What Stablecoins Are and How They Hold Value

A stablecoin is a crypto token engineered to hold a steady value against a reference asset, most often the U.S. dollar, by backing each token with reserves or another supporting mechanism. The largest issuer, Tether, reported roughly $145 billion of U.S.-dollar-tethered tokens outstanding in its mid-2025 reserve attestation, making the instrument a core piece of crypto market plumbing.

Horison publishes information, not investment advice, and whether any crypto-related instrument belongs in a portfolio depends on individual circumstances this site cannot know. A stablecoin is a crypto asset with a specific design goal, not a bank deposit and not a money market fund. Crypto assets can lose most or all of their value quickly, and documented depegging episodes show that the stable prefix is a target, not a guarantee.

What Are the Main Collateral Models?

Stablecoins fall into three documented collateral models, distinguished by what stands behind the peg. Fiat-backed tokens hold cash and short-dated securities in custodial accounts. Crypto-backed tokens hold an overcollateralized pool of other crypto assets locked in smart contracts. Algorithmic tokens rely on arbitrage incentives and supply adjustments, typically without equivalent external reserves. Each model has produced both long-running tokens and documented failures.

The models answer the same question differently: what an owner can claim if everyone redeems at once. Fiat-backed issuers point to bank balances and Treasury positions; crypto-backed protocols point to code that liquidates collateral; algorithmic systems pointed to market incentives alone. The 2022 TerraUSD collapse, examined below, ended most confidence in the unbacked variant.

How Do Reserves and Redemptions Keep the Peg?

The peg of a reserve-backed stablecoin is an arbitrage condition, not a promise enforced by the blockchain. Because the issuer commits to redeem tokens at one dollar, any market price below one dollar lets traders buy tokens cheaply and redeem them at par, and any price above one dollar lets arbitrageurs mint new tokens and sell them. Redemptions pull supply down when the token trades weak; minting pushes supply up when it trades rich. The price stays near par only while that loop keeps functioning and while participants believe the reserves exist.

Reserve composition therefore carries the real risk. Tether's monthly attestations, prepared by the accounting firm BDO Italia, show a portfolio weighted toward U.S. Treasury bills, reverse repurchase agreements, and cash; Circle's USDC reports, issued through BDO since 2023 after earlier Grant Thornton engagements, describe a similar short-duration mix. Attestations verify holdings at a date and are not continuous audits, a limitation the reports state themselves. Reserve income is the business model: Tether reported about $13 billion of profit for 2024 on its interest-earning reserves, per its own disclosures in 2025.

What Happens When a Stablecoin Depegs?

Depegs are the mechanism's stress tests, and the record includes both recoveries and total failures. In March 2023, USD Coin fell to about $0.87 after Circle disclosed that $3.3 billion of its reserves sat at the failed Silicon Valley Bank; the token returned to par within days after federal authorities announced backstop measures for bank depositors on March 12, 2023. The episode documented how a stablecoin's peg inherits the banking system's own failure modes.

The failure case is TerraUSD. In May 2022, the token's arbitrage relationship with its sister token LUNA broke under redemption pressure, and UST fell from its $1 peg to under $0.10 within about a week, erasing roughly $40 billion of combined value in the two tokens. The collapse removed the largest algorithmic stablecoin from circulation and triggered a broader market decline and a wave of lender insolvencies later that year. Both episodes are standard reference points in regulatory analysis of the sector.

How Are Stablecoins Regulated?

Regulation moved from guidance to statute during the 2020s, with the United States completing a federal framework in 2025. The President's Working Group's November 2021 report recommended legislation requiring issuers to be insured depository institutions; New York had already chartered several issuers under its limited-purpose trust framework since 2015. The European Union's MiCA regulation subjected stablecoin issuers to reserve and disclosure rules from its full application date of December 30, 2024.

The U.S. framework arrived with the GENIUS Act, signed on July 18, 2025. The law restricts the term payment stablecoin to permitted issuers, requires one-to-one backing with cash and short-term Treasury-grade assets, mandates monthly public reserve disclosures certified by executives, and phases its compliance timetable in over the following roughly 18 months. State regimes remain in force alongside the federal pathway, and implementation rulemaking was still in progress as of late 2025.

What Roles Do Stablecoins Play in Crypto Markets?

Stablecoins serve as the market's cash leg. Exchange trading pairs quote prices in dollar tokens rather than in banks' dollars; lending and derivatives protocols accept them as collateral; and cross-border settlement in stablecoins runs on public chains with trillions of dollars of annual transfer volume, per Chainalysis market data through 2025. Because tokens move on the same rails as other crypto assets, they inherit those rails' properties: transfers settle in minutes, are final, and have no chargeback mechanism.

The same properties cut both ways. Fast final settlement is useful for commerce and remittances, and stablecoins became the most-transferred category of crypto asset by the mid-2020s in Chainalysis's tracking. But holdings sit with issuers or in self-custody outside the deposit insurance perimeter, and recourse depends on the issuer's redemption promise and the legal regime behind it. The market-structure role is documented; the instrument's safety remains a matter of issuer execution.

What Should Readers Weigh About Stablecoin Risk?

The documented risk factors are specific: the credit and liquidity quality of reserves, the frequency and depth of attestation, the enforceability of redemption rights, and the regulatory status of the issuer in a given jurisdiction. Depeg episodes in 2022 and 2023 traced to each of these in turn, from absent reserves to concentrated banking exposure. A stablecoin's blockchain layer did not fail in either case; the supporting structure did.

Stablecoins also sit inside the volatility disclosure that governs this site's crypto coverage. Crypto assets can lose most or all of their value quickly, and a dollar-pegged token is a designed exception whose design has failed before, not an eliminated risk. Readers evaluating any crypto allocation, stablecoin or otherwise, weigh the same questions: what backs the asset, who is accountable, and what the documented failure record shows.