Stablecoin Design

01 · Concept — what problem does it solve?

Crypto needs a stable unit of account — somewhere to sit between trades, a denominator for loans, a medium for payments — without leaving the chain. A stablecoin is any token engineered to hold a peg (almost always $1). The whole design space is one trade-off: what backs the peg, and who do you have to trust for it to hold? As of 2026 stablecoins are a ~$320B asset class, the most clearly product-market-fit thing crypto has produced.

02 · Mechanics

• Fiat-backed (USDT ~$190B, USDC ~$78B): one token, one dollar of reserves (T-bills, cash) held by a company. Tightest peg, simplest model — but centralized: you trust the issuer's reserves and their freeze switch.
• Crypto-backed (DAI / USDS, Sky): mint against over-collateralized on-chain crypto via a CDP. Decentralized and transparent, but capital-inefficient (150–200% collateral) and exposed to collateral crashes.
• Algorithmic: hold peg via supply-and-incentive mechanics with little or no hard backing — historically fragile. See Algorithmic Stablecoins.
• Yield-bearing / synthetic (e.g. USDe): back the peg with a delta-neutral hedge (spot collateral + short perp) so the float earns the funding rate. New, powerful, and carrying exchange/funding risk.
• The peg arbitrage: redemption keeps the peg honest — if the token trades below $1, arbitrageurs buy cheap and redeem for $1; the Peg Stability Module does this at the margin for DAI.

03 · Formulas

// fiat-backed solvency
reserves ≥ tokens_outstanding · $1        // trust the attestation

// crypto-backed (CDP) collateralization
CR = collateral_value / debt ≥ liquidation_ratio   // e.g. ≥ 150%

// peg-restoring arbitrage
price < $1 → buy token, redeem for $1 → supply falls → price ↑
price > $1 → mint token, sell for >$1 → supply rises → price ↓

04 · Edge cases & risks

• USDC depeg (Mar 2023) — $3.3B of reserves were stuck in the failed Silicon Valley Bank; USDC fell to ~$0.88 over a weekend. "Fully backed" still carries where the backing is held risk.
• Centralized freeze risk — fiat issuers can and do blacklist addresses; the decentralization of anything built on USDC/USDT is capped by that switch.
• Collateral correlation — crypto-backed coins fail when their collateral crashes faster than liquidations can clear (MakerDAO's Black Thursday).
• Reserve opacity — attestations are point-in-time and not full audits; the market periodically reprices issuer trust, and that repricing is a depeg.
• Depeg contagion — a wobble does not stay contained. When USDC slipped in March 2023, every lending market and vault holding it as collateral marked it down at once, triggering liquidations of unrelated positions downstream. Choosing a stablecoin as collateral means asking "what cascades if this drops a few percent?", not just "is it backed?".