Stablecoins Explained: How They Hold Their Peg, and When They Do Not

What is a stablecoin?

A stablecoin is a cryptocurrency designed to stay at a fixed value, usually one dollar or one euro. Most are backed by reserves of cash and government bonds held by a company that promises to redeem tokens at face value, which makes them dependent on that company being solvent and honest.

Why they exist

Cryptocurrencies move too much in price to be useful for payment or for parking funds between trades. Stablecoins were the practical answer: a token that behaves like ordinary money on rails that settle in minutes.

They now carry a large share of all crypto transaction volume, which makes them the part of the sector most entangled with the traditional financial system.

Reserve-backed

The dominant model. A company issues tokens and holds reserves, typically cash and short-term government debt, promising to redeem each token for one unit of currency.

The peg holds because arbitrage makes it hold: if the token trades below a euro, buying it and redeeming it at face value is profitable, which pushes the price back.

This works exactly as well as the issuer's solvency and honesty. The questions that matter are what the reserves actually contain, who audits them, and whether redemption is available to ordinary holders or only large clients.

Algorithmic

No reserves. The peg is meant to hold through supply adjustments and incentives between paired tokens.

Terra/Luna collapsed in May 2022, erasing tens of billions in days. When confidence went, the mechanism that was supposed to restore the peg accelerated its failure instead. The episode is the strongest available evidence that a peg with nothing behind it depends on belief, and belief can go quickly.

The EU position

MiCA regulates stablecoins directly. Issuers of asset-referenced and e-money tokens need authorisation, must hold reserves that are segregated and redeemable at par, and face limits when a token becomes widely used for payments rather than trading.

This is one area where European rules are ahead of most jurisdictions, and it matters commercially: an issuer without authorisation cannot serve EU users through regulated venues.

What to look at

Who issues it, what backs it, who verifies that, and whether you personally can redeem. A stablecoin is a claim on somebody. Knowing who is the whole exercise.

This page is general information, not investment or legal advice.

Stablecoins