How Stablecoins Are Made: A Look Behind the Digital Dollar

Stablecoins are becoming a cornerstone of the digital financial world. Unlike typical cryptocurrencies that experience wild price swings, stablecoins are designed to hold a steady value—most often pegged to a fiat currency like the US Dollar. But the question many are asking is: how stablecoins are made and what keeps them truly “stable”? The process starts with the concept of collateral. Most stablecoins are backed by something—either traditional fiat currency, crypto assets, or even algorithms. For example, fiat-backed stablecoins like USDC or USDT are issued by centralized entities. These organizations claim to hold reserves in banks that match the total amount of tokens in circulation. Whenever someone buys a stablecoin, the issuer is supposed to deposit an equivalent amount of fiat into a reserve account. Crypto-backed stablecoins, on the other hand, are overcollateralized. This means users lock up crypto assets—like Ethereum—into a smart contract, which then mints stablecoins based on the collateral value. If the market shifts and the collateral value drops, users must add more funds or risk liquidation. Then there’s the algorithmic approach, which tries to maintain price stability through code, not collateral. These stablecoins use smart contracts that automatically adjust supply and demand. If the price dips below the target, the system reduces the supply. If the price rises, it increases the supply. While innovative, this model has faced criticism and failures, most notably TerraUSD. In every case, transparency and trust are key. Regular audits, smart contract security, and real reserve data are essential to maintain confidence in the coin’s value. Knowing how stablecoins are made helps users understand the risks and the mechanisms that support their stability. As stablecoins continue to grow in use, so too does the importance of building them right.