Part 6 of our "Crypto Explained Well" series. "Stablecoin" sounds like a promise. Whether it's a real one depends entirely on what's behind it, and one of the biggest collapses in financial history came from a stablecoin that had nothing behind it but code.
A stablecoin is a crypto token designed to hold a steady value, almost always one US dollar. They're the plumbing of crypto: how people park value without cashing out. But "designed to" is doing a lot of work in that sentence. The story of three stablecoins explains why some are genuinely stable and one wasn't at all.
The Backed Kind: USDT and USDC
USDT (Tether) and USDC (Circle) are fiat-backed stablecoins. The idea is simple: for every token in circulation, the issuer holds roughly one real dollar (or equivalent: cash, short-term government debt) in reserve. The token is stable because you can, in principle, redeem it for the real thing, and the reserves exist to honour that. These are the dominant stablecoins precisely because the model is boring and works: their stability rests on real assets, regular attestations, and the issuer's ability to redeem.
Worth knowing: that same issuer control means USDT and USDC can freeze a wallet, since the issuer governs the token. Stability and control come together; see Stablecoin Freeze for that side.
The Algorithmic Kind: TerraUSD's $40 Billion Lesson
TerraUSD (UST) was different. It wasn't backed by dollars in a reserve; it tried to hold its peg through an algorithm and a sister token (Luna), with code that minted and burned to push the price back to $1. It worked until it spectacularly didn't. In May 2022, confidence cracked, the mechanism spiralled the wrong way (the more UST fell, the more the system printed Luna, destroying its value), and tens of billions of dollars evaporated within days. It is the textbook case that "stable" is a claim, not a property, and that an algorithm holding a peg is only as stable as the confidence propping it up.
Ask what's behind the dollar
The single question that separates a safe stablecoin from a dangerous one is: what backs it? Real, audited reserves of cash and high-quality assets are a genuine cushion. An algorithm and a promise are not; they hold until the moment everyone tries to leave at once, and then they don't. MiCA and the other 2026 frameworks exist largely to force the first kind and ban the second. "Stable" in the name guarantees nothing; the reserves behind it are the only thing that does.
How the Rules Caught Up
After TerraUSD, regulators moved fast. The EU's MiCA now imposes reserve, redemption, and disclosure rules on stablecoin issuers, and the US GENIUS Act did the same in 2025. The effect is to push the market toward the backed model and squeeze out the algorithmic experiments. For the regulatory detail, see Stablecoin Regulation under MiCA.
Next in the series: Crypto and Divorce: How On-Chain Assets Get Split in an Italian Courtroom.
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