FOLLOW THE MECHANISM
- 1Reference value
Defines the intended unit of account.
- 2Backing or mechanism
Supplies assets or incentives supporting the target.
- 3Issuance and redemption
Changes token supply under stated conditions.
- 4Secondary market
Trades at prices determined by actual orders and liquidity.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
The target is a design objective
Many stablecoins aim to trade near one unit of a national currency. USDC and USDT target dollars; EURC targets euros. The target is an intention, not an assurance that every trade occurs there. A euro token can maintain its euro peg while changing in dollar value. Gold-backed tokens such as PAXG represent a quantity of gold instead: their dollar value moves with gold. Always name the reference before calling an asset stable.
Different mechanisms support the target
A fiat-backed issuer holds reserves and manages issuance and redemption. A crypto-collateralized design creates tokens against locked positions, with price feeds and liquidation rules. Synthetic designs can pair assets with offsetting derivatives; Ethena’s USDe uses a broader, changing backing portfolio. Algorithmic designs can rely heavily on supply adjustments involving another token. Real systems combine mechanisms. These categories describe how support is organized, not how safe an asset is or whether a quoted yield is sustainable.
Arbitrage needs a usable route
If eligible participants can buy a discounted token and reliably redeem it at the target, that trade can help pull the market price back toward the peg. It requires access, capital, operational capacity and confidence in settlement. A documented redemption right is not equivalent to every holder being able to redeem instantly. If the route stops working, the market price can remain far from the reference even while tokens keep transferring normally.
Losses can arrive through several layers
Reserves may lose value or become inaccessible; a custodian may fail; a contract may malfunction; an oracle may misprice collateral; or heavy redemptions may overwhelm available liquidity. A bridged version adds another obligation between the holder and the original stablecoin. Holding a stablecoin in a lending product then adds borrowing and platform risks. Stability of the quoted unit does not make every use of that unit equally safe.
MAKE IT CONCRETE
Three prices that can differ
Illustrative token: the target is 1 currency unit, estimated recoverable backing is 0.98 per token and a thin trading venue quotes 0.95. These numbers answer different questions. The first is an objective, the second is an asset/obligation estimate and the third is a market exchange rate. None can simply be substituted for the others.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
- A peg is not guaranteed purchasing power.
- A yield product using a stablecoin adds risks beyond the stablecoin itself.
KEEP EXPLORING