The whole point of a stablecoin is in the name: a cryptocurrency that maintains a stable value, typically pegged to the US dollar. They exist because crypto markets are brutally volatile — if you want to sit in "cash" within the crypto ecosystem without converting back to fiat, stablecoins let you do that. They're also the backbone of DeFi lending, trading, and payments. But not all stablecoins are equally stable, and the difference matters enormously.
USDC (Circle) and USDT (Tether) are the two largest stablecoins. The model: for every token in circulation, the issuer holds an equivalent amount of US dollars (or dollar-equivalent assets like Treasury bills) in reserve. Want your $1 back? Redeem your USDC for $1. The peg holds because it's backed by real dollars.
USDC is generally considered more transparent — Circle publishes regular attestations of its reserves. Tether has a longer, more controversial history — for years it was accused of not holding full reserves. Both have generally maintained their peg, but USDC briefly depegged in March 2023 when $3.3bn of its reserves were held at the collapsed Silicon Valley Bank, dropping to $0.87 before recovering within days.
Algorithmic stablecoins try to maintain their peg without holding real collateral — purely through code and economic incentives. TerraUSD (UST) was the most prominent example. Its mechanism: 1 UST could always be redeemed for $1 worth of LUNA (Terra's native token), and vice versa. This arbitrage mechanism was supposed to maintain the peg.
In May 2022, large withdrawals from Anchor Protocol (which was paying 20% "yield" on UST deposits) created selling pressure. UST depegged slightly. Holders panicked and sold, creating more selling pressure. LUNA was minted to absorb UST, hyperinflating its supply. Within 72 hours, both UST and LUNA had collapsed to near-zero. $40 billion in market cap evaporated. Dozens of crypto companies that held UST went bankrupt.
The lesson that wasn't new: algorithmic stablecoins backed by nothing but reflexive mechanisms and confidence are not stable. They're only stable as long as confidence holds. Multiple algorithmic stablecoins had failed before TerraUSD — Basis Cash, Empty Set Dollar, Iron Finance. The collapse of Iron Finance (which inspired TerraUSD's design) was literally called "the first large-scale crypto bank run" — over a year before Terra collapsed.
DAI is the most established crypto-backed stablecoin. It's issued by MakerDAO's protocol when users deposit ETH or other approved crypto as collateral — always overcollateralised (you deposit $150+ of ETH to borrow $100 of DAI). If collateral falls below a threshold, the position is automatically liquidated. Unlike fiat-backed coins, DAI is fully decentralised — no company controls it.
For UK investors: USDC and DAI are the most trustworthy stablecoins for holding dollar exposure within the crypto ecosystem. USDT is widely used but carries higher counterparty risk. Algorithmic stablecoins — regardless of how compelling the mechanism sounds — have a near-perfect record of eventual failure. The 20% yields were not free money; they were the risk premium for holding an instrument that could go to zero.
Answer questions on stablecoins, earn XP, and challenge your mates to a stock duel.
Download free on iOS →