Stablecoins are crypto assets designed to track the value of another asset, most often the US dollar. They are used as a quote currency on exchanges, for transferring value between wallets, and in decentralised finance. The word ‘stable’ describes a design goal; it does not mean a token is risk-free or guaranteed to redeem at one dollar everywhere.
How a fiat-backed stablecoin works
A central issuer creates tokens and states that reserves support outstanding supply. Reserves may include cash, bank deposits, Treasury instruments or other assets, depending on the issuer and its disclosures. Users should read the issuer’s reserve reports, redemption terms, legal structure and geographic restrictions. A monthly attestation is not identical to a full independent audit, and neither removes banking, custody or operational risk.
Three common models
- Fiat-backed: issued by a company that manages reserves and redemptions.
- Crypto-collateralised: backed by on-chain collateral, often with over-collateralisation and liquidation rules.
- Algorithmic: relies on market incentives or token mechanisms; designs can fail under stress and deserve extra scrutiny.
What does a depeg mean?
A depeg occurs when the market price moves away from the intended reference value. It can happen because of doubts about reserves, redemption bottlenecks, exchange liquidity, smart-contract exploits, collateral volatility or a broad rush to exit. Even a temporary deviation can create losses if a user must sell at that moment.
Before using USDT or another stablecoin
Confirm the exact token and network before sending. A ticker can exist on multiple chains, and an exchange may not support every version. Check withdrawal fees, liquidity, issuer terms and your own local rules. Test with a small transfer, secure your wallet, and avoid treating a stablecoin balance as a bank deposit. This article is educational, not investment or legal advice.
For the blog’s existing USDT explainer, compare its points with current issuer documentation and reserve disclosures before making decisions.
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