What is a stablecoin, and what backs it?

What does the word stablecoin describe, and which value does it track?

A stablecoin is a crypto token built to keep a steady value, most often 1 US dollar. Prices of other tokens swing widely, and traders need a calm reference to measure gains, park cash, and quote prices. The stablecoin plays that role. It lives on a blockchain, so it moves between wallets and exchanges within minutes, around the clock.

An issuer creates new tokens when customers deposit dollars and removes tokens when customers redeem them. The issuer’s promise, that one token equals one dollar, is the whole product, so everything depends on what stands behind the promise. The rest of this page follows that question through each design, from full reserves to code and incentives.

Why do crypto traders use a stablecoin instead of cash?

Stablecoins settle at any hour, while bank transfers follow banking hours. A trader who sells Bitcoin on a Sunday can hold the proceeds in a dollar token and buy again on Monday without leaving the crypto market. Exchanges list most trading pairs against stablecoins, which turns the token into the common language of price quotes.

Lenders and DeFi protocols accept stablecoins as collateral and as the unit of loans. Companies in Singapore, ASEAN, and Hong Kong also use them for payments between accounts held at different banks. Each use adds a dependency, and a crash reveals how many parts of the market rely on one peg at once.

What backs a fiat-backed stablecoin and who holds the reserves?

A fiat-backed issuer holds reserves that match the tokens in circulation. According to Wikipedia, reserves can include short-term government bonds, commercial paper, repurchase agreements, and bank deposits, kept with a third-party custodian. FATF figures reported in October 2025 show that about 95% of stablecoins are fiat-backed, and about 97% of those are denominated in US dollars.

Reserve mix is the variable to read. Government bonds convert to cash fast, while commercial paper takes longer and bank deposits depend on the bank that holds them. A report that lists each asset class, its size, and its maturity lets a holder judge how quickly the issuer could pay redemptions in a rush. Detailed reporting is the first sign of a well-run reserve.

How does a crypto-backed stablecoin hold its peg?

A crypto-backed stablecoin uses other cryptocurrencies as collateral, often locked in smart contracts. Because the collateral itself swings in price, these designs lock more value than they issue. The extra value forms a buffer, so the token can keep its peg while the collateral moves within a range.

The buffer has limits. When collateral drops fast, the contract sells it automatically to repay the tokens, and that selling adds pressure in a crash. Holders of this design therefore depend on code, on price feeds called oracles, and on the liquidity available when liquidations start. The collateral ratio and the list of accepted collateral give a first view of the risk.

Which other stablecoin designs exist beyond fiat and crypto backing?

Commodity-backed tokens, such as PAX Gold and Tether Gold, track the price of a physical asset instead of a currency. They suit holders who want gold exposure on a blockchain, and their value moves with the commodity instead of staying near 1 dollar. The word stablecoin describes the ambition of the token more than its price path.

Algorithmic tokens hold no reserves, or only partial reserves, and use supply and demand rules to steer the price. The ECB suggests treating them as unbacked crypto-assets, according to Wikipedia. Their record in 2022 was weak, and a dedicated guide explains why. For this page, the key point is that backing is a spectrum from full reserves to none.

How do redemption and arbitrage hold a stablecoin at 1 dollar?

The peg rests on redemption and arbitrage. When a token trades below 1 dollar, approved participants can buy it cheaply and redeem it with the issuer for a full dollar, a profit that pulls the price up. When it trades above 1 dollar, they deposit dollars, receive new tokens, and sell them, which pushes the price down.

This loop works while redemption stays open and fast. Fees, minimum sizes, and eligibility rules decide who can use it. Ordinary holders often sell on an exchange instead of redeeming with the issuer, so the exchange price can drift while the issuer still pays par. In a crash, the speed of redemption and the trust in reserves decide how long the drift lasts.

How can you read a stablecoin’s backing before a crypto crash?

Start with 5 questions. What assets stand behind the token, and in what mix? Who holds them? How often does an outside party review them? Who may redeem, and at what minimum size? Which regulator supervises the issuer? Write the answers down with a date, and compare them each quarter to see whether the backing improves or weakens.

These questions apply to any stablecoin and keep the focus on structure instead of products. This page is general information, not investment advice. If your treasury touches stablecoins in Singapore, ASEAN, or Hong Kong, a 30-minute pre-diagnostic with EQOS Asia applies a structured score to your exposure.

Frequently asked questions

About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile