins (and how each holds the peg)

Not all stablecoins keep their value the same way. There are four models, and the difference between them is exactly the difference between "sleeps at night" and "lost everything." Here is how each one is built and where it breaks.

Source: Cobo 2026 stablecoin guide; Changelly types-of-stablecoins explainer, 2026.

What this means for you: when someone says "stablecoin," ask which type. A fiat-backed coin and an algorithmic one share a name and a price target and nothing else. The first is a claim on real assets; the second is a claim on a self-reinforcing belief. Treat them as different instruments, because they fail in completely different ways — which the next section shows in painful detail.

Can a stablecoin actually lose its peg?

Yes — and the two most important examples teach opposite lessons. One was a fatal flaw in the design. The other was a survivable scare in an otherwise sound coin. Knowing the difference is what separates an informed holder from a headline-panicker.

TerraUSD: the algorithmic coin that went to zero

TerraUSD (UST) was algorithmic, propped up by a sister token, LUNA, and a yield platform called Anchor that paid roughly 20%. By April 2022 UST's market cap topped $18 billion and LUNA was valued above $40 billion. The catch: nearly 70% of all UST sat in Anchor, chasing that yield rather than being used.

When Anchor's rate was cut and large holders headed for the exits, UST slipped below $0.98 on 7 May 2022. The design meant to defend the peg minted ever more LUNA to absorb selling — so LUNA's supply hyperinflated from about 350 million tokens to over 6.5 trillion. By 13 May, UST was worth ten cents. Roughly $45 billion in value evaporated in about three days.

The lesson is permanent: an algorithmic stablecoin with no real reserves is only stable while confidence holds. Remove the yield, add a bank-run dynamic, and "stable" becomes a free-fall with nothing underneath to catch it.

USDC: the backed coin that wobbled and recovered

USDC is fiat-backed, and in March 2023 it proved both the strength and the limit of that model. When Silicon Valley Bank failed on 10 March 2023, Circle disclosed that $3.3 billion of USDC reserves — about 8% — were stuck at SVB. USDC fell to roughly $0.87 within hours as redemptions flooded in.

Then the opposite of Terra happened. Because the reserves were real and the shortfall was a banking problem, not a design flaw, the moment US regulators guaranteed SVB's depositors, USDC climbed back to $1 within about three days. The coin was never insolvent; it was temporarily uncertain.

Here is the catch: a fiat-backed stablecoin moves the risk rather than removing it. You are no longer betting on an algorithm — you are betting on the issuer's reserves and the banks holding them. That is a far better bet, but it is still a bet.

USDT vs USDC: which is safer?

This is the question most new traders actually want answered, and the honest version is nuanced. USDT (Tether) is far larger and more liquid; USDC (Circle) has historically leaned toward more conservative, transparent reserves. Size and transparency are both forms of safety — just different ones. First, see how lopsided the market is.

USDT carried roughly a 58% market share at about $185 billion in April 2026, with USDC near $78 billion. The largest crypto-backed coin, DAI, is barely a sliver at around $5 billion — over-collateralized stability is robust but does not scale cheaply. About 99% of all stablecoin supply is US-dollar denominated.

What this means for you: for deep liquidity and the widest pair coverage, USDT is the default trading unit. For holding larger balances where reserve quality matters more than tick-by-tick liquidity, many traders prefer USDC. The practical answer is not "pick one forever" — it is to know why you are holding each, and to spread balances across reputable issuers rather than trusting a single name with everything. If you trade derivatives, the same logic governs how crypto futures and funding work, where your margin and funding payments are settled in exactly these coins.

Why do crypto traders use stablecoins instead of dollars?

Because moving real dollars through banks is slow, expensive, and closed on weekends — and crypto never closes. A stablecoin lets you sit in dollar value inside the market, ready to redeploy in seconds, without a bank wire in the loop. That convenience has quietly become the market's backbone.

The scale is striking. In Q1 2026, stablecoins recorded $8.3 trillion in trading volume — about 75% of all crypto trading, the highest share on record. As of March 2026, they accounted for roughly 83% of US-dollar-denominated spot volume, with traditional fiat pairs fading. Over 2025, reported stablecoin transaction volume topped $33 trillion.

For a trader, the practical uses are concrete: park profits without exiting to a bank, move between exchanges in minutes, settle into a pair without currency-conversion friction, and earn yield in some venues (with its own risk). Just remember that swapping into a stablecoin is still a disposal — read how crypto disposals are taxed before you assume "it's just a dollar" means "no tax event."

What the 2026 rules (GENIUS Act, MiCA) changed for holders

Stablecoins spent a decade in a regulatory grey zone. That is ending. In the US, the GENIUS Act of 2025 passed the House on 17 July 2025 and requires regulated issuers to hold at least $1 of permitted reserves for every $1 issued — cash, insured deposits, short-dated Treasury bills and similar government assets. Issuers with more than $50 billion outstanding must file audited annual statements, and crucially, issuers are prohibited from paying interest to holders. Implementing rules are due by around 18 July 2026.

In the EU, MiCA has applied to stablecoins since 30 June 2024. It mandates 1:1 backing with at least 30% of reserves held in bank deposits (60% for coins deemed "significant"), and like the GENIUS Act, it bans paying interest on these tokens.

What this means for you: the headline trend is reserve quality going up and yield going away. If a coin offers you eye-catching "interest" for simply holding it, that is now a flag to investigate the structure — not a free lunch. The regulation is, in effect, codifying the lesson Terra taught the hard way.

Mistakes to avoid with stablecoins

• Treating all stablecoins as equally safe. An algorithmic coin and a fiat-backed coin are not the same product — UST and USDC ended their crises $0.90 apart.
• Chasing yield without reading the source. Anchor's ~20% was the bait that concentrated 70% of UST and turned an exit into a stampede.
• Putting every balance in one issuer. The SVB scare was survivable; a permanent issuer failure would not be. Spread across reputable names.
• Forgetting the tax and accounting reality. Converting crypto to a stablecoin is usually a taxable disposal, not a neutral "cash-out." New to all of this? Begin with getting started in crypto trading the structured way.
• Assuming "$1" is a guarantee. It is a target the market enforces — and markets can stop enforcing it for hours or forever.

Frequently asked questions

Trading and holding crypto assets involves substantial risk of loss, including the risk that a stablecoin loses its peg. Crypto regulation and tax treatment vary by country. This article is educational content, not investment advice.