What Is a Stablecoin and How Does It Keep Its Price?

Bitcoin and most other cryptocurrencies can gain or lose a large share of their price in a single day. Stablecoins solve this problem: they are tokens whose price is pegged to a stable asset, most often the US dollar. Here is how they work and what to keep in mind before using them.

What a stablecoin is

A stablecoin is a cryptocurrency designed to keep a fixed price, usually 1 token = 1 US dollar. There are also stablecoins pegged to the euro or to gold, but dollar ones dominate the market. People use them to lock in profits without leaving crypto, to send money abroad, to pay for goods and services and to move funds between exchanges.

How stablecoins hold their price

• Fiat-backed. The issuer holds reserves in cash and short-term government bonds and promises to redeem each token for one dollar. The largest examples are USDT (Tether) and USDC (Circle).
• Crypto-backed. Tokens are issued against crypto collateral locked in smart contracts, and the collateral is worth more than the tokens issued. The best-known example is DAI.
• Algorithmic. The price is supported by an algorithm that expands or reduces supply instead of full reserves. This model has proved the most fragile: in 2022, TerraUSD (UST) lost its peg and collapsed within days.

Risks to be aware of

• Depeg. Even a large stablecoin can briefly trade below $1. In March 2023, USDC fell below $0.90 after part of its reserves got stuck at the failed Silicon Valley Bank, and recovered within a few days.
• Issuer risk. A fiat-backed stablecoin is only as reliable as its issuer and its reserves. Check whether the issuer publishes regular reserve reports.
• Freezing. The issuers of USDT and USDC can freeze tokens on specific addresses, for example at the request of law enforcement.
• Network choice. The same stablecoin exists on many blockchains: USDT, for example, runs on Ethereum, Tron, TON, Solana and other networks. Tokens sent over the wrong network may be lost, so always check which network the recipient supports.

Stablecoins on Xgram

On Xgram, you can exchange stablecoins for other cryptocurrencies and back on the network you need. When you choose a stablecoin, pay attention to the network shown next to it, for example TRC20 (Tron) or ERC20 (Ethereum): the recipient address must belong to the same network.