Stablecoins: what they are and how they break
Stablecoins are the plumbing of crypto. They are also where a lot of people quietly take on risk they have not registered.
The three kinds, and they are not equally safe
What a depeg actually looks like
In March 2023 USDC fell to about 87 cents when part of its reserves were held at Silicon Valley Bank. It recovered fully once the deposits were guaranteed. The lesson is not that USDC is unsafe. It is that "stable" describes an intention rather than a guarantee, and the backing matters.
Practical rules
- Prefer fully backed stablecoins with published attestations for anything you are holding.
- Spread across two issuers if the amount is meaningful.
- Understand that holding a stablecoin is holding a claim on a company.
- Treat any yield above what short term government debt pays as compensation for a risk somebody has not explained to you.
BEFORE YOU MOVE ON
Common questions
Is USDT safe?
It is the largest stablecoin and functions reliably day to day. It has faced longer running questions about reserve transparency than USDC. Many people use it for trading and hold USDC for balances.
What happened to Terra UST?
It was algorithmic, backed by a mechanism rather than reserves. When confidence broke in May 2022 the mechanism accelerated the collapse instead of arresting it, and around forty billion dollars was destroyed in days.
Risk warning: crypto is highly volatile and largely unregulated. You can lose everything you put in. Nothing here is financial, investment or tax advice.