# What is a stablecoin?

> A stablecoin is a cryptocurrency designed to hold a steady value — almost always one US dollar — by being backed by reserves or managed by code. They are how dollars move on a blockchain.

4 min read · Updated 2026-06-09 · Topic: stablecoins

Canonical: https://tempo.dataos.so/articles/what-is-a-stablecoin

A stablecoin is a cryptocurrency built to **not** be volatile. Where Bitcoin or Ether can move 10% in a day, a stablecoin is engineered to stay pinned to a reference price — almost always **one US dollar**. That single property is what turns a blockchain from a trading venue into a payments network: if a token is reliably worth a dollar, you can use it to pay a salary, settle an invoice, or send money home, without either side gambling on the exchange rate.

The mechanism is simple in the most common case. A regulated company takes in one dollar, holds it (and short-term US Treasuries) in reserve, and issues one token in return. To redeem, you hand back the token and get your dollar. The reserves are what make the peg credible; the blockchain is what makes the token move in seconds, globally, around the clock.

## Why stablecoins exist

Three problems pushed dollars onto blockchains.

- **Volatility made crypto unusable as money.** Traders needed a way to sit in "dollars" without leaving the exchange. Stablecoins gave them a dollar that lived on-chain.
- **The dollar is in demand everywhere, but hard to get.** In economies with weak local currencies or limited banking, a dollar-pegged token reachable from a phone is a genuine store of value and a way to transact.
- **Moving money internationally is slow and expensive.** A blockchain settles a transfer in seconds for cents; correspondent banking takes days and layers on fees. Stablecoins inherit that speed.

By 2025 those forces had pushed stablecoin supply into the hundreds of billions of dollars, and annual on-chain stablecoin transfer volume into the **tens of trillions** — numbers that put the asset class in the same conversation as the card networks.

## The three designs

Not all stablecoins hold their value the same way. The design determines the risk.

| Design | How the peg holds | Examples | Main risk |
|---|---|---|---|
| **Fiat-backed** | One token per dollar of cash + Treasuries in reserve | USDC, USDT, PYUSD | Reserve quality, redemption access, issuer solvency |
| **Crypto-backed** | Over-collateralised with on-chain assets (e.g. $1.50 of ETH per $1) | DAI | Collateral crashes faster than it can be liquidated |
| **Algorithmic** | Code and incentives, little or no reserve | (failed) TerraUSD | Reflexive collapse — the peg breaks and can't recover |

Fiat-backed stablecoins are the overwhelming majority of supply and the only design most businesses should consider. Crypto-backed designs are resilient but capital-inefficient. **Algorithmic** stablecoins are the cautionary tale: TerraUSD (UST) held its $1 peg with an arbitrage loop against a sister token until confidence cracked in May 2022, wiping out roughly **$40 billion** in days. The lesson the market drew — and that regulators later codified — is that a dollar stablecoin should be backed by dollars.

## Who issues them

The supply is concentrated. **Tether (USDT)** is the largest, dominating trading pairs and everyday payments in emerging markets. **Circle (USDC)** is the second pillar, US-based and built around compliance and transparency. Newer entrants — **PayPal's PYUSD**, bank consortium coins, and issuer-specific dollars — are expanding the field as regulation makes issuance safer to build on.

What every credible issuer now shares is **disclosure**: regular attestations of what backs the coins. After 2022, "trust us" stopped being an acceptable answer, and the 2025 wave of legislation made reserves and reporting a legal requirement rather than a marketing choice.

## Where stablecoins live: the rails matter

Here is the part most explainers skip. A stablecoin is only as good as the **chain it runs on**. The same USDC behaves very differently depending on the rail underneath it:

- On a congested general-purpose chain, a $5 transfer can cost more than $5 in fees at peak, and you need to hold a separate volatile token just to pay for gas.
- On a chain tuned for payments, the same transfer settles in under a second for a fraction of a cent.

That gap is why a new category of **payments-first** chains has appeared. **Tempo**, incubated by **Stripe** and **Paradigm**, is the clearest example: it has **no native token at all** — gas is paid directly in USD-denominated stablecoins — targets fees **under $0.001**, and reaches **deterministic sub-second finality**. The asset (the stablecoin) and the rail (the chain) were designed for each other rather than bolted together.

For a first-time reader, the takeaway is two-layered: a stablecoin is a dollar you can program and send anywhere; *which network you send it over* decides whether that feels like a wire transfer or like sending a text.

## What to read next

If you now understand *what* a stablecoin is, the useful next questions are *how* it holds its peg, *which* type to trust, and *which rail* to send it over. The links below go there — and the Tempo field guide picks up where the asset ends and the network begins.

## FAQ

**What is a stablecoin in simple terms?**

A stablecoin is a digital token that is meant to always be worth the same as a reference currency — usually one US dollar. Unlike Bitcoin, whose price moves freely, a stablecoin like USDC or USDT aims to stay at $1 by holding cash and short-term US Treasuries in reserve for every token issued.

**Are stablecoins safe?**

It depends on the design. Fiat-backed stablecoins from regulated issuers are as safe as the reserves and disclosures behind them; the largest are backed by cash and US Treasuries and publish attestations. Algorithmic stablecoins, which try to hold the peg with code rather than reserves, have failed catastrophically — TerraUSD lost its peg and erased about $40 billion in May 2022.

**What is the difference between USDC and USDT?**

Both are fiat-backed dollar stablecoins. USDT (Tether) is the largest by supply and dominates trading and emerging-market payments; USDC (Circle) is smaller, US-based, and positions itself around regulation and transparency. Both publish reserve attestations.

**Do stablecoins pay interest?**

The token itself does not. Issuers earn yield on the reserves (the Treasuries backing the coins), and that revenue is theirs. Users earn yield only by lending stablecoins through a separate protocol or product, which carries its own risk.

## Sources

1. [Circle — What is USDC](https://www.circle.com/usdc)
2. [Tether — Transparency & reserves](https://tether.to/en/transparency/)
3. [BIS — Bulletins on digital money & stablecoins](https://www.bis.org/publ/bisbull.htm)
4. [Paradigm — Tempo, a payments-first blockchain](https://www.paradigm.xyz/2025/09/tempo-payments-first-blockchain)

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Neutral, sourced explainer from tempowiki. Index: https://tempo.dataos.so/llms.txt