What is Stablecoin?

The mechanism that holds the peg is what distinguishes one stablecoin from another, and it is the only part worth understanding. A fiat-backed stablecoin holds reserves — cash and short-term government debt — with a custodian, and honours redemptions at par. A crypto-collateralised stablecoin is over-collateralised with volatile assets and liquidates positions when coverage falls. An algorithmic stablecoin holds its peg through supply adjustments rather than reserves, a design that has failed repeatedly and at scale.

The distinction matters because the risks are entirely different. A fiat-backed coin carries custody and counterparty risk: the peg depends on the reserves existing and being redeemable. A crypto-collateralised coin carries liquidation risk during sharp drawdowns. The three are often discussed as one asset class, and they are not.

For payments specifically, the relevant properties are settlement speed and finality rather than yield. A stablecoin transfer settles on-chain in seconds and cannot be reversed by the sender, which is the opposite of a card payment's chargeback window — an advantage for the merchant and a reason for the payer to verify the recipient before sending.