Learn what stablecoins are, how they maintain their peg, and why they matter. This beginner's guide covers USDC, USDT, DAI, and how stablecoins are used in crypto lending and borrowing.
A stablecoin is a type of cryptocurrency designed to maintain a stable price, usually pegged to a traditional currency like the US dollar. While Bitcoin and other cryptocurrencies can fluctuate significantly in value from day to day, a stablecoin aims to always be worth approximately one dollar (or whatever asset it tracks).
If cryptocurrencies like Bitcoin are the volatile, high-growth frontier of digital money, stablecoins are the calm, reliable bridge between traditional finance and the crypto world. They combine the stability of the dollar with the speed, accessibility, and programmability of blockchain technology.
To understand why stablecoins were created, consider the challenges of using volatile cryptocurrencies for everyday financial activities.
Imagine you borrow the equivalent of $10,000 in Bitcoin. If Bitcoin's price doubles, you now effectively owe $20,000. If it halves, you owe only $5,000. This unpredictability makes volatile crypto unsuitable as a borrowing or lending currency. Merchants face similar problems: accepting payment in a currency that might lose 10% of its value overnight is risky.
Stablecoins solve this problem. They give users a dollar-equivalent asset that lives on the blockchain, meaning it can be sent globally in minutes, used in smart contracts, and traded around the clock, all while maintaining predictable purchasing power.
Not all stablecoins work the same way. There are three main approaches to maintaining a stable price.
These are the simplest to understand. A company holds real US dollars (or equivalent assets like Treasury bills) in a bank and issues digital tokens on a 1:1 basis. For every stablecoin in circulation, there should be one dollar sitting in reserve.
USDC (USD Coin): Issued by Circle, USDC is widely regarded as one of the most transparent stablecoins. Circle publishes regular attestation reports from independent accounting firms showing that its reserves match or exceed the number of USDC tokens in circulation. USDC is available on many blockchains, including Ethereum, BASE, Arbitrum, Polygon, and Optimism.
USDT (Tether): The oldest and most traded stablecoin by volume, USDT is issued by Tether Limited. It is available on virtually every blockchain and exchange. While Tether has faced scrutiny about the composition of its reserves, it has consistently maintained its peg and remains the most liquid stablecoin in the market.
Instead of holding dollars in a bank, these stablecoins are backed by other cryptocurrencies locked in smart contracts. Because crypto is volatile, these systems require over-collateralization: you might need to deposit $150 worth of crypto to mint $100 worth of stablecoins.
DAI: Created by MakerDAO (now Sky), DAI is the most well-known crypto-collateralized stablecoin. Users deposit assets like ETH into smart contracts called vaults and can then mint DAI against that collateral. DAI has maintained its dollar peg through multiple market cycles, demonstrating the viability of this approach.
These attempt to maintain their peg through algorithms and market incentives rather than collateral. When the price rises above $1, the system creates new tokens to increase supply. When it falls below $1, it reduces supply. This category has proven more risky. The most notable failure was Terra's UST in 2022, which lost its peg and collapsed entirely, wiping out billions in value.
For borrowing and lending purposes, fiat-backed stablecoins like USDC and USDT are the most commonly used due to their reliability and deep liquidity.
The mechanism depends on the type, but the core economics are similar across categories.
The primary force keeping fiat-backed stablecoins on their peg is arbitrage. If USDC trades at $0.99 on an exchange, traders can buy it cheaply and redeem it from Circle for $1.00, pocketing the difference. This buying pressure pushes the price back up. Conversely, if USDC trades at $1.01, traders can mint new USDC from Circle at $1.00 and sell it on the market, pushing the price back down.
Issuers like Circle and Tether invest their reserves in safe, liquid assets such as US Treasury bills and cash deposits. This ensures they can honor redemptions and provides transparency about the backing.
For crypto-collateralized stablecoins like DAI, smart contracts automatically liquidate collateral if its value drops too low relative to the stablecoins issued. This ensures the system always remains over-collateralized, protecting the peg even during market downturns.
Stablecoins are not limited to a single blockchain. Major stablecoins like USDC and USDT exist on numerous networks, including:
When you borrow stablecoins on Borrow by Sats Terminal, you can choose from multiple supported chains, letting you pick the network that best fits your needs in terms of fees, speed, and the DeFi ecosystem you want to interact with.
