Stablecoin
A cryptocurrency designed to maintain a stable value relative to a reference asset (usually the US dollar) — the primary medium of exchange in crypto markets, systemic plumbing of DeFi, and a growing force in dollar globalisation.
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What Is a Stablecoin?
A stablecoin is a cryptocurrency pegged to a stable reference value, almost always the US dollar at a 1:1 ratio. They allow crypto market participants to hold dollar-equivalent value on blockchains without exiting into traditional banking — essential for trading, lending, and DeFi operations.
Types of Stablecoins
Fiat-backed (centralised):
- Tether (USDT): ~$100B+ in circulation; backed by a mix of Treasuries, cash, and other assets; largest stablecoin by volume
- USD Coin (USDC): Issued by Circle; fully backed by Treasuries and cash; more transparent
- Backed by actual reserve assets held 1:1
Crypto-backed (decentralised):
- DAI/USDS: Issued by MakerDAO; over-collateralised with crypto assets
- Requires >150% collateral to maintain peg through price swings
Algorithmic (undercollateralised):
- TerraUSD (UST): Used algorithmic mechanisms to maintain the peg; collapsed spectacularly in May 2022 — $40B wiped out in days as the peg broke
Why Stablecoins Matter for Macro
The total stablecoin market cap (~$200B+) represents an extraordinary private demand for dollars outside the traditional banking system. Implications:
- Dollar globalisation: Billions of people in emerging markets use stablecoins to access dollars without a US bank account
- Treasury demand: USDT and USDC hold large amounts of US T-bills — they are now significant sovereign debt buyers
- Monetary policy leakage: Stablecoin creation creates dollar-denominated purchasing power that operates outside the Fed's direct control
Systemic Risk: The De-Peg
If a major stablecoin loses its peg (as UST did, and as USDC briefly did during the SVB crisis when Circle held reserves there), the contagion is immediate and severe:
- Crypto markets crash as stablecoin holders rush to exit
- DeFi protocols dependent on the stablecoin face cascading liquidations
- The 2022 UST collapse contributed to the broader crypto bear market
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