Three stablecoin models: what your "dollar" is actually backed by

All stablecoins display $1, but they hold on to that number in three different ways - and each has its own death scenario.

Model 1: fiat backing (USDT, USDC)

The issuer holds dollars and treasuries in accounts; the token is an IOU on them. Simple and capital-efficient. The risks are counterparty risks: reserve quality, the issuer's banks, the regulator, the honesty of the reports. The failure scenario is not "the math broke" but "the reserves turned out to be something else" or a freeze by the authorities.

Model 2: overcollateralized crypto (DAI and its heirs)

The stable is minted against crypto collateral in excess: want 100 DAI - lock up 150+ worth of ether. Transparent and on-chain, but capital-inefficient and dependent on liquidation speed: in a market crash the collateral must sell in time. The failure scenario is a cascade where liquidations cannot keep up with the collateral's fall.

Model 3: algorithmic (rest in peace)

Holding the peg with a balance of incentives and a second absorber coin, without full backing. Terra/UST is the textbook: $18 billion evaporated in one week of May 2022 when the "arbitrage" turned into a death spiral. Every new "algo stable 2.0" owes an answer to how it differs from UST - usually in nothing fundamental.

We track depegs and issuance in the section.