Key findings
- A peg is only as good as redeemability: fiat-backed coins hold via a credible 1:1 redemption promise, which depends on reserve quality and access.
- Over-collateralized crypto-backed stablecoins hold via liquidations; they can survive volatility but are exposed to collateral and oracle risk.
- Purely algorithmic designs that lack real collateral have repeatedly failed under stress; the mechanism is reflexive by construction.
Background
“Stablecoin” describes an outcome — a token that trades near a reference value, usually one US dollar — not a mechanism. Three broad designs achieve it in incompatible ways, and understanding which one you hold is the whole risk picture.
Data & method
Data: protocol documentation and public reserve attestations; aggregate supply from DefiLlama. Method: analyze each design by its redemption path and its dominant failure mode. Limitation: reserve attestations are point-in-time and vary in rigor; we distinguish audited reserves from self-reported ones.
Analysis
Fiat-backed: the issuer holds reserves (cash, short-dated government paper) and promises redemption at par. The peg holds because arbitrageurs mint and redeem against that promise. The risk is reserve quality, banking access, and whether redemption is actually available to the parties arbitraging the peg. Over-collateralized crypto-backed: users lock more collateral than they mint; liquidations defend solvency. This survives volatility but inherits collateral, oracle, and liquidation-mechanism risk. Algorithmic (uncollateralized): the peg is defended by minting/burning a companion asset. This is reflexive — the mechanism relies on market confidence it is meant to guarantee — and has failed repeatedly under stress.
Risks & limitations
Peg stability in calm markets tells you little about behavior in a run. The questions that matter are: who can redeem, at what size, how fast, and what backs the promise when everyone asks at once.
What to watch
Track reserve composition and redemption terms, not just the market price. See also reading lending-market risk.
Sources — primary where possible
The BlackPearlBitcoin Research Desk holds no positions relevant to this report. See our conflict-of-interest policy in the methodology.
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