How stablecoins hold their peg
A stablecoin is only as stable as whatever stands behind it. The three main designs fail in entirely different ways, and the difference matters most precisely when markets are stressed.
Three designs, three failure modes
Fiat-backed tokens hold cash and short-term government paper with a custodian. The risk is not price volatility but access: whether redemption works, and whether the reserve is where the issuer says it is.
Crypto-collateralised tokens are overcollateralised with volatile assets. They survive ordinary drawdowns and are stressed by sharp ones, when liquidations cannot clear fast enough.
Algorithmic designs hold no meaningful collateral and defend the peg with mint-and-burn mechanics. This works while demand grows and unwinds violently when it reverses.
| Design | Backing | Main risk |
|---|---|---|
| Fiat-backed | Cash, T-bills at a custodian | Redemption and reserve transparency |
| Crypto-collateralised | Overcollateralised crypto | Liquidation cascade in fast drawdowns |
| Algorithmic | Little or none | Reflexive unwind when demand falls |
What a depeg actually shows
A small, brief deviation usually reflects thin liquidity on one venue rather than a problem with backing. Arbitrage normally closes it within hours.
A sustained deviation across venues is different: it means the market doubts redemption at par. At that point the question stops being technical and becomes a question about the issuer.
FAQ
Are stablecoins insured?
Generally no. Reserves held at a bank may carry deposit protection up to local limits, but that protects the issuer's account, not individual token holders.
Why do stablecoins pay yield?
Yield comes from lending the token out or from the issuer sharing reserve interest. Both introduce counterparty risk that the token itself does not have.