Stablecoin is a cryptocurrency designed to maintain a fixed value, almost always pegged to the US dollar. The category covers fundamentally different designs — fiat-backed, crypto-collateralized, algorithmic — and the differences matter more than the marketing suggests. Three failures (TerraUSD in May 2022, USDC in March 2023, Tether's quarterly attestation gaps) make stablecoin selection a real custody question, not a "they're all the same" question.
The three major designs
Fiat-backed (USDC, USDT, PYUSD). The issuer holds USD or USD-equivalent assets (Treasury bills, bank deposits) in a 1:1 ratio with circulating tokens. Redemption is through the issuer. The peg works as long as the reserves are real, accessible, and adequately diversified across banks. This is the dominant design — USDT and USDC, the two largest stablecoins, both work this way.
Crypto-collateralized (DAI, LUSD, crvUSD). Users lock cryptocurrency (ETH, wstETH, RWAs) into smart contracts at over-collateralization ratios (the locked collateral is worth more than the stablecoins issued against it), mint stablecoins against the collateral. The peg holds through liquidation mechanics if the collateral value drops. DAI is the canonical example; it has held its peg through multiple crypto-market crashes.
Algorithmic (failed: TerraUSD; surviving: minor experiments). No collateral, peg maintained through contraction/expansion of a paired governance token. TerraUSD lost its peg in May 2022, triggering a $40B collapse over five days. The category is essentially dead post-2022; remaining experiments (Ethena's USDe is closer to a delta-neutral structured product than a pure algorithmic stablecoin) take different shapes.
The 2023 USDC depeg episode
On March 10, 2023, Silicon Valley Bank collapsed. Circle held about 8% of USDC reserves at SVB ($3.3 billion of $40B). Over the weekend, USDC briefly fell below $0.88. After US regulators announced that SVB deposits would be fully protected, USDC regained its peg within days.
For a US-resident holder, the lesson is precise: fiat-backed stablecoins carry banking-system risk on top of issuer risk. Circle has since diversified reserves across multiple banks, but the underlying exposure remains.
How to think about stablecoin choice in 2026
For day-to-day on-chain activity, USDC is the conservative default for US holders: regulated issuer (Circle), monthly attestations from Deloitte, MiCA-compliant for EU operations, broad cross-chain support. USDT carries higher liquidity globally but more opacity around reserves; for short-term operational use this is fine, for multi-month holding it adds risk.
For long-term "cash position" within a crypto portfolio, do not concentrate in a single coin. Fiat-backed coins like USDC and USDT carry issuer risk and banking-system risk; crypto-collateralized coins like DAI trade some of that for on-chain peg-mechanism risk. Spreading across different issuers and mechanisms limits how much one failure can hurt you. How to split it depends on your own amounts and what the money is for.
The yield product warning
Stablecoin "savings" products at exchanges and DeFi protocols are not zero-risk. Anchor Protocol promised 19.5% APY on TerraUSD; depositors lost essentially everything. Lower-risk versions (Aave's USDC supply, Maple Finance's institutional pools) carry real but smaller risks — smart-contract risk, depeg risk during stress, illiquidity during market events.
Further reading: Proof of Reserves, MiCA.