Why stablecoins exist
Crypto is volatile. Bitcoin can drop 10% in a day. If you want to "cash out" of a position but stay in the crypto ecosystem, you need an asset that holds its value. That's what stablecoins do — they maintain a 1:1 peg with the US Dollar.
Without stablecoins, every time you wanted to exit a trade you'd need to convert back to fiat through a bank. That process takes hours or days and involves fees. Stablecoins let you move to "cash" instantly, on-chain, 24/7.
How they maintain the peg
Fiat-backed (USDT, USDC)
For every token in circulation, the issuing company holds equivalent reserves — dollars, treasury bills, and other liquid assets. You can (in theory) always redeem 1 USDT or 1 USDC for $1 from the issuer.
Crypto-backed (DAI)
MakerDAO's DAI is backed by over-collateralized crypto deposits. To mint $100 of DAI, you lock $150+ of ETH. If the collateral drops in value, the system liquidates positions to maintain the peg. More decentralized, but more complex.
Algorithmic (historical)
UST (Terra) tried to maintain its peg through algorithmic balancing with the LUNA token. It collapsed spectacularly in May 2022, wiping out $40 billion. This approach has largely been discredited, though some newer designs are being explored.
The major stablecoins
- USDT (Tether). The largest by market cap ($110B+). Most traded. Most liquid. Used on virtually every exchange. Backed by reserves including treasuries, cash, and commercial paper.
- USDC (Circle). Second largest. Audited monthly. Fully backed by cash and short-term US treasuries. Considered more transparent than USDT.
- DAI (MakerDAO). Decentralized. Over-collateralized by crypto. No single company controls it. Favored by DeFi purists.
- FDUSD, PYUSD, GHO. Newer entrants from Binance, PayPal, and Aave respectively. Each with different backing and use cases.
How stablecoins are used
- Trading pairs. BTC/USDT, ETH/USDC — stablecoins are the quote currency for most crypto trading.
- Safe haven. During market crashes, traders swap volatile assets for stablecoins to preserve value.
- DeFi yields. Lending stablecoins on Aave or Compound earns interest (typically 3-8% APY).
- Payments. Fast, cheap, borderless dollar transfers — particularly useful for international remittances.
- Liquidity pools. Stablecoin pairs (USDC/USDT) offer low impermanent loss for liquidity providers.
Risks to be aware of
- De-peg risk. Stablecoins can temporarily lose their peg during market stress. USDC briefly dropped to $0.87 during the SVB bank collapse in March 2023.
- Regulatory risk. Governments are actively regulating stablecoins. Rules could change how they're issued or redeemed.
- Counterparty risk. Fiat-backed stablecoins depend on the issuer's solvency and honesty about reserves.
Stablecoins in practice
On Korvex, your demo account starts with USDT — the same stablecoin used on every major exchange. Trading pairs like BTC/USDT and ETH/USDT work exactly as they do in production environments. Understanding how stablecoins function is a fundamental part of learning crypto, and practicing on demo makes that understanding concrete.