A stablecoin is a digital token designed to hold a fixed value, almost always one US dollar. It is issued on a blockchain, so it moves between accounts at any hour without a bank in the middle. The price holds because the issuer keeps reserves against every token in circulation, or because the token is overcollateralized.
A stablecoin sits somewhere between a bank deposit and a money market fund share: it is a claim on an issuer, it moves on the holder's instruction rather than through a correspondent bank, and in most cases no deposit insurance stands behind it. Almost everything in how treasuries deploy capital onchain begins with holding one.
What are the main types of stablecoin?
Three designs are in use. A Federal Reserve staff note published in December 2022 groups them as off-chain collateralized, on-chain collateralized, and algorithmic, a split that turns on where the backing sits, how much of it there is, and whether there is any at all.
Fiat-backed, or off-chain collateralized, is the form most institutions meet first. Someone sends the issuer a dollar, the issuer holds it as cash or short-term government debt at a bank or custodian, one token is minted, and the reserve that results is an ordinary portfolio sitting inside the traditional financial system, so the quality of that portfolio is what matters.
Crypto-backed, or on-chain collateralized, works from the other direction. A borrower locks volatile crypto assets into a smart contract, a program that holds assets and enforces rules without an intermediary, and mints stablecoins against them. Because the collateral can fall in price the position is overcollateralized, so roughly $150 of collateral might support $100 of issued tokens, and if the collateral drops toward the value of the debt the contract sells it automatically.
Algorithmic stablecoins hold no meaningful reserve. Supply expands and contracts by rule, supported by a second token the same system issues, and the category is better understood as a cautionary one than as a live design choice. TerraUSD failed in May 2022, and the Federal Reserve note records that the collapse "reverberated throughout the digital asset ecosystem", with the market value of uncollateralized stablecoins falling back to 2021 levels.
How does a stablecoin hold its price at one dollar?
Redemption at par is the mechanism, and arbitrage is what carries it into the open market: the issuer promises to buy tokens back for a dollar each, on demand. If the token trades at 99 cents on an exchange, a party with a redemption account buys it there and redeems it at par; if it trades above a dollar, the same party mints at par and sells, and that pressure closes the gap without the issuer ever trading in the market itself.
The part that surprises people is who is allowed to do this. Redemption is normally open only to onboarded counterparties who have cleared the issuer's checks and meet a minimum ticket size, so everyone else holds a token whose price depends on those parties finding the arbitrage worth doing. In calm markets the distinction rarely shows. Under stress it separates the secondary market price from the redemption price. Those are two different numbers.
US law now puts a floor under the fiat-backed version. The GENIUS Act, approved 18 July 2025, requires a permitted issuer to maintain identifiable reserves backing its outstanding payment stablecoins "on an at least 1 to 1 basis", and it restricts those reserves to a defined list: currency, balances at a Federal Reserve Bank, insured demand deposits, Treasury bills, notes and bonds, repurchase and reverse repurchase agreements, and shares in government money market funds. Issuers must also "establish clear and conspicuous procedures for timely redemption".
Why do stablecoins exist?
A dollar payment between two institutions in different countries still clears through a chain of correspondent banks over several days, and a stablecoin transfer settles in seconds on a shared ledger, so that gap is the practical reason the instrument exists and the reason it spread beyond the market it was invented for.
Stablecoins started as the unit of account for crypto trading, where parking actual dollars on an exchange was awkward, and from there they became a payment instrument. Most onchain lending is now denominated in them, and that makes them the standard form of collateral as well, but all three uses rest on the same property: the ledger is open, so the recipient does not need a banking relationship with the sender.
Failure modes, and where they actually sit
Most of the failure modes sit outside the code: in the reserve, the redemption path, the issuer's own controls, and how the token is represented on other chains.
- Reserve quality. An attestation is a point-in-time statement by an accountant that assets were present, not a full audit of how they are managed, and composition matters as much as size, because a reserve of overnight government paper behaves differently in a run than one holding commercial paper.
- Redemption access. If the redemption window is narrow or gated to a short list of counterparties, the market price can move away from a dollar and stay there. That is what a depeg usually is: a redemption problem showing up as a price.
- Issuer control. Most fiat-backed tokens include functions that let the issuer freeze or seize balances at a given address, a compliance feature and a real exposure to hold at the same time.
- Collateral cascades. In crypto-backed designs a sharp fall in collateral value triggers automated selling, and the selling pushes prices down further.
- Chain and bridge risk. The same ticker on a different blockchain may be a bridged claim on a locked balance rather than a direct liability of the issuer.
Where this leaves a treasury holding a balance
Whether the balance is a settlement asset or a credit position decides how it is governed: a working balance used to move money is a payments question. A balance held for size is unsecured exposure to an issuer and its reserve manager, sized and monitored the way any counterparty limit would be, with reserve composition reviewed on a schedule rather than at onboarding.
Once the balance is large enough that leaving it idle has a cost, the question changes to where a return would come from and what holding it does to the risk profile. Where such a return comes from, and how the sources behave together, is set out in onchain yield sources. What a treasury policy has to say about each is a separate question. Two adjacent instruments are worth understanding first: yield-bearing stablecoins pay the holder directly, and tokenized treasuries are fund shares rather than dollar liabilities.
Common questions
What is a stablecoin, in one sentence?
A token issued on a blockchain that is designed to trade at a fixed value, nearly always one US dollar, and that holds that value because the issuer keeps reserves against every token outstanding or because the token is overcollateralized with crypto assets.
Are stablecoins backed by real dollars?
Fiat-backed ones are backed by a reserve portfolio, though not usually by physical dollars. Under the GENIUS Act a permitted US issuer must hold at least one dollar of defined reserve assets per token, drawn from cash, Federal Reserve balances, insured deposits, Treasury securities, repos, and government money market fund shares.
Do stablecoins pay interest?
A plain payment stablecoin does not. The GENIUS Act states that no permitted payment stablecoin issuer "shall pay the holder of any payment stablecoin any form of interest or yield", though separate instruments exist that do pay, and those are structured as something other than a payment stablecoin.
What is a depeg?
A period where the secondary market price of a stablecoin trades away from its reference value, usually a signal that redemption is slow, gated, or doubted rather than a signal about the token's software.
Are stablecoins insured?
No. Deposit insurance covers deposits at insured banks, not tokens issued against them. A reserve held in insured demand deposits may benefit from insurance at the bank level, subject to limits, but the token holder is not the insured depositor.