The point
A stablecoin is a crypto token built to hold a fixed value, usually one US dollar. The issuer holds reserves it says are worth at least the tokens in circulation. It promises to redeem a token for that value on request. What differs between stablecoins is what sits behind that promise, who can reach it directly, and who earns while everyone else waits.
The three ways a peg gets built
A stablecoin holds its dollar value one of three ways, and the difference explains almost everything else about it.
Fiat-backed
The issuer holds cash and short-term government debt worth at least as much as the tokens in circulation. These sit in accounts kept apart from the issuer's own operating funds. The issuer promises to redeem a token for a dollar on request. USDC and USDT are both built this way. The reserve is the entire mechanism. Remove it, and there is no peg left to hold.
Crypto-collateralised
The token is backed by other crypto rather than cash. That crypto sits locked in a smart contract, worth more than the token it backs. A fall in the collateral's price still leaves it over-collateralised, up to a point. The buffer is code rather than a bank account. The code sells the collateral automatically once the buffer gets too thin.
Algorithmic
There is no reserve at all. A second token and a set of trading rules are supposed to hold the peg, expanding and contracting supply against demand. In May 2022, an algorithmic dollar token lost its peg within days and never recovered it. The mechanism built to defend the price was the same one that kept selling into it.
What sits inside a fiat-backed reserve, and who earns on it
Take USDC, issued by Circle, as the working example. Its reserve is published rather than asserted. As of 21 September 2026, Circle's own transparency page lists the reserve behind USDC in four categories:
- Bank deposits held outside systemically important institutions
- Deposits at systemically important institutions
- Overnight reverse Treasury repurchase agreements
- Treasury bills maturing inside three months
These sit directly, in custodial accounts, or inside the Circle Reserve Fund, an SEC-registered fund managed by BlackRock. Source: circle.com/transparency, read 23 September 2026.
That reserve earns interest, the ordinary interest any holder of Treasury bills and bank deposits earns. None of it reaches the person holding the token. Circle's own terms for USDC are direct about this. The token "is not designed to intrinsically create returns for holders, increase in value, or otherwise accrue financial benefit to the USDC holder". Terms last updated 12 December 2025, read 23 September 2026. A dollar sitting in a wallet as a token holds still for the holder. The same dollar inside the reserve earns, for the issuer.
Who can actually redeem a stablecoin at par
The promise is redemption at par. But that door does not open the same way for everyone. Circle's own terms split USDC holders into two kinds. A holder who has opened a Circle Mint account, called "User Type A" in the terms, can send USDC back to Circle and receive dollars. Everyone else holds the status "User Type B" under those terms. A User Type B is not a Circle customer, and redeeming with Circle requires opening a Circle Mint account first (circle.com/legal/usdc-terms, read 23 September 2026).
Most people who hold a stablecoin never use that direct door. They sell the token on an exchange instead, at whatever price it happens to be quoting. That price matches the redemption price only as long as enough Mint-account holders keep arbitraging the gap shut.
Why an exchange gets paid to prefer one stablecoin over another
On 22 September 2026, Circle disclosed a deal with Binance. Binance bought 1,237,011 Circle shares for 100 million dollars, at 80.84 dollars a share. The two companies signed a five-year agreement. Under it, Circle pays Binance a monthly fee tied to how much USDC sits inside Binance's own wallet infrastructure. In exchange, Binance promotes USDC on its platform (CoinDesk, read 23 September 2026).
An exchange choosing which stablecoin to default to, to list first, to waive a fee on, is making a paid placement. The fee exists because Circle's own income depends on USDC balances staying inside wallets rather than moving to a rival dollar token. A reader deciding which stablecoin to hold is choosing between two promises that look identical on a screen, backed by two different reserves and two different redemption doors.
What a broken peg looks like, and what a stablecoin is not
A broken peg
A peg is a promise. It can slip in either of two places. The exchange price is whatever the last trade printed, and it drifts the moment sellers outnumber buyers, the same as any traded asset. The redemption price stays fixed at one dollar for whoever can reach it directly. A peg breaks when the gap between those two prices opens and stays open. Closing that gap needs someone able to redeem, willing to act, and confident the reserve is genuinely there. Remove any one of those three conditions, and the gap can sit open. That is what happened to the algorithmic design in May 2022. The mechanism meant to hold the price steady was the one driving it down.
Three things a stablecoin is not
- No deposit insurance. Deposit protection schemes cover a bank account up to a stated limit; nothing covers a stablecoin the same way, whatever the issuer's own balance sheet shows.
- No government counterparty. The promise behind a stablecoin belongs to a private issuer, never a central bank or a government.
- No guarantee beyond the report. A reserve report states what was held on the date it was checked. The token itself is a promise the issuer keeps only for as long as it can and chooses to.
What this means for a portfolio that holds an index
Two of Qatobit's four QSI indices, QSI Core and QSI Growth, hold a stable reserve (USDT Earn) as one of their stated assets. QSI Core holds Bitcoin, Ethereum, Gold and that reserve. QSI Growth adds Solana to the same four. The reserve is not there to pay the investor anything. It exists so the index has capital ready to redeploy when a monthly rebalance calls for buying crypto at a lower price, or trimming it at a higher one. What the reserve is for is stated. What it pays is never stated, because paying the investor was never its job.
A crypto index runs the same way. A published methodology, stated in advance, checked against what is actually held, rather than a discretionary call made after the fact. Moving rupees in and out of that index runs over bank rails instead of a stablecoin door, which sidesteps the redemption question this piece just walked through. Crypto trades around the clock, with no closing bell. So the gap between an exchange price and a redemption price is a live condition, moving for as long as the market stays open. The mechanics of how a stablecoin holds its peg and what counts as reserve backing go a layer deeper than either fits here.
Frequently asked questions
What is a stablecoin in simple terms?
A stablecoin is a crypto token built to hold a fixed value, usually one US dollar. An issuer holds reserves and promises to redeem tokens for that value on request. The peg is a promise backed by a reserve, checked against what the issuer actually holds.
What backs a stablecoin?
A fiat-backed stablecoin is backed by cash and short-term government debt the issuer holds apart from its own funds. A crypto-collateralised one is backed by other crypto, locked in a smart contract at more than the token's value. An algorithmic design carries no reserve at all, relying instead on a second token and a set of trading rules.
Who earns interest on stablecoin reserves?
The issuer does. Circle's own terms state that USDC carries no financial benefit for the holder. The interest earned on the cash and Treasury bills behind the token stays with the issuer.
Can a stablecoin lose its peg?
Yes, when the gap between the price an exchange is quoting and the price the issuer will actually redeem at opens and stays open. Closing that gap needs someone able to redeem directly, willing to act, and confident the reserve is genuinely there. Remove any one of those conditions, and the gap can persist.
Is a stablecoin the same as a bank deposit?
No. A stablecoin carries no deposit insurance the way a bank account does, whatever the issuer's balance sheet shows. The counterparty is a private issuer, never a government.
Crypto investments are subject to market risk. Not financial advice.
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