Stablecoins are often marketed as the safest form of cryptocurrency. Pegged to stable assets like the U.S. dollar or gold, they promise the best of both worlds: the speed and freedom of crypto with the stability of fiat.
But after high-profile collapses like TerraUSD in 2022 and ongoing regulatory scrutiny, many investors are asking: Are stablecoins truly safe—or are they a hidden risk in your portfolio?
In this article, we’ll break down what stablecoins are, how they work, the risks involved, and how to choose the safest options in 2023.
What Are Stablecoins?
Stablecoins are digital assets designed to maintain a stable value by being pegged to a reserve asset, most commonly the U.S. dollar (USD). They aim to avoid the volatility associated with cryptocurrencies like Bitcoin or Ethereum.
There are three main types of stablecoins:
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Fiat-collateralized: Backed 1:1 by fiat currency reserves (e.g., USD in a bank account).
Examples: USDC, USDT, BUSD. -
Crypto-collateralized: Backed by other crypto assets, overcollateralized to absorb price swings.
Example: DAI (backed by ETH and other crypto). -
Algorithmic stablecoins: Use algorithms and smart contracts to manage supply and demand.
Example: (Defunct) UST—high risk.
Each type has a different risk profile and mechanism to maintain its peg.
Why Stablecoins Matter in 2023
Stablecoins serve multiple vital roles in the crypto ecosystem:
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Bridge between crypto and fiat
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Store of value during market volatility
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Stable currency for DeFi platforms
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Payment method for cross-border transactions
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Collateral in crypto lending and borrowing
In 2023, stablecoin use is rising on centralized exchanges, Web3 wallets, and global remittance services. However, their safety depends heavily on transparency, backing, and regulation.
Top Stablecoins in Use
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USDT (Tether)
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Market leader by volume
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Fiat-backed (but past controversy over reserves)
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Widely used but faces transparency concerns
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USDC (USD Coin)
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Issued by Circle (regulated U.S. firm)
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Fully backed by cash and short-term treasuries
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Popular in DeFi and preferred for transparency
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BUSD (Binance USD)
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Regulated by NYDFS (until 2023 phase-out began)
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Losing ground due to Paxos halting issuance
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DAI
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Decentralized and crypto-collateralized
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Peg maintained via MakerDAO protocol
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Popular among DeFi users
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FRAX, LUSD, TUSD
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Alternatives with various degrees of decentralization and collateral structure
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Are Stablecoins Really Safe?
While more stable than traditional crypto, stablecoins are not risk-free. Here’s why:
1. Reserve Transparency
Is the stablecoin fully backed—and by what? Some issuers, like USDC, publish audited reports. Others, like USDT, have faced allegations of insufficient or opaque reserves.
If the reserves backing a stablecoin aren’t truly there—or are locked in risky assets—the coin can depeg and collapse.
2. Regulatory Risk
Governments are closely watching stablecoins. In 2023, the U.S., EU, and other regions are drafting new rules. Some projects (like BUSD) have already been forced to halt issuance.
Investors face uncertainty: regulations may limit use, increase compliance burdens, or cause centralized coins to be delisted.
3. Smart Contract Risk (DeFi)
For algorithmic and decentralized stablecoins, bugs in smart contracts or faulty peg mechanisms can lead to a loss of value.
TerraUSD (UST) was a prime example of an algorithmic failure that wiped out $40 billion. The collapse exposed how quickly “stability” can vanish if the underlying mechanics fail.
4. Counterparty Risk
Centralized stablecoins rely on trust in the issuer and custodians. If the issuer is hacked, insolvent, or fraudulent, users may lose access to their funds.
Even reputable issuers could freeze wallets or block transactions if required by law—undermining the concept of censorship resistance.
5. Depegging Events
Temporary or permanent depegging can occur due to panic selling, lack of liquidity, or systemic failures.
Examples:
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USDC briefly depegged in March 2023 after Silicon Valley Bank exposure.
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UST collapsed entirely after losing its peg in 2022.
How to Choose a Safe Stablecoin
Here’s a checklist for evaluating stablecoin safety:
✅ Transparency: Does the issuer publish regular audits or attestations?
✅ Regulation: Is the issuer compliant with financial authorities?
✅ Backing: What assets back the coin? Are they high-quality and liquid?
✅ Reputation: Is the issuer trustworthy with a clean track record?
✅ Use Case: Are you using it for DeFi, trading, saving, or payments?
For most users, USDC remains the most transparent and safest fiat-backed option. For DeFi users prioritizing decentralization, DAI is a popular choice.
Should You Use Stablecoins for Savings?
Stablecoins are often used to park funds during bear markets or between trades. But using them for long-term savings comes with caveats:
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Unlike bank deposits, they’re not insured (no FDIC)
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Earnings from staking/lending stablecoins (e.g., 5%–10%) carry risk
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They rely on trust in the issuer or protocol
If you use stablecoins for savings, diversify across several, monitor news closely, and consider pairing with hardware wallets or self-custody options.
Use Cases for Stablecoins in 2023
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DeFi Yield Farming: Provide liquidity or earn interest on platforms like Aave or Compound
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Cross-Border Remittances: Send value globally without bank intermediaries
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Crypto On-Ramps: Easily swap between stablecoins and volatile assets
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Treasury Management: Businesses hold USDC for payroll, invoicing, and stable exposure
Stablecoins are no longer just a convenience—they’re a foundational layer of the digital economy.
Final Thoughts
Stablecoins are a powerful tool in crypto—but not without risk. While they offer a refuge from volatility and enable a range of financial services, they rely on trust in technology, issuers, and regulatory clarity.
To stay safe in 2023:
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Stick to reputable, audited stablecoins
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Avoid algorithmic coins with weak pegs
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Use cold storage or DeFi wallets when possible
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Stay informed on regulation and security events
By understanding how stablecoins work and how to assess their risk, you can use them wisely in your investment or DeFi strategy.