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Stablecoins Explained: How They Work and Why They Matter in Crypto

· 2 min read

What are Stablecoins?​

As explained in the previous lesson, stablecoins are tokens pegged to the value of government currencies (most often the US dollar).
They can also be pegged to real-world assets like gold or silver.

The most popular stablecoins are:

  • USDT
  • USDC
  • BUSD

How Do They Stay at $1?​

Let’s take USDT (Tether) as an example:

  • Issued by Tether Limited
  • Backed by reserves of dollars and cash equivalents
  • For every 1 USDT issued → 1 USD is held in reserve

📌 Peg mechanism:

  • If USDT drops to $0.98, traders can buy it at a discount, redeem it for $1, and profit.
  • This arbitrage quickly pushes the price back to $1.

The same logic applies to USDC (issued by Circle) and BUSD (issued by Binance).

Centralized Stablecoins​

All three — USDT, USDC, BUSD — are centralized stablecoins.
This means:

  • They are issued by companies.
  • Companies comply with regulations.
  • They include a freeze function in their contracts.

👉 Yes, centralized issuers can freeze tokens directly in your wallet.

Why?

  • To comply with regulators.
  • Usually applied in cases of stolen funds or hacks.
  • Ordinary users are almost never affected.

Decentralized Stablecoins​

To avoid the risk of freezing, decentralized stablecoins exist.

Example: DAI (issued by Oasis/MakerDAO).

  • Pegged to the US dollar.
  • Backed by crypto collateral.
  • To mint 1 DAI → lock $1.50 worth of ETH.
  • Overcollateralization keeps DAI stable around $1.

Other examples: Frax, LUSD.
Their mechanisms are more complex (covered in PRO modules).

Where Are Stablecoins Used?​

Stablecoins are used everywhere in crypto:

  • Buying BTC, ETH, and other crypto on exchanges
  • In DeFi for lending, borrowing, yield farming
  • Across centralized and decentralized instruments

Which Stablecoin to Use?​

  • Short-term / everyday use: USDT or USDC are fine (buying, trading, DeFi yield).
  • Long-term holding: Avoid large balances in centralized stablecoins → risk of freeze (low, but real).
  • Consider decentralized options like DAI for higher safety.

Disclaimer: These materials are created for educational purposes only and do not constitute financial advice.