Stablecoins: fiat-backed vs. algorithmic
How stablecoins try to stay at $1, the difference between reserve-backed and algorithmic designs, and the lessons of the Terra/UST collapse in May 2022.
A stablecoin is a token designed to keep a steady price, usually $1. Traders use stablecoins to park money between trades without leaving crypto, and to move dollars across blockchains. Keeping a token at exactly $1 is called holding the peg. How a stablecoin tries to hold its peg decides how risky it is.
A fiat-backed stablecoin is issued by a company that says it holds reserves, such as cash and short-term government bonds, worth at least as much as all tokens in circulation. USDT (Tether) and USDC are well-known examples. In principle, one token can be redeemed with the issuer for one dollar.
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