What is a stablecoin? How USDT and USDC hold a $1 peg

Key takeaways

• Stablecoins are tokens built to trade at a fixed value, almost always one US dollar, and they hold that value through reserves plus a promise of redemption at par.
• Roughly $303 billion of stablecoins circulated on October 25, 2026, according to DefiLlama; USDT and USDC together account for about 84% of that.
• The peg is kept by arbitrage: approved firms can create (mint) new coins for $1 and redeem them for $1, so prices that drift away from $1 tend to get pulled back.
• Pegs can and do break. USDC fell to about 88 cents in March 2023, and the algorithmic TerraUSD collapsed in May 2022.
• The US GENIUS Act, signed on July 18, 2025, requires 1:1 reserves, monthly reserve disclosures and a ban on issuer-paid yield. Its rules apply from January 18, 2027 at the latest.

A stablecoin is a cryptocurrency built to trade at a fixed value, usually $1, because the issuer holds cash and short-term government debt and promises to redeem each token for a dollar. About $303 billion circulated on October 25, 2026, according to DefiLlama.

That simple promise hides a lot of machinery. This guide explains what a stablecoin is, the main types, how USDT and USDC actually hold their $1 peg, what happened when pegs failed, and how the US GENIUS Act now regulates issuers.

What is a stablecoin?

Most crypto assets, such as Bitcoin or Ether, swing in price every minute. A stablecoin is designed to do the opposite: to behave like digital cash that moves on a blockchain. People use stablecoins to move dollars between exchanges, to settle trades around the clock, to send money across borders, and to hold a dollar-like balance outside the traditional banking system.

Almost all of them track the US dollar. The Bank for International Settlements (BIS) noted in its 2025 Annual Economic Report that more than 99% of stablecoins are denominated in dollars. Euro, yen and Hong Kong dollar versions exist, but they are small. Bullquill has covered several of the newer ones, including HSBC's RedCoin Hong Kong dollar token on PayMe and Shinhan and SBI's plan to test yen stablecoin payments in Korea.

The three main types of stablecoins

1. Fiat-backed stablecoins

These are the dominant type. A company issues a token and holds an equal or larger amount of traditional assets, such as bank deposits, US Treasury bills, overnight repurchase agreements and money market fund shares. Tether's USDT, Circle's USDC, PayPal USD (PYUSD) and World Liberty Financial's USD1 all fall into this group. Their stability depends on the quality of the reserves and on whether holders can actually redeem.

2. Crypto-backed stablecoins

These tokens are backed by other crypto assets locked in smart contracts. Because crypto collateral is volatile, systems such as Sky's USDS and its predecessor DAI typically require users to deposit more value than they borrow (over-collateralisation) and automatically liquidate positions if collateral falls too far. Ethena's USDe takes a different route: it holds crypto collateral and offsets the price risk with short derivatives positions, which makes it a "synthetic dollar" that carries exchange and funding-rate risk.

3. Algorithmic stablecoins

Algorithmic designs try to hold a peg mainly through code that expands or shrinks token supply, often paired with a second, volatile token. They hold little or no outside collateral. TerraUSD (UST) was the best-known example, and its collapse in 2022 is the main reason regulators now treat this model with deep suspicion.

Largest stablecoins by supply

The table below lists the biggest dollar stablecoins by circulating supply. Figures are from DefiLlama's stablecoin dashboard, data as of October 25, 2026 (UTC); shares are calculated against DefiLlama's total of about $302.6 billion.

The concentration is striking: two issuers control about 84% of the market. That is why the reserve practices of Tether and Circle matter far beyond crypto trading desks.

How USDT and USDC hold a $1 peg

Minting and redemption

Fiat-backed stablecoins have a "primary market" and a "secondary market". In the primary market, approved customers (usually exchanges, trading firms and payment companies that have passed identity checks) send dollars to the issuer and receive newly minted tokens one for one. They can also send tokens back and receive dollars; the issuer then destroys, or "burns", those tokens. Retail users usually buy and sell stablecoins in the secondary market, on exchanges, where the price can move slightly above or below $1.

Arbitrage pulls the price back

The redemption promise is what anchors the price. If USDC trades at $0.995 on an exchange, a trading firm with redemption access can buy it cheaply and redeem it with Circle for $1, pocketing the difference. That buying pushes the price back up. If the token trades at $1.005, the firm can mint new coins for $1 and sell them, which pushes the price down. As long as redemption works and traders trust the reserves, these trades keep the market price very close to $1.

