Stablecoins explained: what actually backs them, and what makes them break

A stablecoin is a cryptocurrency built to hold a steady value, almost always one US dollar, so that people can move money on a blockchain without riding bitcoin’s swings. They have quietly become the plumbing of crypto: the dollar you park between trades, the rail that settles payments, and now the asset at the center of a new US law.

The global stablecoin market stood at roughly $302.8 billion on September 10, 2026, according to Stablecoin Beat, with Tether’s USDT and Circle’s USDC together controlling about 85 percent of supply. At that scale the word stable is doing a lot of work, so it is worth asking what actually holds the peg, and what happens when it slips.

What a stablecoin actually is

There are three families. Fiat-backed coins such as USDT and USDC hold reserves of cash and safe assets and promise to redeem each token for a dollar. Crypto-collateralized coins such as DAI are backed by other crypto assets, over-collateralized to absorb price swings. Algorithmic coins try to hold the peg through code and a paired token, with little or no hard collateral, and they are the most fragile of the three.

The scale is not theoretical. Visa’s onchain analytics team clocked a record $1.79 trillion in adjusted stablecoin transaction volume in June 2026 alone, most of it settlement rather than speculation. Tether’s USDT held about $183 billion in supply, roughly 60 percent of the market, with Circle’s USDC near $74 billion.

What actually backs the big two

USDC holds its cash at Bank of New York Mellon and the rest in the Circle Reserve Fund, a government money-market fund managed by BlackRock, and publishes monthly third-party reserve reports. USDT is more mixed: by Tether’s own disclosures, roughly three quarters sits in fiat-backed assets and about a quarter in bitcoin, precious metals and secured loans, with quarterly assurance reports and record US Treasury holdings reported in its January 2026 update.

Those differences in composition and transparency are exactly what matter on a bad day. Tether’s chief executive, Paolo Ardoino, argues the demand is structural, driven by people outside crypto who want dollars where local banking is slow or hard to reach.

Why one collapse was final and another was not

The clearest way to understand stablecoin risk is to compare two depegs. In May 2022, TerraUST lost its peg and never came back. It was algorithmic, backed not by reserves but by a mint-and-burn link to a sister token, LUNA. As confidence broke, LUNA’s supply exploded from about 342 million to roughly 6.5 trillion tokens, destroying its value and the only thing propping up UST. Around $60 billion evaporated, per crypto.news, with no recovery, because nobody will buy a token they cannot redeem.

In March 2023, USDC also broke its peg, falling to about $0.87 after Circle disclosed that $3.3 billion of its reserves were trapped at the failed Silicon Valley Bank. DAI followed it down to $0.85, because USDC made up more than half of DAI’s collateral at the time. But USDC recovered within days once US authorities protected the bank’s depositors and Circle regained access to the cash. As S&P Global and the Wall Street Journal both documented, the reserves were real; the problem was liquidity, not solvency.

That is the distinction to carry around. A depeg driven by a liquidity scare tends to recover if the reserves are sound and redemptions keep working. A depeg driven by missing collateral does not.

What the GENIUS Act now requires

US law finally has an answer to some of this. The GENIUS Act, passed in July 2025, requires issuers of payment stablecoins to hold 100 percent reserves in liquid assets such as cash and short-term Treasuries, to publish monthly reserve disclosures, and not to pay yield to holders, with a federal or state license required from January 2027. The Office of the Comptroller of the Currency published a 376-page proposed rule in February 2026 to implement it, covering reserves, custody, capital and disclosures.

Not every question is settled. Whether stablecoins can pay interest to users was one of the sticking points that helped stall the broader market-structure bill, the CLARITY Act, in the Senate. Even the freeze question is contested: Circle’s Jeremy Allaire has said a private company freezing user funds at its own discretion would create a moral quandary, while Tether has frozen tokens tied to hacks.

Our take

Fully backed is a spectrum, not a switch. Before trusting a stablecoin with real money, ask three plain questions: what exactly backs it, who verifies that and how often, and can you redeem it for a dollar on the worst day, not the average one. USDC and USDT dominate for different reasons, transparency versus reach, and the GENIUS Act is an attempt to make the honest answer legible. This is information, not investment advice, but the reserve and redemption terms are where the real risk lives.