Back to: DeFi 101
Stablecoins are DeFi’s cash: dollars on-chain for trading, lending, and saving without volatility. But “stable” describes a mechanism, not a guarantee — and mechanisms differ enormously.
The three designs
| Type | Backing | Examples | Failure mode |
|---|---|---|---|
| Fiat-backed | Dollars/T-bills in custody | USDC, USDT | Custodian freeze, reserve doubt |
| Crypto-backed | Over-collateralized on-chain | DAI | Collateral crash cascade |
| Algorithmic | Code + confidence | (UST — collapsed) | Death spiral |
Due diligence in five questions
- What exactly backs each token — and who attests it, how often?
- Can the issuer freeze my balance? (Most fiat-backed: yes.)
- Has it ever depegged? How far, how long, why?
- Where does its yield come from — real revenue or token emissions?
- What happens to it if its chain halts for a day?
How beginners should use stables
– Hold operating cash and take profits in the most boring, most audited stables. – Split across at least two issuers/models — no single point of stable failure. – Treat 8%+ “stable” yields as risk labels, not gifts: the premium prices exactly the dangers above.
The Terra lesson (required history)
UST promised algorithmic stability, grew to tens of billions on 20% Anchor yields, then depegged and vaporized everything in days. The post-mortem fits one sentence: yield without a revenue source is a countdown, and “stable” was the marketing, not the mechanism.
Stablecoins are tools, not savings accounts. Diversify issuers, discount
> yield, and remember every peg is a promise someone must keep.
Next lesson: yield, staking, and farming — risks first.