What is a stablecoin?

Stablecoin: A cryptocurrency pegged to for example the dollar. Its stability depends on the issuer and what it holds as backing.

A stablecoin tries to stay worth about the same as a regular currency, usually the dollar. One coin should then always be worth about 1 dollar.

To do that the issuer holds backing, for example cash at a bank or government bonds. Whether the peg holds depends on that backing and on trust in the issuer.

There are also stablecoins that use other crypto as collateral or a formula. In the past some of those have lost their peg.

Example
You swap 1,000 euros for a stablecoin pegged to the dollar. At a rate of 1.10 dollars per euro you get 1,100 coins. If the euro rises to 1.20 dollars, those 1,100 coins are worth only about 917 euros. In dollars nothing changed, in euros it did.

Watch out
For someone who thinks in euros, a dollar stablecoin is not stable because of the exchange rate. Stablecoins are also not covered by the deposit guarantee scheme.

Read more in the guide Stablecoins are 300 billion dollars of promises.

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