Stablecoins (USDC, USDT, DAI): how the peg actually holds

A stablecoin is a crypto asset engineered to hold a fixed price, usually one US dollar, instead of floating with the market like Bitcoin or Ether. It's a token that moves on public blockchains but is designed to behave like cash.

The peg isn't automatic. Every stablecoin ties its price to the dollar through one of three mechanisms, and the mechanism determines how much you can trust the peg when things get stressed.

How it works

Fiat-collateralized stablecoins are the simplest design. USDC (issued by Circle) and USDT (issued by Tether) hold dollar reserves, cash and short-term Treasury bills, in bank accounts and custody arrangements matching the number of tokens in circulation. One token in, one dollar held. Redemption works the other way: send a token back to the issuer, get a dollar out. The peg holds because the token is a claim on an actual, audited reserve.

Crypto-collateralized stablecoins work differently. DAI (issued by the Sky Protocol, formerly MakerDAO) is backed by a basket of crypto assets, ETH, staked ETH, and other tokens, locked in smart contracts at more collateral than the DAI issued against them. If ETH is worth $3,000 and someone locks it to mint DAI, the protocol requires far more than $1 of ETH per $1 of DAI, often 150% or higher. That overcollateralization absorbs price swings in the collateral without breaking the peg.

Algorithmic stablecoins tried to hold a peg through supply and demand mechanics alone, minting and burning a paired token to arbitrage price back to one dollar, without full reserves behind it. TerraUSD was the highest-profile version. In May 2022 its peg broke and the token, along with roughly $40 billion of paired value, collapsed to zero in days. The lesson reshaped the category: a peg backed by an algorithm and market confidence, and nothing else, is a bet rather than a reserve.

Why it matters

Stablecoins are the settlement layer for almost everything else in crypto finance. Trading pairs, lending markets, and on-chain payments all use dollar-pegged tokens as the unit of account, because holding Bitcoin or Ether as working capital means holding volatility you didn't sign up for. A stablecoin lets capital move at blockchain speed while staying priced in the currency institutional accounting already understands.

The category also carries real tail risk that the label "stable" undersells. Redemption depends on the issuer actually holding what it claims, on time, in a form regulators recognize. USDC briefly traded below $0.88 in March 2023 when Circle disclosed part of its reserves sat at the failed Silicon Valley Bank, and only recovered once the FDIC guaranteed deposits. The peg is a promise backed by a balance sheet and a redemption process, not a law of physics.

Where this shows up in Rekord

LP capital enters and exits the platform in stablecoins, and the choice of which stablecoins a vault accepts, and which reserve model backs them, is itself a risk decision, not a formality. For how that capital moves from deposit to real-world return, see The capital cycle: how stablecoin deposits become real-world returns.