Stablecoins

In brief

Stablecoins are tokens, not a single technical standard. Fiat-backed coins such as USDC and USDT depend on an issuer, reserves, redemption and the legal system around them. Crypto-collateralized coins depend on on-chain vaults, over-collateralization and oracles. Algorithmic designs depend on a mechanism that can break, as TerraUSD (UST) did in May 2022. A peg can slip (depeg). Attestations are not the same as a full audit. A token on one chain may be native issuance or a bridged copy. This article explains the models. It does not recommend a coin.

What “stable” does and does not mean

ethereum.org describes stablecoins as tokens designed to stay at a fixed value even when ETH moves. That is the design goal. Market price is whatever buyers and sellers pay. A coin can trade at $0.99 for months, gap to $0.90 in a panic, or collapse toward zero if the backing or the mechanism fails.

“Stable” does not mean:

• the issuer cannot freeze an address;
• you can always redeem at $1 in five minutes;
• reserves are risk-free;
• the token on every chain is the same legal claim;
• the coin is legal tender;
• the coin is a good investment.

It also does not mean all stablecoins are ERC-20s. USDC exists as an ERC-20 on Ethereum and as a mint under Solana’s Token Program, among other representations. The economic claim, if any, is to the issuer or the mechanism — not to the token interface.

Fiat-backed / reserve-backed coins

The usual story: an issuer takes dollars (or another currency), holds reserves, and mints tokens. Redeeming burns tokens and returns currency to eligible customers. Secondary-market traders keep the price near $1 by minting when the coin is rich and redeeming when it is cheap — if they have access to the issuer and the banking rails still work.

USDC, issued by Circle, is a useful public example of this model’s disclosures. Circle’s transparency page says USDC is redeemable 1:1 for US dollars and describes weekly reserve disclosure, mint/burn flows, monthly third-party assurance, and the Circle Reserve Fund. Those are issuer statements, not independent proof.

USDT, issued by Tether, follows the same broad issuer-and-reserve model. Tether’s transparency page says its fiat-denominated tokens are pegged 1-to-1, backed by reserves, and reported with typically daily circulation figures. A specific dated report is needed for any reserve breakdown; a live issuer dashboard is not a substitute.

Shared properties of this model:

• Counterparty risk. You depend on the issuer, its banks, and its willingness and legal ability to redeem.
• Custodians. Reserves sit at financial institutions or in a money-market fund, not “in the token.”
• Freezing. Issuers typically can blacklist addresses. That is a feature of the contract or mint authority, not a rumor.
• Access. Direct 1:1 redemption is often limited to vetted customers. Everyone else trades on exchanges and DEXs.
• Regulation. Applicable laws and issuer terms can change who may hold or redeem the coin.

Crypto-collateralized coins

Here the “reserve” is other crypto locked in a program. A user deposits ETH or another accepted asset, and the program lets them mint a stablecoin up to a collateral ratio. If the oracle price of the collateral falls, the position can be liquidated.

MakerDAO’s DAI (and later related tokens such as USDS on ethereum.org’s list) is the long-running example. ethereum.org classifies DAI / USDS as crypto-backed. The system is not “unbacked.” It is over-collateralized if the collateral list, the ratios and the oracles hold. It still has:

• smart-contract risk;
• oracle risk;
• liquidation-cascade risk;
• governance risk over parameters and collateral types;
• exposure to any fiat stablecoins that later entered the collateral mix (a hybrid many “decentralized” coins eventually became).

This is closer to a secured loan book than to a bank deposit.

Algorithmic and mechanism-based coins

Some designs try to hold a peg with little or no exogenous collateral: a mint-and-burn relationship with a floating token, a seigniorage share, a rebase. When demand for the stablecoin falls, the mechanism must absorb that demand — often by minting more of the floating token. If confidence breaks, both sides can spiral.

TerraUSD (UST) is the case that must be described carefully.

