Stablecoins: What They Are and How They Break

A stablecoin is a token designed to hold a constant value, usually one US dollar. They are the plumbing of crypto — the pair you exit into when you don't want to leave the ecosystem.

Three kinds, three risks

• Fiat-backed. USDT and USDC. Reserves held by the issuer. Risk: whether those reserves are real and redeemable.
• Crypto-backed. DAI. Overcollateralised with crypto. Risk: liquidation cascades when collateral crashes.
• Algorithmic. Terra's UST was the famous one. Risk: the whole design.

Why they break

UST did not break because of a hack. It broke because the mechanism holding the peg depended on confidence, and confidence is not collateral. When the peg slipped, the arbitrage that was supposed to restore it became the thing that accelerated the collapse.

Fiat-backed coins are sturdier but not immune. USDC depegged briefly in 2023 when a chunk of its reserves sat in a failed bank. It recovered — but the lesson landed: "backed by reserves" is only as good as the reserves.

What to watch

Check who issues it, where the reserves sit, and whether the issuer can actually redeem at par. And never treat a stablecoin as risk-free just because the price is boring.