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Contracts & tokens · 2 min read

What is a stablecoin?

By Oliver James Whitmore · Updated 20 October 2026

In one sentence

A stablecoin is a token designed to keep a steady value relative to something else — usually one national currency — by means of reserves, collateral or an algorithm.

A reserve-backed stablecoin: tokens are created when currency comes in and destroyed when it goes out.CustomerIssuercreates anddestroys tokensReservedeposits, short-term debt1,000 in1,000 tokensheldRedemption runs the other way: tokens back, currency out, tokens destroyed
A reserve-backed stablecoin: tokens are created when currency comes in and destroyed when it goes out.

How it works

There are three broad designs.

Reserve-backed stablecoins are issued by a company that holds assets such as bank deposits and short-term government debt. It creates tokens when customers hand over currency and destroys them when tokens are redeemed. Stability depends on the quality of the reserves, on redemption actually being available, and on honest reporting.

Crypto-collateralised stablecoins are created by smart contracts that lock up more crypto-assets than the value of the tokens issued. If the collateral loses too much value, the contract auctions it off to cover the tokens.

Algorithmic designs try to hold the value with supply rules instead of full backing. Several have failed; in May 2022 a large one, TerraUSD, lost its peg and collapsed within days.

In the EU, the MiCA Regulation sorts most stablecoins into two categories. E-money tokens refer to one official currency; asset-referenced tokens refer to other values or baskets. Their issuers need authorisation and must meet reserve and redemption rules, which have applied since 30 June 2024. Central banks and the BIS have also pointed out that stablecoins do not offer the same protections, or the same reliability as money, as bank deposits or central bank money.

A simple example

A customer gives an issuer 1,000 euros and receives 1,000 tokens; the issuer adds the money to its reserve. Later someone else hands back 200 tokens; the issuer pays out 200 euros and destroys those tokens. As long as reserves cover every token and redemption works, the two stay in step. If either fails, the "stable" value can break.

Common misconception

Misconception: A stablecoin is the same as money in a bank account.

In fact: A stablecoin is a claim on an issuer or a smart contract, with different rules and protections. It is generally not covered by deposit guarantee schemes, and "stable" describes what the design aims for, not a promise.

Where you meet it

  • Payments and settlement on public blockchains.
  • Rules for e-money tokens and asset-referenced tokens under MiCA.
  • Reports by central banks and the BIS.

Sources

This card explains a technical concept for general education. It is not a recommendation to acquire, sell or hold any crypto-asset, and it is not financial advice.