Stablecoins explained: what actually backs them, and what happens when it does not

“Stable” describes an intention, not a property. What determines whether the intention holds is the mechanism.

Fiat-backed

The issuer holds dollars or short-term instruments and issues tokens against them. This works as long as the reserves exist, are liquid, and the issuer honours redemptions. Your risk is entirely the issuer: solvency, honesty and the jurisdiction they operate in.

Read reserve reports carefully. An attestation confirming assets at a point in time is not an audit of the business, and the distinction matters — the same gap covered in our piece on proof of reserves.

Crypto-collateralised

Backed by other crypto, deliberately over-collateralised because the collateral is volatile. Positions liquidate automatically if collateral falls too far. The mechanism is transparent and on-chain, which is a real advantage. It depends on liquidations executing in a falling market, which is exactly when they are hardest.

Algorithmic

No meaningful collateral; the peg is maintained by mint-and-burn incentives. These have failed repeatedly and spectacularly, because the mechanism relies on demand that disappears precisely when it is needed. Treat any variant with strong scepticism regardless of the yield attached.

The practical questions

What backs it, who holds that backing, who can verify it, and what has happened when it was last stressed? A peg that has held during calm conditions has told you very little.

Related reading

• How to evaluate a new coin launch in fifteen minutes — A short checklist for new tokens: supply and unlocks, who is funded, what it does that an existing
• What market cap does not tell you about a cryptocurrency — Market cap is price multiplied by supply. Neither half is as solid as it looks, and the product
• How to read a crypto whitepaper and what to skip — Most whitepapers are marketing with equations. Four sections tell you almost everything; the rest is usually decoration.