Why stablecoins exist
Bitcoin and most cryptocurrencies swing wildly in price. That is fine for speculation but useless for everyday purposes: nobody wants to be paid a salary in something that might lose 15% by the weekend, and traders need a stable place to park value between bets without cashing out to a bank. Stablecoins fill that gap. They are crypto tokens engineered to track a stable reference — almost always the US dollar, though euro and other pegs exist — so that one token is always worth about one dollar.
Because they live on blockchains, stablecoins move with the speed and openness of crypto while behaving like digital cash. They have become the dominant medium of exchange in crypto: most trading pairs are priced in stablecoins, and hundreds of billions of dollars of them circulate.
The three main types
Fiat-backed (the most common). A company holds real dollars and dollar-equivalent assets in reserve and issues one token for each dollar held. Tether (USDT) and USD Coin (USDC) are the giants. They are simple and reliable as long as the reserves are real and accessible — which means you are trusting the issuer and its auditors. The key risk is the reserve: are the dollars actually there, and can holders redeem at par?
Crypto-collateralised. Instead of dollars in a bank, these are backed by other crypto locked in smart contracts — and because crypto is volatile, they are over-collateralised, with more value locked than tokens issued. MakerDAO's DAI is the classic example. These are more decentralised and transparent (you can verify the collateral on-chain) but capital-inefficient, and a sharp crash in the collateral can stress the peg.
Algorithmic and synthetic. These try to hold the peg through algorithms, incentives, or hedged positions rather than full backing. This is the most experimental and most dangerous category. The 2022 collapse of TerraUSD (UST), which fell from one dollar to near zero in days and erased tens of billions, is the defining cautionary tale. Newer designs like Ethena's synthetic dollar use different mechanics, but the category demands extra scrutiny.
How stablecoins fail
The thing that can go wrong is a "de-peg" — the token trades away from its target value. This happens when the market loses confidence that the token can be redeemed for what it claims to be worth. USDC briefly de-pegged in March 2023 when part of its reserves sat in a failed bank; it recovered when those reserves were guaranteed. UST de-pegged and never recovered because there was nothing solid behind it. The lesson: a stablecoin is only as stable as the assets and trust behind it, and "stable" is a design goal, not a guarantee.
Stablecoins in India
Indian law makes no special exception for stablecoins. They are Virtual Digital Assets like any other crypto, despite barely moving in price. That has a counter-intuitive consequence: using a stablecoin is a taxable event. When you swap a coin into a stablecoin to lock in a gain, or move from one stablecoin to another, you have disposed of a VDA and the 30% tax and 1% TDS rules apply — even though the stablecoin's price is essentially flat.
Separately, India is developing its own central bank digital currency, the digital rupee (e₹), which is a different thing entirely — a sovereign liability issued by the Reserve Bank of India, not a private stablecoin. Stablecoins and CBDCs both aim for stable digital value but sit on opposite sides of the public/private line.