Stablecoin
A cryptocurrency designed to maintain a stable value, typically pegged 1:1 to the US dollar. Major stablecoins include USDC, USDT, and DAI. Stablecoins are the primary asset for crypto lending and borrowing.
Most crypto assets swing 10% in a day. Stablecoins don't — that's the whole point. They're designed to hold a fixed value, almost always $1, so you can earn yield, post collateral, or borrow against your crypto without riding a price rollercoaster.
For anyone using a crypto lending platform, stablecoins are the foundation. Lenders park USDC or USDT to earn interest. Borrowers take out stablecoin loans against their Bitcoin or ETH. Without stablecoins, crypto lending would be two volatile assets trading risk back and forth — not a lending market.
How It Works
Different stablecoins hold their peg in different ways. USDC and USDT are fiat-backed — for every token in circulation, the issuer claims to hold $1 in cash or cash equivalents in reserve. DAI is crypto-backed and overcollateralized: to mint $100 in DAI, you lock up more than $100 worth of ETH as collateral.
The overcollateralization in DAI is what keeps it solvent when ETH drops. If your collateral falls below a set threshold — say, a 150% collateral ratio — the system liquidates it automatically to cover the outstanding DAI. No human makes that call; a smart contract does.
On lending platforms, stablecoin supply rates fluctuate with demand. When lots of traders want to borrow USDC to go long on ETH, lenders earn more. When demand is low, rates compress. The rate you see today on Aave's USDC pool is a real-time reflection of borrowing demand in that pool.
Why It Matters
Stablecoins let you earn yield without taking on price risk. That's a meaningful distinction. If you lend ETH and ETH drops 40%, your dollar-denominated return looks very different than the APY suggested. Lend USDC instead, and your principal holds its value — the yield is the yield.
What is Overcollateralization?
Requiring borrowers to deposit more collateral than the loan amount. Most DeFi loans require 150-200% collateralization — you must deposit $150-$200 in crypto to borrow $100.
Full glossary entryThey also make borrowing predictable. A borrower taking a $50,000 USDC loan against their ETH knows exactly what they owe. A loan denominated in a volatile asset would be a moving target every day.
Bill's Take
In 25 years of mortgage lending, I never had to explain to a borrower that their loan balance might change because the dollar moved. That stability is so baked into traditional finance that we forget it's a feature. Stablecoins bring that same predictability into crypto — but the mechanisms holding that peg are not the same as a government-backed currency. Know what's backing yours.
What to Watch
Not all stablecoins are equally stable. Fiat-backed coins like USDC carry issuer risk — Circle can freeze individual addresses, and the reserves are only as trustworthy as the audits. Algorithmic stablecoins, which use code and incentives instead of real reserves to hold the peg, have a track record of catastrophic failure.
What is Smart Contract?
Self-executing code on a blockchain that automatically enforces the terms of an agreement. All DeFi lending protocols operate through smart contracts that handle deposits, loans, interest, and liquidations.
Full glossary entryNot All Pegs Hold
"Stablecoin" is a category, not a guarantee. USDC, USDT, DAI, and an algorithmic token all carry that label — and they do not carry the same risk. Before you lend or borrow against any stablecoin, find out exactly what backs it and what happens to that backing in a market crisis.
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