What Is a Stablecoin? USDT, USDC and Depeg Risk Explained
A stablecoin is a crypto token built to hold a steady value, usually $1. Learn how USDT, USDC and other stablecoins work, the main types and what depeg risk is.
Updated
A stablecoin is a cryptocurrency token designed to keep a stable value, most often one US dollar. Stablecoins such as USDT and USDC are the main unit of account in crypto trading. Most spot pairs and most perpetual futures are priced and margined in them.
Key takeaways
- Stablecoins are tokens that aim to track a reference asset, usually $1.
- The main types are fiat-backed, crypto-collateralized and algorithmic.
- USDT (Tether) and USDC (Circle) are the most widely used dollar stablecoins.
- A depeg is when a stablecoin trades away from its target value.
- Linear perpetuals are margined in stablecoins, so stablecoin risk is part of every trade.
How stablecoins keep their peg
Most stablecoins rely on redemption. If the issuer lets approved users swap one token for one dollar, and the reserves are trusted, then:
- If the token trades at $0.99, arbitrageurs buy it and redeem for $1.00.
- If it trades at $1.01, they create new tokens for $1.00 and sell them.
This two-way pressure keeps the market price close to $1, as long as redemption works and the market trusts the reserves.
Types of stablecoins
| Type | How it is backed | Examples | Main risks |
|---|---|---|---|
| Fiat-backed | Cash, bank deposits, short-term government debt held by an issuer | USDT, USDC | Issuer, bank and regulatory risk; reserve transparency |
| Crypto-collateralized | Crypto locked in smart contracts, usually over-collateralized | DAI | Collateral crashes, smart contract risk, liquidations |
| Algorithmic | Supply rules and a paired token, with little or no hard collateral | TerraUSD (UST), which collapsed in 2022 | Loss of confidence can cause a total collapse |
| Synthetic or hedged | Crypto collateral hedged with short perpetual positions | Various newer designs | Negative funding, exchange and custody risk |
The synthetic type is essentially a delta-neutral position packaged as a token, so its yield depends on funding rates.
What is depeg risk?
A depeg happens when a stablecoin trades meaningfully away from its target. Common causes:
- Reserve doubts: the market fears the backing is missing, illiquid or frozen.
- Banking problems: in March 2023, USDC traded well below $1 for a short time after Circle disclosed that part of its reserves was held at Silicon Valley Bank, which had failed. It returned to its peg after US authorities said all SVB deposits would be protected.
- Mechanism failure: algorithmic designs can enter a spiral where selling pressure destroys the collateral that supports them.
- Redemption limits: if only some users can redeem, or redemption is paused, the market price can drift.
Small moves such as $0.998 or $1.002 are normal and reflect supply and demand across venues.
Why stablecoin prices matter for arbitrage
Prices quoted in different stablecoins are not the same unit. Suppose:
- BTC/USDT trades at 60,000 USDT
- BTC/USDC trades at 60,060 USDC
This looks like a 0.10% gap. But if 1 USDT trades at 1.001 USDC, then 60,000 USDT is worth 60,000 × 1.001 = 60,060 USDC. There is no real spread: the difference is just the stablecoin exchange rate.
Before acting on a cross-stablecoin spread, check the stablecoin rate itself. ArbTide's arbitrage scanner compares USDT, USDC and USD markets directly, so small stablecoin price differences are part of the spread shown. The methodology lists this as a known limitation.
Stablecoins and perpetual futures
Most perpetual futures on centralized exchanges are USDT-margined or USDC-margined. Your margin, profit and loss are all held in that stablecoin. If it depegs, the dollar value of your account changes even when your position is flat. Some traders spread collateral across more than one stablecoin to reduce this concentration.
Stablecoin checklist
- Issuer and reserves: who issues it and what backs it?
- Redemption: who can redeem, and how fast?
- Liquidity: is it widely traded on the exchanges you use?
- Chain and contract: stablecoins exist on many blockchains; always verify the contract address.
- Regulation: rules differ by country and can affect which stablecoins an exchange lists.
Frequently asked questions
- What is a stablecoin?
- A stablecoin is a cryptocurrency token designed to keep a stable value, usually one US dollar. Most are backed by reserves such as cash and short-term government debt, or by crypto collateral held in smart contracts.
- What is the difference between USDT and USDC?
- Both are dollar stablecoins backed by reserves. USDT is issued by Tether and USDC by Circle; they differ in issuer, reserve reporting, regulatory setup and which exchanges and markets use them as the main quote currency.
- What does it mean when a stablecoin depegs?
- A depeg is when a stablecoin trades meaningfully away from its target value, for example at $0.97 instead of $1.00. It usually happens when the market doubts the reserves, redemptions are blocked, or the stabilizing mechanism fails.
- Can a stablecoin lose its value?
- Yes. Stablecoins carry issuer, reserve, banking, smart contract and regulatory risk. Algorithmic stablecoins have collapsed completely, and even reserve-backed ones have traded below $1 for short periods.