Stablecoins are the most common quote currency in crypto trading. Instead of trading Bitcoin against the US dollar directly, most exchanges pair crypto assets with USDT or USDC. This provides dollar exposure without the regulatory complexity of handling actual fiat currency.
This is where stablecoins truly shine. In decentralized finance (DeFi), stablecoins are the primary asset that people borrow. Here is the typical flow:
Platforms like Borrow by Sats Terminal aggregate rates from leading protocols like Aave v3 and Morpho Blue, helping you find the best borrowing terms without manually checking each protocol. No KYC is required, and your assets remain in a self-custodial wallet. To dive deeper, read our guide on cryptocurrency lending.
Sending stablecoins is faster and often cheaper than international wire transfers. A USDC transfer on BASE or Arbitrum settles in seconds and costs a fraction of a cent. This makes stablecoins attractive for cross-border payments, freelancer payments, and remittances.
Holders of stablecoins can earn yield by depositing them into lending protocols. Because there is strong demand to borrow stablecoins (from traders, DeFi users, and others), lenders can earn interest rates that often exceed traditional savings accounts.
During periods of market uncertainty, crypto traders often convert their holdings to stablecoins to preserve value without leaving the crypto ecosystem entirely. This is sometimes called "going to stables."
While stablecoins are designed to be stable, they are not risk-free.
Fiat-backed stablecoins depend on the issuing company properly managing reserves. If an issuer mismanaged funds, became insolvent, or faced regulatory action, the stablecoin could lose its peg. This is why transparency and regulation matter.
Governments around the world are actively developing stablecoin regulations. While increased regulation could add legitimacy, it could also impose restrictions on how stablecoins are used, issued, or redeemed.
Crypto-collateralized stablecoins rely on smart contracts, which are computer programs. If a bug were found in the smart contract code, it could potentially be exploited. Major stablecoins mitigate this through extensive auditing and bug bounty programs.
Although rare for major stablecoins, temporary deviations from the $1 peg can occur. In March 2023, USDC briefly traded below $0.90 after the collapse of Silicon Valley Bank, where Circle held a portion of its reserves. The peg was restored within days once the government guaranteed depositors at SVB.
Stablecoins are central to the concept of crypto-backed borrowing. If you hold Bitcoin and need liquidity, you can deposit your BTC as collateral and borrow stablecoins instead of selling. This strategy has several advantages:
Borrow by Sats Terminal makes this process straightforward. You connect your wallet, deposit Bitcoin or Bitcoin-equivalent tokens (BTC, wBTC, cbBTC, BTCB), choose how much USDC or USDT to borrow, and the platform shows you the best rates across Aave v3, Morpho Blue, and other protocols. Everything is self-custodial and requires no KYC.
To understand the full mechanics, see our guide on how Bitcoin-backed loans work.
| Feature | USDC | USDT | DAI |
|---|---|---|---|
| Type | Fiat-backed | Fiat-backed | Crypto-collateralized |
| Issuer | Circle | Tether | MakerDAO (Sky) |
| Transparency | Regular attestations | Quarterly reports | Fully on-chain |
| Market cap | Very large | Largest | Large |
| Networks | 15+ blockchains | 15+ blockchains | Ethereum + L2s |
| Primary use | DeFi, payments | Trading, liquidity | DeFi-native operations |
All three are widely available for borrowing on DeFi lending protocols, and Borrow by Sats Terminal supports USDC and USDT across multiple chains.
If you are new to stablecoins, here is a simple path to get started:
Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to the US dollar. They bridge the gap between traditional finance and the crypto world, enabling trading, lending, borrowing, payments, and savings without the volatility of assets like Bitcoin. The most widely used stablecoins, USDC and USDT, are backed by real-world assets and available on numerous blockchains. Whether you are trading, sending money internationally, or borrowing against your crypto holdings on platforms like Borrow by Sats Terminal, stablecoins are an essential part of the modern cryptocurrency ecosystem.
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Common Questions
Stablecoins are not dollars. They are digital tokens designed to track the value of a dollar (or another reference asset). Fiat-backed stablecoins like USDC are redeemable for actual dollars from the issuer, which helps maintain the 1:1 peg. However, they carry their own risks, including issuer risk and regulatory uncertainty, that traditional bank deposits do not.
