Stablecoins, explained properly
A stablecoin is a promise to redeem at par. Its safety is entirely a question of what sits behind the promise, and whether you can test it.
Judge a stablecoin the way you would judge a bank, because that is what it is.
How Stablecoins works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why a solvent bank can die in 48 hours
The bank lent your deposit out. That is not a scandal, it is what a bank is. It only becomes fatal when everyone asks for their money on the same afternoon.
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The idea: money that moves like a message
A stablecoin is a token that is meant to be worth exactly one dollar, that can be sent anywhere in seconds, at almost no cost, without a bank in the middle. That is genuinely useful, especially for moving money across borders, and it explains why the market has grown to hundreds of billions.
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The promise is only as good as the reserves
The issuer says: give me a dollar, I will give you a token, and you can always swap it back. Whether that holds depends entirely on what they did with your dollar. Short-term government debt and cash is one answer. Riskier or illiquid assets is a very different answer.
Read what backs it, and read who audits that claim, and how often.
This is exactly the analysis you would run on a bank. That is not a coincidence. It is a bank.
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A depeg is a bank run with better graphics
If holders doubt the reserves, they redeem at once. The issuer must sell assets fast to meet the redemptions, which means selling at bad prices, which makes the reserves genuinely insufficient, which vindicates the fear. The mechanism is identical to a classic bank run, and it can play out in hours rather than days.
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Algorithmic ones are a different animal, and they have failed before
Some stablecoins hold no reserves and instead maintain the peg through a trading mechanism against another token they create. When confidence goes, the mechanism accelerates the collapse rather than arresting it. Several have gone to zero, taking billions with them.
You can name what backs the stablecoin you hold, and who verifies it.
Read next
A stablecoin is a promise to redeem at par. Its safety is entirely a question of what sits behind the promise, and whether you can test it.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.