Bitcoin and ether can change price sharply within a day. That volatility makes them difficult to use as a unit of account or short-term parking place. Stablecoins attempt to solve this by targeting a steady reference price, most commonly one US dollar.
The word stable describes a goal, not a guarantee. A stablecoin needs a mechanism that encourages its market price to return to the peg. The mechanism differs by design, and understanding it is more useful than trusting the name printed on the token.
Fiat-backed stablecoins are issued against assets held by a company or custodian. In the ideal case, one token can be redeemed for one dollar, and traders buy or sell when the market price drifts. Users depend on the issuer, its banks, the quality of reserves, redemption rules, and the accuracy of public reports.
Crypto-collateralised stablecoins use assets locked in smart contracts. Because crypto prices move, these systems normally require collateral worth more than the stablecoins created. If collateral falls too far, it can be liquidated to protect the system. This design is transparent on-chain but still exposed to market, oracle, and contract risks.
Algorithmic designs try to manage supply using incentives or a related token, sometimes with little dependable collateral. They can appear efficient during calm markets, yet confidence can unravel quickly. If everyone wants to exit at once and the promised redemption value is not available, the feedback loop can break the peg.
Stablecoins also differ in censorship controls, chain support, liquidity, legal claims, and technical bridges. Two tokens both trading near one dollar can therefore carry very different risks. It is worth checking the issuer, reserves, redemption path, contract permissions, and the network version you actually hold.
Stablecoins became a basic building block for on-chain trading, borrowing, and payments. Tomorrow we will explore the larger system built from these pieces: decentralised finance, usually shortened to DeFi.