Understanding Stablecoins
Stablecoins aim to hold a peg, but backing models differ widely. You'll learn how collateral, algorithms, and regulation shape stability and risk.
Who Is This For?
- •Users parking funds in stable assets
- •DeFi participants using stablecoins as collateral
Learning Objectives
- 01Compare fiat, crypto, and algorithmic collateral models
- 02Identify warning signs of depegs and governance risk
- 03Select stablecoins that fit your risk tolerance
Collateral Models
How a stablecoin maintains its peg is the most important factor in its risk profile. Three main models exist, each with distinct tradeoffs.
Explore Collateral Models
Fiat-Backed
Each token is backed 1:1 by traditional assets held in regulated financial institutions.
PROS
- ✓ Simple 1:1 backing model
- ✓ Highly liquid on all exchanges
- ✓ Regulatory clarity in many jurisdictions
- ✓ Stable peg under normal conditions
CONS
- × Centralized: issuer can freeze addresses
- × Bank dependency: SVB crisis affected USDC
- × Requires trust in issuer and auditors
- × Not censorship-resistant
Quick Comparison
| Model | Risk | Decentralized | Capital Efficient |
|---|---|---|---|
| 🏦 Fiat-Backed | Low-Med | No | Yes |
| 🔐 Crypto-Backed | Medium | Yes | No (150%+) |
| 🤖 Algorithmic | Med-High | Varies | Yes |
Risks and Safeguards
Even “stable” coins can lose their peg. Understanding the risks helps you prepare and choose wisely.
Depeg Impact Simulator
See how a depeg would affect your holdings. Move the slider to simulate different scenarios.
Centralization Risk
Fiat-backed issuers can freeze your address or be forced to by regulators.
Liquidation Risk
Crypto-backed stables can trigger liquidations in crashes, potentially cascading.
Algorithm Risk
Algorithmic mechanisms can fail in death spirals when confidence drops.
Why Reserve Ratio Matters
A healthy stablecoin has reserves matching or exceeding circulating supply.
✓ Healthy: Reserves cover 100% of supply. All redemptions can be honored.
Choosing and Using
The right stablecoin depends on your use case and risk tolerance. Use this tool to find your match.
Find Your Stablecoin
Select what matters most to you:
Trading Float
Parking funds between trades. Need high liquidity and tight spreads.
DeFi Collateral
Borrowing against or providing liquidity. Need stability and wide acceptance.
Long-term Savings
Holding larger amounts. Consider diversifying and censorship resistance.
Stablecoin Best Practices
Common Mistakes & Gotchas
Stablecoins seem safe, but complacency is dangerous. Avoid these costly mistakes:
⚠️ Remember: “Stable” doesn't mean “risk-free.” Every stablecoin has assumptions that can break. Understand what you're holding and why.
Knowledge Check
Let's see how well you understand stablecoin mechanics and risks.
Why are crypto-backed stablecoins overcollateralized?
What is a major centralization risk of fiat-backed stablecoins?
Name one hybrid/algorithmic stablecoin:
What happened to UST (TerraUSD) in May 2022?
Why did USDC briefly depeg to $0.87 in March 2023?