Research by Jiageng Liu, Igor Makarov and Antoinette Schoar, summarized by MIT Sloan, and on-chain analysis by Chainalysis describe a run in May 2022. UST was an algorithmic dollar on the Terra chain, tightly linked to LUNA and supported by a 19.5% advertised yield on the Anchor lending protocol. On 7 May, large Anchor withdrawals began; separately, Terraform Labs removed UST from Curve’s 3pool as part of a planned pool move, thinning that market before large swaps broke the peg. Over subsequent days the peg failed, LUNA was minted rapidly as holders exited UST, and the Luna Foundation Guard sold bitcoin reserves trying to defend the peg. Chainalysis says those reserves were depleted by 10 May. UST traded far below a dollar and LUNA collapsed. MIT Sloan’s research summary describes the episode as wiping out $50 billion in valuation; that is the authors’ estimate, not an official loss total or a claim that every holder realized that amount.

The lesson is mechanical, not moral: a peg that depends on continuous demand for a companion token can fail in a run, and a bitcoin reserve is not the same thing as a redeemable cash reserve if it can be exhausted in a few days.

Redemption, reserves, attestations

Redemption is the right (for someone) to turn tokens into the reference asset at a stated rate. If only a few institutions can redeem, the peg for everyone else is a market peg, held by arbitrage — until banking hours, compliance, or a run get in the way.

Reserves are the assets said to back circulating tokens. Quality matters: cash at a systemically important bank is not the same as commercial paper, affiliated loans, or the issuer’s own token.

Attestation / assurance is an accountant’s engagement on defined management assertions or selected information under a stated standard. It is not automatically a financial-statement audit of the whole company, and it is not a promise about tomorrow. Read the report’s scope and qualifications, not only the issuer’s headline.

The December 2025 USDC report was inspected for this review. Deloitte examined Circle management’s assertion that reserve fair value was at least USDC in circulation at two report dates under AICPA attestation standards. The attached reserve report listed the assets, while management remained responsible for it. Tether’s 31 December 2025 report was also inspected: BDO Advisory Services performed a reasonable-assurance engagement under ISAE 3000 (Revised) on selected financial figures and reserves. BDO expressly limited its assurance to that point in time and noted that the report was not the company’s financial statements. These reports are stronger evidence than issuer marketing, but their scope still matters.

An attestation that “reserves ≥ circulation on 31 March” does not prevent a depeg on 1 April if the bank holding the cash fails, if redemption is gated, or if the market does not believe the next report.

Depegging and other failures

A depeg is a market price away from the target. Causes include:

• doubt about reserves or redemption;
• a bank or other reserve intermediary failing;
• a run on an algorithmic mint;
• thin on-chain liquidity for a bridged copy;
• an issuer freeze or a chain halt.

Depegs can be brief or terminal. A 50-basis-point wiggle in a deep market is not the same event as UST at ten cents.

Native versus bridged

The “same” ticker can be:

• native issuance by the issuer on that chain;
• a bridged representation locked on chain A and minted on chain B;
• a wrapped token from a third party.

A bridged USDC is only as good as the bridge and the lockup. Circle has moved toward native issuance on many chains (its attestation language lists approved blockchains). Users who hold a bridged copy do not automatically hold the issuer’s claim. See also Layer 2 on bridges.

Regulation

Rules differ by jurisdiction and by the coin’s structure. The BIS Committee on Payments and Market Infrastructures, with IOSCO, published guidance applying the Principles for Financial Market Infrastructures to systemically important stablecoin arrangements in July 2022. A 2025 BIS Annual Economic Report chapter argues that stablecoins fall short of its “singleness, elasticity and integrity” tests for the mainstay of a monetary system. Those are official-sector views, not market prices. They matter because redemption is a legal and banking fact as much as a smart-contract fact.

What this article is not saying

No coin is recommended. Market-cap tables are not safety rankings. “Decentralized stablecoin” is a claim to check against collateral, oracles, governance and any hidden fiat backing. A wallet balance of $1.00 is a display. The risks are in the issuer, the mechanism, the chain and the bridge.