How do stablecoins work?

Stablecoins are cryptocurrencies designed to hold a roughly constant value — most commonly pegged to the US dollar (1 USDC ≈ $1). They solve a real problem: Bitcoin and Ethereum swing wildly, which makes them awkward for payments or as a store of value. A stablecoin gives you the speed and programmability of crypto without the volatility. The "how" depends on which of the four main designs it uses:

Fiat-collateralized (USDT, USDC) — the most common. Every token is supposedly backed 1:1 by real dollars (or equivalent) held in a bank account. You deposit $1, get 1 token; redeem the token, get ~$1 back. The issuer earns interest on the reserves. The main risk is trust: you have to believe the reserves actually exist and are properly audited — there's no on-chain way to verify a bank balance.

Crypto-collateralized (DAI) — backed by other crypto assets instead of dollars. You lock up, say, $150 of ETH as collateral to mint $100 of DAI. The over-collateralization (150% here) absorbs price drops in the collateral. This is decentralized and transparent — everything happens on-chain via smart contracts — but it ties up capital and can be fragile in a crash if collateral gets liquidated en masse.

Commodity-collateralized — backed by physical assets like gold (e.g. PAXG). Same idea as fiat-backed, just with a different underlying. Less common.

Algorithmic — no collateral at all; the peg is maintained by code that expands or contracts the token supply based on price. If the price is above $1, mint more tokens; if below, burn them. These have mostly been a disaster — Terra's UST collapsed to near zero in 2022, and many others have de-pegged. The lesson most people take from that era is that an unbacked algorithm pegging to a currency is extremely fragile.

A few honest caveats worth keeping in mind:

• Stable ≠ risk-free. Every design carries risk: the issuer's bank reserves (fiat-backed), collateral volatility and liquidation cascades (crypto-backed), or outright collapse (algorithmic). During market stress, even big ones can briefly de-peg from $1.
• The 2022 precedent. UST's collapse showed that a stablecoin losing confidence can spiral fast, and that "1 UST = $1" was a social convention, not a law of physics.

If you want to compare the actual current state of specific stablecoins — market caps, which ones hold their peg best right now, where each trades — I can pull live data on USDT, USDC, DAI, and others. Just say the word.