Stablecoins, explained: the $400 billion corner of crypto that tries not to move

The strangest thing about crypto's most volatile decade is that some of its largest coins are designed to do nothing at all. Stablecoins — tokens engineered to hold a fixed value, almost always one US dollar — are the plumbing of the entire market: the default trading pair, the parking spot between positions, the rails for moving dollars at blockchain speed. Understanding how the peg works, and how it fails, is core literacy now.

Fiat-backed: a dollar in a bank account, tokenised

The dominant model — USDT (Tether) and USDC (Circle) — is conceptually simple: for every token issued, the issuer holds roughly a dollar of reserves (cash and short-term US government debt), and stands ready to redeem tokens for dollars. The peg holds because arbitrage makes it hold: drift below $1 and buyers redeem for profit; drift above and the issuer mints more. The entire model rests on one question — are the reserves really there, and really liquid? — which is why reserve reporting is the battleground. The two giants differ meaningfully in structure, jurisdiction and disclosure history; our USDT vs USDC head-to-head lays the differences out.

Crypto-backed and algorithmic: the clever cousins

Crypto-collateralised stablecoins like DAI hold no bank account — they're backed by a surplus of other crypto locked in smart contracts, over-collateralised so the peg survives the collateral's swings. More transparent (the collateral is on-chain), but exposed to crypto crashes. Then there was the algorithmic model: no meaningful collateral, just a mechanism balancing supply against a sister token. Its defining specimen was Terra's UST, which in May 2022 spiralled from $1 to nearly zero in days, destroying tens of billions of dollars and its entire ecosystem. The lesson written in that wreckage: a peg is only as strong as what actually backs it.

When "stable" wobbles

Even collateralised pegs have stress-tested badly for hours or days. In March 2023, USDC briefly traded well under a dollar when part of its reserves sat in the collapsed Silicon Valley Bank — it recovered fully once US authorities guaranteed deposits, but the episode showed the failure path for even a conservative stablecoin runs through the traditional banking system it depends on. The practical reading: depegs of a few cents under stress are survivable and have happened; a depeg with no credible reserves behind it is a death spiral. Know which kind you're holding.

What Australians actually use them for — and the tax sting

Trading pairs, parking between positions, moving money across borders, and earning yield in DeFi — with an AUD wrinkle: because the big stablecoins track the US dollar, an Australian holding USDT is carrying AUD/USD currency risk that a true AUD stablecoin wouldn't have. And the sting almost everyone discovers late: swapping into a stablecoin is a CGT disposal like any other trade. "I moved to USDT, I didn't sell" is not how the ATO sees it — the gain or loss on what you swapped away is realised at that moment.

General information only, not financial advice. Stablecoins are not bank deposits and carry no government guarantee — reserve quality is everything.