In short
- A stablecoin targets a reference through a specific mechanism.
- Peg, reserve value and redemption right are distinct.
- Model risks differ across fiat-reserve, crypto-collateral and algorithmic designs.
- Run, liquidity, custody, oracle and governance stress can break stability.
After this lesson you can
- Compare fiat-reserve, crypto-collateral and algorithmic stabilization models
- Separate market peg, reserve value and redemption right
- Identify run, liquidity, custody, oracle and governance risks
Stable relative to what, and by what mechanism?
A stablecoin targets a reference value, often a fiat currency. Fiat-reserve models rely on issuer assets and redemption; crypto-collateral models rely on on-chain collateral and liquidation; algorithmic models rely more heavily on incentives, supply adjustments or related tokens. The peg is an outcome of confidence, liquidity and mechanism performance, not a permanent property of the token name.
Key point: Analyze reference asset, legal claim, reserve quality, redemption access and stress mechanism.
Three stabilization models
| Primary support | Stress focus | |
|---|---|---|
| Fiat-reserve | Issuer reserves plus redemption | Reserve quality, custody, liquidity, legal claim and run risk |
| Crypto-collateral | Overcollateralization and liquidation | Collateral crash, oracle, congestion and liquidation capacity |
| Algorithmic | Incentives, supply rules or paired token | Confidence spiral, reflexivity and governance |
Investigate a depeg
A stablecoin trades at 0.96 relative to its target.
- Check whether primary redemption is functioning and who is eligible.
- Assess reserve or collateral value, liquidity and disclosure freshness.
- Inspect venue depth, bridge versions and network congestion.
- Separate temporary secondary-market imbalance from impaired redemption, without assuming recovery.
Common trap: calling stablecoins cash
A bank deposit, money-market instrument and stablecoin can have different legal claims, insurance, redemption, reserve and operational protections. Even strong reserves can face timing and liquidity mismatch during a run. Price stability in calm markets is not proof of par redemption under stress.
Practise what you just read
Take this lesson's quiz and review cards in the app, then try the idea with virtual money in paper trading. Free account, no card.
Education only, not investment advice. Examples are illustrative. Read the full disclaimer