What sits in the reserves

Circle says most USDC reserves are held in the Circle Reserve Fund (USDXX), an SEC-registered government money market fund managed by BlackRock that can hold cash, short-dated Treasuries and overnight Treasury repurchase agreements, with the rest held as cash at large banks. Circle publishes weekly reserve holdings and monthly attestation reports from a Big Four accounting firm, according to its transparency page.

Tether reports quarterly. Its latest published attestation, prepared by BDO and released on July 31, 2026, showed total assets of about $187.75 billion against liabilities of about $183.64 billion as of June 30, 2026, leaving excess reserves of roughly $4.11 billion, down from $8.23 billion three months earlier, according to coverage of the report by ForkLog and Stablecoin Insider. Tether says most of its reserves sit in US government-backed instruments, alongside gold, Bitcoin and secured loans, which are riskier than Treasury bills.

Attestation is not the same as an audit

An attestation is an accountant's check that the reserves shown on a specific date match what the issuer reports. A full audit examines a company's financial statements and controls over a whole period, which is more thorough. Readers comparing stablecoins should note which kind of report an issuer publishes and how often.

When the peg breaks: USDC in 2023 and TerraUSD in 2022

USDC and Silicon Valley Bank (March 2023)

On March 10, 2023, Silicon Valley Bank failed. Circle disclosed that $3.3 billion of USDC's cash reserves, about 8% of the total, was held there. Holders rushed to sell, and USDC fell as low as about $0.88 on some venues, The Block reported. The peg recovered within days after the US Treasury, the Federal Reserve and the FDIC said in a joint statement on March 12 that all SVB depositors would have access to their money. The episode showed that even a well-reserved coin can wobble if part of its cash is stuck in a failing bank.

TerraUSD (May 2022)

TerraUSD was an algorithmic stablecoin that relied on being exchangeable with the volatile LUNA token rather than on cash reserves. In May 2022 it lost its peg and became nearly worthless. The US Securities and Exchange Commission later charged Terraform Labs and its co-founder Do Kwon with fraud, saying in its February 2023 complaint that the firm misled investors about UST's stability and promoted yields of up to 20% through its Anchor Protocol. The collapse wiped out tens of billions of dollars in value and pushed lawmakers worldwide to write stablecoin rules.

The BIS has argued that such episodes reflect structural limits. In its 2025 report, it concluded that stablecoins "fall short of requirements to be the mainstay of the monetary system", because their price depends on each issuer's credibility rather than on settlement in central bank money.

How the GENIUS Act regulates stablecoins

The Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act was signed into law on July 18, 2025, according to the White House. It is the first US federal framework for "payment stablecoins". Its main requirements include:

• 1:1 reserves: every token must be backed by high-quality liquid assets such as US dollars, short-term Treasuries and Treasury repurchase agreements, according to summaries by the White House and law firm Covington.
• Monthly disclosure: issuers must publish the composition of their reserves every month.
• No issuer-paid yield: issuers cannot pay interest or yield to holders just for holding the coin.
• Federal or state oversight: issuers with $10 billion or less outstanding may choose a state regime if it is certified as substantially similar to the federal one; larger issuers fall under federal supervisors such as the Office of the Comptroller of the Currency (OCC).
• Priority in insolvency: if an issuer fails, stablecoin holders' claims rank ahead of other creditors.
• Legal status: payment stablecoins from permitted issuers are excluded from the definitions of a security and a commodity, Covington notes.

The law takes effect on the earlier of January 18, 2027, or 120 days after regulators issue final rules. On October 21, 2026, the OCC issued the first final implementing rule, which keeps the yield ban but reviews third-party rewards programs case by case; Bullquill's report on the OCC's final GENIUS Act rule covers the details. The broader crypto market-structure bill is a separate fight: the CLARITY Act stalled in the Senate after a 49-50 vote in September 2026.

What it means

For everyday users, a stablecoin is only as stable as three things: the assets behind it, the issuer's ability to pay out redemptions quickly, and the legal protections if something goes wrong. Fiat-backed coins with short-term Treasury reserves and frequent public reports have held up best, but the 2023 USDC episode shows that even these can trade below $1 for a time.

For the financial system, the market has grown large enough to matter. With around $300 billion in circulation and most of it held in Treasury bills and repo, the BIS cites evidence that stablecoin inflows can push down short-term Treasury yields by a few basis points. The GENIUS Act is meant to make the sector safer by forcing transparent, liquid reserves, while the ban on issuer-paid yield is designed to keep stablecoins from competing directly with bank deposits. How strictly regulators enforce rewards programs before January 2027 will shape which coins, and which platforms, win the next phase.

For more coverage of the sector, see Bullquill's stablecoins topic page.

This article is for information only and is not investment advice.