Stablecoins Deep Dive
Module 4 of DeFi
What Are Stablecoins?
Tokens designed to maintain stable value, usually pegged to $1 USD.
Market size: $130B+ (2024) Daily volume: $50B+ (more than most stocks)
Types of Stablecoins
1. Fiat-Backed (Centralized)
Real dollars in a bank account.
| Stablecoin | Issuer | Reserves |
|---|---|---|
| USDC | Circle | Cash, T-bills |
| USDT | Tether | "Reserves" (less transparent) |
| BUSD | Paxos | Cash, T-bills (discontinued) |
Pros: Simple, redeemable 1:1 Cons: Centralized, censurable, counterparty risk
2. Crypto-Backed (Decentralized)
Backed by over-collateralized crypto.
DAI (MakerDAO):
Deposit $150 ETH
Mint $100 DAI
150% collateralization ratio
Pros: Decentralized, transparent Cons: Capital inefficient, liquidation risk
3. Algorithmic (Experimental)
Maintain peg through supply/demand mechanics.
Price > $1: Increase supply
Price < $1: Decrease supply
Warning: UST/LUNA collapsed in 2022 ($40B lost)
The Terra/LUNA Collapse
What Happened (May 2022)
- UST was algorithmic stablecoin
- Large sell pressure broke the peg
- Death spiral: UST down → LUNA minted → LUNA down → repeat
- $40B wiped out in days
Lesson
Pure algorithmic stables are high-risk. Collateral matters.
Comparing Stablecoins
| Type | Example | Collateral | Decentralized | Risk |
|---|---|---|---|---|
| Fiat-backed | USDC | 100% USD | No | Bank failure, censorship |
| Crypto-backed | DAI | 150%+ crypto | Yes | Liquidation cascade |
| Algorithmic | FRAX | Partial | Yes | De-peg spiral |
Key Takeaways
- Fiat-backed dominates but is centralized
- Crypto-backed is trustless but capital inefficient
- Algorithmic is risky — Terra proved it
- No perfect stablecoin — all have tradeoffs