Stablecoins: uses and risks
What stablecoins are for, why they can lose their peg and what to check before holding them.
The essentials
What is it for?
Stablecoins let you move dollar-denominated value between platforms and apps, or wait without being directly exposed to BTC and ETH price swings. They can exist on several networks. "100 USDC" should always be read together with the network and the matching contract address.
In practice, they're mostly used to:
- Park value between two purchases, without going back to euros and a bank transfer.
- Send money abroad in minutes, at any time.
- Use DeFi: most lending, trading and liquidity pools run on stablecoins.
- Pay for some services or crypto cards.
The main stablecoins
| Stablecoin | Issuer | Currency tracked | Mechanism | In Europe |
|---|---|---|---|---|
| USDT | Tether | Dollar | Reserves declared by the issuer | Not MiCA-compliant: delisted or restricted on licensed platforms |
| USDC | Circle | Dollar | Reserves in cash and short-term US Treasuries | Issued in the EU under the MiCA regime |
| EURC | Circle | Euro | Euro reserves | Issued in the EU under the MiCA regime |
| DAI / USDS | Sky (formerly MakerDAO) | Dollar | Backed by deposited crypto and other assets | Decentralized, outside the licensed-issuer regime |
| USDe | Ethena | Dollar | Synthetic: hedged crypto positions | Different model, its own risks |
Decentralized and synthetic models are covered in Decentralized and synthetic stablecoins.
How is the peg maintained?
Models differ. Some tokens are issued by a company that describes its reserves and redemption mechanisms; others rely on crypto collateral or market mechanisms. These structures don't carry the same risk. Look at the issuer, the redemption terms, the reserve assets, the published reports, the network and any ability to freeze. Don't infer a stablecoin's strength from its name or its market cap.
The price can temporarily drift away from $1 on a market. Even when the issuer advertises redemption at par for eligible customers, an individual user may depend on a platform, access conditions, fees and the liquidity available to exit. USDC, for example, has official documents on its reserves, terms and risks; reading them is more useful than assuming a digital dollar is a bank deposit.
What MiCA changes in Europe
The European MiCA regulation governs stablecoins pegged to a single currency, called "e-money tokens". Their issuer must be licensed as a bank or an electronic money institution. Holders have a right to redemption at face value, at any time and free of charge. Neither the issuer nor the platform may pay interest on simply holding these tokens.
In practice: platforms licensed in Europe have delisted or restricted non-compliant stablecoins, including USDT, for their European customers. You can still hold USDT in a personal wallet, but buying, selling or converting it to euros from a regulated platform has become more complicated. If an app offers you a "yield" on your stablecoins, it comes from another activity, not from the issuer.
The four risks to look at
- Issuer and reserves: a failure, a rule change or a banking problem can disrupt redemptions.
- Market: the resale price can drift from parity, especially under stress.
- Network and contract: a token version, a bridge or a contract can add its own risk.
- Custody: if the token stays on a platform, you also depend on that platform.
Add a fifth one that's often forgotten: freezing. Centralized issuers like Tether and Circle can block tokens at an address, for example at the request of authorities. It's a protection against some thefts, but also a power the issuer keeps over your funds.
When a stablecoin lost its peg: two examples
- TerraUSD (UST), May 2022: this "algorithmic" stablecoin, with no real reserves, collapsed in a few days and never recovered its value. Billions of dollars were lost.
- USDC, March 2023: Circle had about $3.3 billion of reserves deposited at Silicon Valley Bank, which failed. USDC briefly fell to around $0.87 on markets, before returning to $1 when US authorities guaranteed the deposits.
These two cases show the difference between a model without solid reserves and a model backed by reserves but exposed to the banking system.
Example: "5% yield on my dollars"
If an app promises a yield for depositing USDC, that yield usually doesn't come from simply holding USDC. It comes from an additional activity: lending, a strategy, incentives or something else. You're therefore adding protocol, counterparty, liquidation or reward-token risk. Ask exactly where the yield comes from and how you get your money back. See Basis trade and yield-bearing stablecoins.
Frequently asked questions
What is a stablecoin?
A token designed to track the value of a currency, most often the US dollar (1 USDC aims to be worth $1). It's used to move dollars between platforms or to shelter from BTC and ETH volatility without going back to euros.
USDT or USDC: what's the difference?
Both target 1 dollar, but they're issued by different companies (Tether for USDT, Circle for USDC), with different reserves, reports and regulatory status. In Europe, the MiCA regulation governs stablecoins offered to retail users, which affects their availability depending on the platform. Check the issuer's documentation before choosing.
Can a stablecoin lose its value?
Yes. Its price can temporarily drift away from $1 during periods of stress, and a failure of the issuer or its reserves can cause a lasting loss. Decentralized or synthetic models add their own risks: see Decentralized and synthetic stablecoins.
Are there euro stablecoins?
Yes, several issuers offer euro-pegged stablecoins, such as Circle's EURC. They avoid EUR/USD exchange risk for someone who spends in euros, but their liquidity is often lower than that of dollar stablecoins.