Stablecoins Explained: USDC, USDT, DAI and How They Work
The three main designs behind tokens that aim to hold a stable price.
A stablecoin is a token designed to hold a stable value, usually one U.S. dollar. There are three broad designs: fiat-backed, crypto-collateralized, and algorithmic.
Fiat-backed stablecoins such as USDC and USDT are issued by a company that holds reserves — typically cash, short-term treasuries, and equivalents — matching the tokens in circulation. Users trust the issuer to maintain those reserves and honor redemptions.
Crypto-collateralized stablecoins such as DAI are backed by other crypto-assets locked in smart contracts. Because those collateral assets can be volatile, the system usually requires over-collateralization to absorb price swings.
Algorithmic stablecoins try to hold their peg through supply-and-demand mechanisms, with no full backing. Several high-profile designs have failed. Understanding which category a stablecoin belongs to is the first thing to check before using it.