What is a stablecoin? A plain-English guide
Stablecoins are digital dollars that live on a blockchain. Here is how they keep their price, who issues them, and why they matter for anyone who wants to hold or move dollars.
By Luindy Editorial6 min read
A stablecoin is a cryptocurrency designed to hold a steady price, almost always one US dollar. Where Bitcoin might move ten percent in a day, a stablecoin is built to sit at $1.00 whether the market is calm or chaotic. That single property is why stablecoins have become the most used product in crypto: people want the speed and reach of a blockchain without the price swings.
If you hold USDC or USDT in a Luindy wallet, you are holding stablecoins. This guide explains what is actually behind that $1.00.
How the peg works
The most common design, and the only one Luindy supports, is the fiat-backed stablecoin. An issuer such as Circle (USDC) or Tether (USDT) holds real dollars and short-term US Treasury bills in reserve. For every token in circulation there is, in principle, one dollar of reserves. You can redeem tokens with the issuer for dollars, and that redemption right is what anchors the price.
When the market price of a token drifts below $1, traders buy it cheaply and redeem it for a full dollar, which pushes the price back up. When it drifts above, the issuer mints new tokens for a dollar each and the price comes back down. Most days the drift is a fraction of a cent.
Other designs you will hear about
- Crypto-collateralised stablecoins (like DAI) are backed by other crypto assets locked in smart contracts, usually with more than $1 of collateral per token.
- Algorithmic stablecoins try to hold the peg with code alone, by expanding and contracting supply. Several have collapsed, most famously TerraUSD in 2022. Luindy does not support them.
- Tokenised deposits are bank deposits represented on a blockchain. They are closer to a bank product than a crypto one and are mostly used between institutions.
Why people use stablecoins
Three reasons come up again and again. First, access to dollars. In countries with high inflation or capital controls, a stablecoin is often the easiest way to hold savings in dollars. Second, cheap, fast transfers. Sending $5,000 across a border by bank wire can take days and cost tens of dollars; on Solana it takes under a second and costs a fraction of a cent. Third, earning and borrowing. Because stablecoins are programmable, they can be lent at a fixed rate or used as collateral without leaving the blockchain.
What can go wrong
Stablecoins are not risk-free. The issuer could fail to hold adequate reserves. Regulators could restrict an issuer. A bank holding part of the reserves could fail, as happened briefly to USDC in March 2023 when Silicon Valley Bank collapsed; USDC dipped to about $0.88 for two days before recovering fully. And, like any crypto asset, a stablecoin sent to the wrong address or wrong network is usually unrecoverable.
Where to go from here
If you want to compare the two coins Luindy supports, read USDT vs USDC. If you are curious why we chose Solana as the network, read why we send stablecoins on Solana.