What is a stablecoin
A stablecoin is a crypto token designed to keep a steady price against a reference asset, usually a currency such as the US dollar.
The token runs on a blockchain like any other crypto asset. Unlike bitcoin or an altcoin, its price is meant to stay close to its reference asset rather than move freely. The best-known example is the USDT stablecoin, issued by Tether and tracking the US dollar. USDC is another dollar-tracking token.
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Formal definition and types
More precisely, a stablecoin is a digital token whose issuer or protocol uses a stabilisation mechanism to keep its market price near a reference value (the "peg"). The mechanism decides how much you can trust the peg:
| Type | What backs the peg | Main risk |
|---|---|---|
| Fiat-backed (USDT, USDC) | Reserves held by the issuer, such as cash and short-term government bills | Quality of the reserves, the issuer as counterparty, the custodian |
| Crypto-collateralised | Other crypto locked in smart contracts, worth more than the tokens issued | Collateral value falling fast, forced liquidations |
| Algorithmic | Supply rules and a sister token, with little or no reserve | Loss of confidence that turns into a collapse |
| Commodity-backed | Gold or another commodity | Storage, audit and redemption terms |
A stablecoin is not a CBDC. A CBDC is issued by a central bank. A stablecoin is issued by a private company or a DeFi protocol, and it is not fiat money itself.
Worked example (hypothetical)
Suppose a trader swaps US dollars for USDT at the peg and keeps the tokens in a crypto wallet.
- Normal conditions: the token trades at or very near a dollar. If it dips, arbitrage traders buy the cheap tokens and redeem them with the issuer at the peg. That buying pulls the price back up.
- Stress: news raises doubts about the issuer's reserves. Sellers outnumber buyers, and the exchange price slips below a dollar. This is called a depeg. If the trader sells now, they get fewer dollars than they paid. The loss is the gap between the peg and the sale price, multiplied by the number of tokens sold.
- Run dynamics: if redemptions slow down, the situation can turn into something close to a bank run.
Edge cases experienced readers should know
- Redemption is not universal. The issuer often redeems tokens only for verified customers who meet minimum sizes. Everyone else exits through the market price.
- Attestation is not an audit. Many issuers publish reserve attestations, which are narrower checks than a full audit.
- Freezing. Some issuers can freeze tokens held at a specific address.
- Network matters. The same token exists on different blockchains. Sending it on the wrong network can lose it, and gas fees differ by network.
- Dollar exposure. For a Pakistani holder, a dollar stablecoin still carries currency risk against the rupee. It works as a form of informal dollarization.
Where you see the term
- Exchanges: pairs such as BTC/USDT, where the stablecoin acts as the quote currency.
- Trading platforms: crypto CFDs are usually quoted against USD. A CFD does not give you the token itself. Leveraged CFD trading can lose money fast.
- News and reports: "depeg", "reserve attestation", "stablecoin supply" and regulatory actions against issuers.
- Payments in Pakistan: stablecoins are sometimes used to fund overseas trading accounts. Note that per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)), and per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. See Regulation and Safety.
Frequent questions
What is stablecoin in simple words?
It is a crypto token built to hold a steady price, usually against the US dollar.
Is USDT a stablecoin?
Yes. USDT is a fiat-backed stablecoin issued by Tether that tracks the US dollar.
Can a stablecoin lose value?
Yes. If confidence in the reserves or the mechanism fails, the market price can fall below the peg and may not recover.
Is a stablecoin the same as a bank deposit?
No. It is a claim on a private issuer or a protocol, not a deposit at a bank.
More terms are in the trading glossary.