A stablecoin is crypto designed to hold its value at 1 USD. The peg comes from real backing - dollars, Treasuries, or other crypto. Move the stress slider below and watch which type holds and which breaks. Real history is built into the numbers.
Stablecoin peg stress test
$1.00 peg
$1.00
USDT
Fiat-backed
$1.00
USDC
Fiat-backed (regulated)
$1.00
DAI
Crypto-backed
$1.00
UST*
Algorithmic
Stress level0% - Normal market
Numbers based on real depeg events. Algorithmic stablecoins (*) are shown for historical comparison - no major one is in use today.
Section 01 · Quick answer
What stablecoins are, why they exist, where they break
What it is
A cryptocurrency designed to hold value at 1 USD. The big three: USDT (Tether), USDC (Circle), DAI (MakerDAO). Total market cap over 200 billion USD.
Why it matters
Digital cash that moves 24/7 across borders for under 1 USD in fees. Used for trading, savings, payments. The bridge between crypto and the regular financial system.
Where it breaks
Issuer mismanages reserves. Bank holding the reserves fails. Smart contract bug. Spread holdings across at least two stablecoins for any meaningful amount.
Section 02 · The peg
How they stay at 1 USD
The trick is simple: every stablecoin you hold should be backed by something worth roughly 1 USD that the issuer can use to honor your redemption. The mechanism for what backs it varies by type, but the principle is the same. If users can always swap 1 stablecoin for 1 USD of real value, arbitrageurs keep the market price near 1.00.
When stablecoin trades above 1.00 on an exchange, traders mint new ones at the issuer for 1 USD and sell them above peg, pushing the price down. When it trades below 1.00, traders buy cheap and redeem with the issuer for 1 USD, pushing the price up. The peg holds as long as redemption actually works. When it stops working, the price detaches.
Section 03 · Three types
Three ways to back a stablecoin
Fiat-backed
USDT, USDC, USDe, FDUSD
Issuer holds real US dollars and short-term Treasuries in a bank for every coin. Largest by market cap. Trust = trust the issuer manages reserves honestly.
Crypto-backed
DAI, LUSD, crvUSD
Backed by over-collateralized crypto (typically 150% of issued amount). If collateral price drops, smart contracts auto-liquidate to maintain the peg. No bank involved, but vulnerable to crypto crashes.
Algorithmic (failed)
UST, IRON (defunct)
Used code-based supply expansion and contraction to balance the peg. No real backing. Worked until it did not. Every major attempt has collapsed. The model is considered broken.
Section 04 · History
When stablecoins broke
Three events shaped how the industry thinks about stablecoin risk. Each one taught a specific lesson.
May 2022
UST collapse - 60 billion USD wiped
Terra's algorithmic UST broke its peg and fell from 1.00 to 0.01 in three days. Triggered the 2022 crypto winter. Killed algorithmic stablecoins as a category. Lesson: a stablecoin without real backing is a confidence trick.
March 2023
USDC depegs to 0.87 during SVB collapse
Circle held 3.3 billion USD of USDC reserves at Silicon Valley Bank. When SVB failed, USDC fell to 0.87 for 3 days until the US government guaranteed deposits. DAI fell with it because DAI was 60% collateralized in USDC. Lesson: even regulated, audited stablecoins carry counterparty risk.
Ongoing
Tether reserve audits remain controversial
USDT has the largest market cap (~110 billion USD) but has been investigated and fined multiple times over reserve transparency. Reserves are now disclosed quarterly but with limited audit. USDT has held the peg through every crisis so far. Lesson: market trust matters as much as audited reserves.
Section 05 · Use cases
When to use stablecoins
Trading dry powder
Hold stablecoins between trades instead of converting back to bank fiat. Zero conversion fees, instant deployment when an opportunity appears. The 30% stablecoin allocation in trading rules.
Cross-border transfers
Send 10,000 USDT to anyone in the world in under 60 seconds for under 1 USD. SWIFT wires take 1-3 business days and cost 25-50 USD. The use case that drove stablecoin adoption in emerging markets.
Yield on idle cash
DeFi protocols (Aave, Compound) and centralized lenders pay 5-15% APY on stablecoin deposits. Bank savings rates rarely beat 4%. Tradeoff: smart-contract or counterparty risk replaces FDIC insurance.
Inflation hedge in soft currencies
In countries with currency controls or high inflation (Argentina, Turkey, Nigeria, Venezuela), USDT and USDC have become a way to hold dollars without a US bank account. Drives the bulk of P2P stablecoin volume.