A stablecoin is a token designed to maintain a stable value relative to a reference asset, usually the US dollar.
Stablecoins fall into three categories:
- Fiat-backed (USDC, USDT, USDP): redeemable 1:1 for real dollars held by an issuer. Counterparty risk is the issuer.
- Crypto-collateralized (DAI, LUSD): minted by locking crypto collateral in over-collateralized vaults. Counterparty risk is the protocol's liquidation mechanism and the volatility of the collateral.
- Algorithmic (UST, AMPL, USDR, most have failed): maintain peg through supply mechanics rather than collateral. Historically, these have unwound catastrophically when the peg breaks.
For security:
- A protocol that assumes stablecoins are at peg in its math fails during depegs (USDC's brief depeg in March 2023 took down protocols that hardcoded the assumption).
- Stablecoin issuer freezes (USDC and USDT can blacklist addresses) interact unpredictably with DeFi protocols holding those assets.
- Bridge representations of stablecoins (USDC.e, USDC on non-issuer-supported chains) are not the same asset as native USDC and have failed independently.