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Stablecoin
A cryptocurrency whose value is pegged to an external reference — typically a fiat currency such as the US dollar or euro — to minimise price volatility.
Definition and context
A stablecoin is a cryptocurrency whose value is pegged to an external reference — typically a fiat currency such as the US dollar or the euro, more rarely gold or a basket of assets. The aim is to strip out the price volatility that defines bitcoin and ether, making crypto infrastructure usable for applications that need a stable unit of account: payments, savings products or trading pairs.
By market volume, US-dollar stablecoins USDT (Tether) and USDC (Circle) still dominate, together accounting for around 90% of the global stablecoin market. In the euro area, EURC (Circle) and EURI (Banking Circle) are gaining ground under the MiCA framework.
What are the different types?
The main design principles are:
- Fiat-backed stablecoins: for every token issued, the issuer (Circle, Tether) holds a corresponding reserve in cash, short-dated sovereign bonds or commercial bank deposits. This is the dominant model.
- Crypto-backed stablecoins: the token is collateralised by other, over-collateralised crypto assets. Example: DAI/USDS from the MakerDAO/Sky protocol. Typically 150% of the token's value is locked up in ETH or other collateral.
- Algorithmic stablecoins: value is stabilised through market incentives alone, with no reserve behind the token. The best-known case — Terra/Luna's UST — collapsed completely in May 2022 and the model has been considered discredited ever since.
Under MiCA, fiat-backed stablecoins are classified as e-money tokens (EMTs). Issuers need the relevant licence and must meet liquidity, reserve and own-funds requirements.
In practice
An investor holds 50,000 USDC in a Bitpanda wallet. The position is worth roughly 50,000 US dollars at all times — the price typically moves in a band between 0.9995 and 1.0005 USD per USDC. Circle confirms the reserves through a quarterly audit, and the bulk of them sits in short-dated US Treasuries.
The investor uses USDC to exit bitcoin or ether without moving back into fiat — and can redeem the position at any time, or put it to work for yield through DeFi protocols such as Aave.