In this lesson you will learn to:
- Explain what a stablecoin tries to do.
- Describe the main ways stablecoins are designed.
- Distinguish stablecoins from CBDCs.
Why "stable"?
The native units of most public blockchains can change in value sharply. For many uses — such as recording a payment for a service — that is impractical. A stablecoin is a token designed to keep a steady value relative to something else, usually a national currency such as the euro or the US dollar.
Three broad designs
- Reserve-backed. An issuer holds assets such as bank deposits or short-term government bonds and promises to redeem each token for one unit of currency. Stability depends on the reserves really existing and being accessible.
- Crypto-collateralised. Smart contracts hold other crypto-assets as collateral, usually more than the value issued, and sell collateral automatically if its value falls too far.
- Algorithmic. A program tries to keep the value steady by adjusting supply, with little or no collateral. In 2022, a large algorithmic stablecoin lost its peg and collapsed within days, showing how fragile this design can be.
In every design, "stable" is a goal, not a law of nature. History includes several tokens that failed to hold their value.
Stablecoins and regulation
Because reserve-backed stablecoins look like private money, regulators treat them seriously. In the EU, the MiCA regulation has set rules for issuers of such tokens since June 2024: authorisation, reserve requirements, redemption rights and regular disclosures. Lesson 6.2 covers MiCA more broadly.
Central bank digital currencies
A central bank digital currency (CBDC) is a digital form of a country's money issued directly by its central bank — a digital equivalent of banknotes. It is a liability of the central bank, not of a private company.
- The Bahamas launched its "Sand Dollar" in 2020, one of the first retail CBDCs.
- China has run large-scale pilots of its digital renminbi (e-CNY).
- The European Central Bank has been preparing a possible digital euro. Its issuance would require EU legislation, which has been under discussion.
Most CBDC designs do not use a public, permissionless blockchain. Central banks generally want control over the system, so they use their own infrastructure, sometimes borrowing ideas from distributed ledgers.
Key differences
| Stablecoin | CBDC | |
|---|---|---|
| Issuer | Private company or smart contract | Central bank |
| Backed by | Reserves, collateral or an algorithm | The central bank itself |
| Typical infrastructure | Public blockchains | Central bank systems |
| Main debates | Reserve quality, redemption, oversight | Privacy, role of banks, design choices |
Key takeaways
- A stablecoin tries to keep a steady value against a currency, using reserves, collateral or algorithms.
- Stability is a design goal, and some stablecoins have failed.
- A CBDC is digital money issued by a central bank.
- Most CBDCs do not run on public blockchains.
Check yourself
What does a reserve-backed stablecoin depend on?
The issuer actually holding sufficient, accessible reserves and honouring redemptions.
Who issues a CBDC?
A central bank.
Do most CBDC designs use public blockchains?
No. They generally run on central bank–controlled infrastructure.
Sources
This lesson is for general education about how the technology works. It is not a recommendation to acquire, sell or hold any crypto-asset and is not financial advice.