A stablecoin is a digital token designed to hold a steady value against an ordinary currency, usually the US dollar. Most are backed by reserves held by the issuer, who promises to redeem one token for one dollar. That promise, and the reserves behind it, are what make the value stable rather than anything in the technology.
The name describes the goal rather than the mechanism, which is why the first useful question is what is making it stable.
For a business owner the answer matters, because it is also the answer to what could go wrong.
The common kind, and the only kind worth a business considering, is backed by reserves. A company issues tokens and holds assets against them, mostly cash and short-dated government debt, and promises that one token can always be redeemed for one dollar.
That promise is what does the work. If large holders can always redeem at a dollar, then anyone selling below a dollar on an open market is leaving money on the table, so the price is pulled back. The peg is an arbitrage, not a law of nature.
Which means the thing to understand about any stablecoin is who the issuer is, what they hold, and who can actually redeem. Those three answers are the risk.
| Kind | How it holds the peg | Business relevance |
|---|---|---|
| Reserve-backed | The issuer holds cash and short-dated debt, and redeems at par | The only kind in normal commercial use. USDT and USDC are both this. |
| Crypto-collateralised | Over-collateralised with other volatile crypto assets, liquidated if it falls | Works, but the collateral can fall faster than it liquidates. Rare in payments. |
| Algorithmic | A mechanism mints and burns to defend the peg, with no real reserves | Has failed catastrophically and publicly. Do not take payment in one. |
The distinction is not academic. The 2022 collapse of an algorithmic stablecoin wiped out its holders in days, and it is why reserve backing is the question rather than a detail.
A stablecoin is not a single object. USDT exists simultaneously on several blockchains, and the version on each one is a separate token that happens to be redeemable for the same thing.
This is the single most practically important fact for a business. The fee, the settlement time, the address format and the availability in a given country all depend on the chain rather than the token. Sending USDT to a correct address on the wrong chain is the most common way people lose money, and it is not the token fault.
It is also why any instruction to send stablecoins should name the chain in the same breath as the address, and why an invoice that does not is incomplete.
Stated plainly, because the honest version is short.
A stablecoin can trade below its reference currency, usually when the market doubts the reserves or redemption is disrupted. Major reserve-backed coins have wobbled and recovered. Recovery is not guaranteed.
Reserve-backed stablecoins depend on a private company holding real assets and honouring redemptions. That is a counterparty, with the ordinary risks of one, and it is a different risk profile from a bank deposit.
A confirmed transfer cannot be reversed by anyone. Sent to the wrong address, it is gone. There is no support desk that can undo it.
Regulation of stablecoins is changing in most major markets, and some tokens and chains are already restricted in some jurisdictions. What is available to your customers depends on where they are.
What matters is whether your customers can pay you this way, and what happens to the invoice when they do.
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This page is general information about how stablecoin payments work, not legal, tax or financial advice. How a stablecoin payment is treated for tax, VAT and reporting depends on your jurisdiction and your circumstances. Check with an accountant who knows both before changing how your business takes money.
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