Definition
A stablecoin is a crypto token designed to hold a steady value against a reference such as the US dollar, usually through reserve assets or an algorithmic rule. It is not cash or a bank deposit, and its target value is not guaranteed.
How it works
Issuers of reserve-backed stablecoins say each token is supported by assets such as cash, deposits or short-term bonds, and some offer redemption at face value to approved customers. Crypto-collateralized and algorithmic designs instead rely on over-collateralization or code, which can fail under stress.
A token can trade away from its target when confidence in the reserves, redemption rights, issuer or market liquidity weakens. Reserve quality, audit disclosures, legal claims and who may redeem differ greatly by issuer and jurisdiction, so two tokens with the same target can carry very different risks.
Formula / convention
Peg deviation (%) = (market price ÷ target value − 1) × 100
Illustrative example
Illustrative: a fictional token called ExampleUSD targets 1.00 US dollar. If doubts about its reserves push its market price to 0.97, a holder of 10,000 tokens has a market value of 9,700 US dollars, 300 below the 10,000 target, or 3%. If redemption at 1.00 remains available to that holder the gap may close; if redemption is delayed or unavailable, it can persist or widen.
What to watch for
A stablecoin is not insured cash: its reserves may be lost, frozen or difficult to redeem, and holders may have no direct claim on the issuer. Read the issuer's published terms and the rules that apply where you are, because protections differ.