Stablecoin
Definition
A cryptocurrency designed to maintain a stable value by pegging to a reserve asset like the US dollar. Common examples include USDC, USDT (Tether), and DAI.
Stablecoins are cryptocurrencies engineered to maintain a consistent value, typically pegged 1:1 to the US dollar. They bridge the gap between volatile crypto assets and stable fiat currencies, enabling trading, lending, and payments on blockchain without exposure to price swings.
There are three main types: fiat-backed stablecoins (USDC, USDT) hold dollar reserves in bank accounts and treasuries, issuing tokens backed 1:1. Crypto-backed stablecoins (DAI) are over-collateralized by crypto assets locked in smart contracts. Algorithmic stablecoins use supply/demand mechanisms to maintain their peg without full collateral backing — these have a poor track record, as demonstrated by Terra/UST's collapse in 2022.
USDC (Circle) and USDT (Tether) dominate with combined market caps exceeding $150 billion. USDC is considered more transparent with regular attestations of its reserves, while USDT has faced scrutiny over its reserve composition. Both are widely used across centralized and decentralized exchanges.
Stablecoins are essential for DeFi — they serve as the base pair for most trading, the primary lending/borrowing asset, and the stable component in yield farming strategies. They also enable cross-border payments at a fraction of traditional wire transfer costs.
For tax purposes, stablecoins are still cryptocurrency and technically subject to capital gains tax when disposed of. However, since they maintain a $1 value, gains and losses are typically negligible unless the stablecoin depegs from its target.
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Frequently Asked Questions
Are stablecoins safe?
Fiat-backed stablecoins from reputable issuers (USDC, USDT) have maintained their pegs well, but carry counterparty risk — you're trusting the issuer to hold adequate reserves. The Terra/UST collapse showed that algorithmic stablecoins carry much higher risk. No stablecoin is risk-free.
Do I owe taxes on stablecoin transactions?
Technically yes — the IRS considers stablecoins as property, so each trade is a taxable event. However, since stablecoins maintain a ~$1 value, the gains/losses are usually minimal. Trading between stablecoins, or using them to buy other crypto, creates taxable events.