Stablecoin explained: USD pegged crypto tokens defined

By Ken Chigbo, Founder, KenMacro. Published 2026-05-13.

What is stablecoin?

A stablecoin is a blockchain native token engineered to track a stable reference, almost always the US dollar at a one to one ratio. The largest issues are USDT from Tether and USDC from Circle, both fiat backed and redeemable against reserves held in cash and short dated US Treasuries. Other designs exist, including crypto collateralised stablecoins such as DAI, and algorithmic variants that attempt to maintain parity through supply mechanics rather than reserves. The desk treats stablecoins as digital dollar substitutes that settle on public ledgers, combining the unit of account function of fiat with the programmability and transfer speed of crypto rails.

How traders use stablecoin

Retail traders use stablecoins primarily as a settlement layer between exchanges and as a parking asset during risk off periods, rotating out of bitcoin or ether into USDT or USDC without converting back to bank held dollars. On centralised venues, most perpetual futures and spot pairs are quoted against a stablecoin, making it the de facto quote currency of crypto markets. Institutional desks use stablecoins for cross venue arbitrage, treasury management between Asian and US sessions, and as collateral on decentralised lending protocols. The desk also tracks stablecoin supply expansion and contraction as a liquidity proxy, since net minting often precedes inflows into riskier crypto assets and net redemption tends to coincide with deleveraging.

Common misconceptions about stablecoins

The most persistent misconception is that all stablecoins are equally safe. They are not. Fiat backed issues like USDC publish monthly attestations on reserve composition, while others have historically been less transparent about backing. A second error is treating algorithmic stablecoins as equivalent to fully reserved ones; the collapse of TerraUSD in 2022 demonstrated that supply rule based pegs can fail catastrophically when reflexive selling overwhelms the mechanism. Finally, a stablecoin trading at one dollar on an exchange order book is not proof of solvency, it reflects market expectation of redemption at par.

Browse the full KenMacro glossary

Frequently asked

What is the difference between USDT and USDC?

USDT is issued by Tether and is the largest stablecoin by circulation, with the deepest liquidity across centralised exchanges and perpetual futures markets. USDC is issued by Circle, a US regulated firm, and publishes monthly attestations from a major accounting firm detailing the cash and Treasury composition of its reserves. The desk views USDC as the more transparent option for compliance sensitive flows, while USDT retains an edge in raw market depth, particularly in Asian trading hours.

Can a stablecoin lose its peg?

Yes. Stablecoins have deviated from one dollar during stress events. USDC traded near 0.88 dollars in March 2023 when part of its reserves was held at Silicon Valley Bank during that bank’s failure, before recovering once redemption was confirmed. Algorithmic designs such as TerraUSD have lost the peg permanently. Pegs depend on the credibility of redemption, the quality of reserves, and the willingness of arbitrageurs to close the gap between secondary market price and the underlying claim.

Are stablecoins regulated?

Regulation varies by jurisdiction. The European Union’s Markets in Crypto Assets framework, known as MiCA, sets reserve, disclosure and authorisation requirements for stablecoin issuers operating in the bloc. In the United States, oversight remains fragmented across federal and state regulators, with active legislative debate around a dedicated federal framework. Singapore, Hong Kong, the United Arab Emirates and the United Kingdom have each published their own approaches, generally requiring licensed issuers to hold high quality liquid reserves and provide redemption rights to holders.

Do stablecoins pay interest?

Stablecoins themselves do not pay interest to holders; the issuer typically keeps the yield earned on reserve assets such as Treasury bills. Holders can earn yield by lending stablecoins through centralised platforms or decentralised protocols, but this introduces counterparty and smart contract risk that is distinct from holding the token itself. Some regulated tokenised money market funds offer a pass through structure where yield flows to the holder, though these are legally distinct from conventional stablecoins.

Educational analysis only. Past performance does not guarantee future results. Manage risk against your own portfolio.