A stablecoin is a promise: the token should stay worth one dollar no matter what the rest of crypto does. That promise is only as good as what sits behind the token. Stablecoins hold their price three different ways, and each way fails in its own way.
Cash and short-term Treasuries
The biggest stablecoins, Tether’s USDT and Circle’s USDC, keep reserves in US dollars and short-term US government debt. Circle says USDC is fully backed and redeemable one-to-one for dollars. A business that sends Circle a million dollars gets a million USDC; when it wants the money back, the tokens are burned and the cash returns.
That redemption option is what anchors the price. If USDC trades below a dollar, a trader can buy it cheap and redeem it for a full dollar, then pocket the difference. The buying pushes the price back up. Most holders never redeem directly, but the option is what keeps exchanges honest.
Crypto collateral and futures hedges
Other stablecoins skip the cash. Crypto-backed coins such as DAI and USDS let users deposit more cryptocurrency than they borrow, sometimes $150 of ether for $100 of stablecoin. If the collateral falls too far, the system sells it. The extra collateral is the reserve.
Synthetic stablecoins take a third path. USDe from Ethena holds crypto and at the same time opens a short position, a bet that the same asset will fall. If the crypto loses value, the short gains roughly as much, so the two offset. The risk shifts to funding rates, the periodic payments that pass between traders in perpetual futures markets, which can turn negative and drain returns.
The yield goes to the issuer
Cash-backed issuers invest their reserves and keep the interest. A holder earns nothing from the issuer just for holding the token. That spread is the business model, and it explains why platforms that advertise stablecoin rewards pay those rewards from their own revenue rather than from the reserve.
Where the model breaks
Cash backing is no guarantee. In March 2023, USDC briefly traded near 87 cents after roughly $3.3 billion of its reserves sat at Silicon Valley Bank, which had just failed; the peg returned once US authorities guaranteed SVB deposits. Algorithmic coins are worse. TerraUSD, which tried to hold $1 through a trading mechanism with its sister token LUNA instead of reserves, collapsed below nine cents in May 2022 and never recovered. A coin can also break on one venue while holding on another, as USDe did on Binance in October 2025 during a market crash.
What US rules change
The GENIUS Act, signed on July 18, 2025 as Public Law 119-27, is the first US federal framework for payment stablecoins. It limits reserves to a narrow set of assets, including Treasury bills maturing within 93 days and overnight reverse repurchase agreements collateralized by Treasuries. Issuers must publish the monthly composition of their reserves, and they may not pay interest or yield just for holding the token. The law also states plainly that stablecoins are not backed by the full faith and credit of the United States and carry no FDIC deposit insurance.
Before you rely on a stablecoin, check what backs it and how often the issuer reports. A coin that reports its reserves monthly, in cash and Treasuries, is easier to judge than one whose backing is a hedge and a funding rate.
Adapted from Stablecoins Explained: How They Work and What Backs Them.