About $300 billion of stablecoins are in circulation in September 2026, and roughly 99 percent of them are pegged to the dollar. Trackers put the total between $291 billion and $303 billion, depending on what each counts as a stablecoin. The total matters less than the mechanics. How stablecoins work differs by design, the four main designs break in four different ways, and one of them has already broken completely.
How stablecoins work at the mint and redeem level
An issuer takes a dollar, holds it, and mints one token. Redemption reverses the trade: the token is burned and the dollar leaves the reserve. Supply tracks flows rather than prices, so a rising stablecoin total means people minted more than they redeemed.
The peg is not enforced by code. It holds through an arbitrage loop around the redemption promise: if the token trades at 99 cents, anyone who can redeem at par buys it and redeems for a dollar, and that buying closes the gap. The weight sits on “anyone who can redeem”. Direct redemption at the large issuers runs through verified institutional accounts with minimums in the hundreds of thousands. Everyone else exits through an exchange at whatever the order book offers, which is invisible on a normal day and decisive on a bad one.
Most supply still settles on Ethereum and Tron, which makes stablecoin activity part of Ethereum’s fee base, though how ether itself gets priced runs on separate drivers.
Four backing models, four failure modes
Fiat-backed coins are the market. USDT held about $183 billion in early September 2026 and USDC about $74 billion, together roughly 85 percent of everything outstanding. Reserves sit in short-dated Treasuries, repo, and bank deposits, so the failure mode is inherited rather than designed: if the bank holding the cash portion fails, the coin has a hole in it until someone fills it.
Overcollateralized crypto-backed coins hold more crypto than the dollars they issue, with automated liquidations defending the buffer. They handle ordinary volatility well and strain when prices fall faster than liquidations clear. Yield-bearing dollar tokens are a separate product that keeps getting called a stablecoin: they appreciate instead of holding a dollar, which is why trackers park about $16 billion of them outside the headline figure, and each carries the risk of whatever trade produces the yield.
Algorithmic coins hold no reserves. TerraUSD kept its dollar through a mint and burn loop with a companion token, LUNA, and paid about 20 percent on deposits to keep demand arriving. On 5 May 2022 LUNA traded above $80. Eight days later UST was worth about two cents, LUNA fractions of a cent, and roughly $40 billion had gone. Do Kwon was sentenced to 15 years in December 2025.
What breaks a peg
Terra was a design failing on schedule. The USDC episode of March 2023 is more instructive, because nothing about the design was wrong.
Circle disclosed on 10 March 2023 that $3.3 billion of the roughly $40 billion backing USDC sat at Silicon Valley Bank, about 8 percent of reserves. The coin fell to around $0.87 by the next morning and recovered within three days, once US regulators guaranteed SVB depositors. The reserve was never lost. The peg broke on a question about when it could be reached, and a fully backed coin can trade well below a dollar for as long as that question is open.
US rulemaking now says so directly. The FDIC’s proposal implementing the GENIUS Act says deposits held as reserves backing a payment stablecoin would not be insured to stablecoin holders on a pass-through basis. The dollars sit in a bank, and the holder of the coin is not the insured depositor. Under the same proposal, redemption has to complete within two business days.
How stablecoins work as payment rails
The volume headlines are close to meaningless. BCG and Allium went through about $62 trillion of 2025 on-chain stablecoin transfers and found roughly $4.2 trillion was economically meaningful once bots, contract routing and intermediary hops came out. Payments for goods and services came to $350 billion to $550 billion, under one percent of the gross figure, growing about 60 percent a year. Small and compounding describes it better than the trillions do.
Cross-border payroll is where the rail earns its place. A contractor in Buenos Aires or Lagos paid in USDC has spendable value in minutes for cents, against days and percentage points through correspondent banking. What the rail does not touch is everything above settlement: classification, local labor law, tax withholding, and the records an auditor asks for two years later. Payroll platforms absorbed that gap, and Deel is the clearest example, running compliance across 130 countries and reporting more than 10,000 contractors already taking stablecoin payouts. Settlement is the easy half of paying someone abroad, and it is the only half a stablecoin solves.
The rulebook lands in 2027
The GENIUS Act became law on 18 July 2025 and takes effect on the earlier of 18 January 2027 or 120 days after final implementing rules. The OCC proposed its framework in February 2026, covering licensing, reserves, redemption, capital and custody for permitted issuers. The FDIC followed in April, and Treasury’s proposal on who may offer or sell a payment stablecoin in the US is open for comment until 19 October 2026.
One provision gets less attention than it deserves: permitted issuers cannot pay interest or yield on the coin. The issuer earns the Treasury bill return on the reserve and the holder earns nothing, which is the whole business model and the reason issuer profits track rates. Anything advertising a yield on a dollar token is doing something else with the money, and that something else is where the risk moved. The EU regulates the same instruments under MiCA, so an issuer serving both markets satisfies both rulebooks.
A checklist before holding a balance
- Read the latest reserve attestation, and note who signs it and how often it appears.
- Check what the reserve holds, since Treasury bills and repo behave differently from bank deposits in a crisis.
- Find out whether you can redeem with the issuer directly or only sell on an exchange.
- Check the issuer’s jurisdiction and whether it is on a path to becoming a permitted issuer.
- Treat a yield-bearing dollar token as a different product, because it is one.
- Size a treasury balance the way you would size an unsecured exposure to one counterparty, and assume no deposit insurance reaches you.
How stablecoins work FAQ
Are stablecoins safe to hold?
Safer than volatile crypto and not the same as a bank deposit. The large fiat-backed coins have held their pegs through several bank failures and a market-wide crash, but they carry issuer risk, bank risk, and no insurance that reaches the holder. A working payments balance sits in a different risk class from six figures parked for a year.
Do stablecoins pay interest?
Not the coins themselves, and under the GENIUS Act permitted issuers cannot pay yield on them. Any dollar token advertising a return generates it somewhere else, through lending, basis trades, or tokenized funds. Those products can work. They are a different instrument, which is why trackers count them separately.
Are stablecoins backed one to one?
The fiat-backed ones are meant to be, and the large issuers publish monthly attestations. Attestation is not a full audit, and composition matters more than the ratio: a reserve of short-dated Treasuries and a reserve of deposits at one mid-sized bank both read as fully backed until the second is tested.
