How it works
The issuer of a fiat-backed stablecoin holds one US dollar of cash, treasuries, or short-term debt for every token in circulation. When you redeem, the issuer burns the token and releases the dollar. Algorithmic stablecoins try to maintain the peg via mint-and-burn arbitrage with a sister token, they have a poor live-fire track record.
Example
USDT (Tether) and USDC (Circle) are the two largest fiat-backed stablecoins. Both target $1.00. USDC publishes monthly attestations of its reserves. USDT publishes quarterly attestations with less detail. Both occasionally trade at $0.999 or $1.001 in the open market, snapping back via redemption arbitrage.
Why it matters
Stablecoins are the on-ramp and off-ramp between fiat and crypto. They settle 24/7 in seconds at a few cents of cost, vastly faster and cheaper than bank transfers. They also expose holders to issuer counterparty risk: if the reserves are mismanaged, the peg breaks. Pick stablecoins with transparent reserves and significant on-chain liquidity.
