A stablecoin is a cryptocurrency built to stay worth a fixed amount, almost always one US dollar. That is the whole promise: one coin, one dollar, always. So people stop asking questions and treat every coin with “USD” in the name as the same safe thing.
They are not the same. The name tells you the target. It tells you nothing about whether the coin can actually hit it. And in 2022, that gap erased around forty billion dollars in a few days.
What is the one question to ask about any stablecoin?
When a coin says it is worth a dollar, ask one thing: what happens if everyone tries to redeem at once?
The answer splits every stablecoin into two very different machines.
What is a collateralized stablecoin?
USDC and USDT are backed by reserves. The idea is straightforward. For every coin in circulation, there is supposed to be a real dollar, or a dollar-equivalent like short-term treasuries, sitting somewhere. You hand back the coin, you get the dollar. The peg holds because it is a claim on something real.
The thing to actually check here is not the concept, it is the reserves. Are they real, are they liquid, and does anyone independent verify them. USDC has leaned into audited, mostly-cash reserves. USDT held a murkier mix for years and got fined over what was actually in there. Same category, different level of trust, and the difference is the quality of what is in the vault. Collateralized is not automatically safe. It is only as safe as the collateral.
What is an algorithmic stablecoin?
UST was different in kind, not degree. It was not backed by a pile of dollars. It held its peg with code and a sister token called Luna. The mechanism let you always swap one UST for a dollar’s worth of Luna, and that arbitrage was supposed to keep the price at a dollar.
It works while confidence holds. The problem is what happens when it does not. The system was propped up further by Anchor, a protocol paying around twenty percent to anyone who parked their UST. Twenty percent, on a thing marketed as a stable dollar. That yield was the tell. There is no safe, boring way to print twenty percent.
What happened when UST lost its peg?
In May 2022, large withdrawals knocked UST slightly below a dollar. To defend the peg, the mechanism minted more Luna. More Luna meant a lower Luna price. A lower Luna price meant the backing behind UST was worth less, which broke the peg harder, which minted even more Luna. A doom loop.
This is a classic reflexive collapse. The thing holding up the peg was the price of an asset whose price depended on the peg holding. When trust cracked, both fed each other straight down. Luna went from the low nineties in dollars to effectively zero. UST never recovered. Money that people believed was sitting safe in a digital dollar was gone.
I learned this one the expensive way
I am not writing this from the sidelines. I lost six figures when UST went down.
Here is what I had done, and why it is such a clean lesson. My UST was parked in Anchor, earning that roughly twenty percent. That alone should have been the warning, and I have already told you it was. But I went a step further. Instead of selling to free up cash, I borrowed against my position in DeFi. It felt smart at the time. Keep the yield, keep the exposure, and get liquidity on top. Three good things at once.
Then the depeg hit, and here is the part that actually got me. It did not crash in a straight line. It slipped off the dollar, wobbled, and bounced back toward the peg for a moment. That little recovery is a trap. It whispers that the worst is over, that this is a blip, that holding was the right call. So I held. And being borrowed against the position meant unwinding was not a clean one-click exit anyway. Then the real collapse came, the doom loop I described above, and it went to zero.
The leverage did not just add risk. It made me slower to move at the exact moment moving was everything. I was not just exposed to UST. I was locked to it.
The lesson was worth what it cost, which is a generous way to describe six figures. Do not chase a yield that cannot exist safely. Do not add leverage to a position you have not stress-tested to zero. And when something that is supposed to be stable starts wobbling, the bounce is not your reason to relax, it is your window to leave.
The takeaways I actually use
Read the backing, not the ticker. “USD” in the name is marketing. What sits behind it is the product. Collateralized by audited reserves is a different risk than an algorithm and a promise.
Yield is a warning label. A stable asset paying far more than a real savings rate is not a free lunch, it is a description of the risk you are being paid to ignore.
Reflexive systems break fast. Anything held up by its own token price can unwind in a doom loop the moment confidence turns. It looks stable right until it is not, and then there is no floor.
None of this is anti-crypto. It is the same discipline I bring to any system: understand what is actually holding it up before you trust it to hold. A stablecoin is only as stable as the thing in the vault. Sometimes the vault is full. Sometimes the vault is a promise wearing a dollar’s clothes.
Common questions
What is a stablecoin?
A stablecoin is a cryptocurrency designed to hold a fixed value, almost always one US dollar. The name tells you the target it is aiming for. It tells you nothing about whether the coin can actually hit it, which depends entirely on what sits behind the peg.
What is the difference between collateralized and algorithmic stablecoins?
A collateralized stablecoin like USDC or USDT is backed by reserves: for every coin there is supposed to be a real dollar or dollar-equivalent you can redeem. An algorithmic stablecoin like UST was not backed by a pile of dollars; it held its peg with code and a sister token. Collateralized is a claim on something real. Algorithmic is a claim on a mechanism that only works while confidence holds.
Why did UST and Terra collapse?
UST kept its peg by letting you always swap one UST for a dollar's worth of its sister token Luna. When large withdrawals pushed UST below a dollar, the mechanism minted more Luna, which lowered Luna's price, which weakened the backing, which broke the peg harder, which minted still more Luna. That reflexive doom loop sent Luna to effectively zero and UST never recovered. A roughly twenty percent yield on Anchor had masked the risk the whole time.
Are stablecoins safe?
It depends entirely on the backing, not the ticker. A stablecoin backed by audited, liquid reserves is a different risk than one held up by an algorithm and a promise. The rule: a stable asset paying far more than a real savings rate is not a free lunch, it is a description of the risk you are being paid to ignore. Read what is in the vault before you trust it to hold.
