✅ Master Stablecoin Mechanics
Understand peg mechanisms, arbitrage, and depegging risks
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0 / 5 completed✨ Key Takeaways
Three Stablecoin Types
Fiat-backed (USDC) offers maximum stability but centralization. Crypto-backed (DAI) provides decentralization but needs over-collateralization. Algorithmic designs (UST) promise efficiency but have catastrophic failure modes.
Arbitrage Maintains Peg
All stable mechanisms rely on arbitrage. When price deviates from $1, profit-seeking traders exploit the gap until it closes. This self-correcting system works as long as confidence in the mechanism remains intact.
Over-Collateralization Works
Crypto-backed stablecoins need 150-200% collateral because crypto is volatile. The buffer protects the peg during crashes by ensuring liquidators profit from buying the stablecoin to close undercollateralized positions.
Confidence is Everything
De-pegging happens when confidence breaks. USDC recovered from $0.87 because users trusted redemption would work. UST went to $0.01 because it had no real backing and confidence was irreversibly lost. Trust determines survival.
Choosing the Right Stablecoin
- Maximum stability + speed: USDC (fiat-backed, instant redemption)
- Decentralization priority: DAI (crypto-backed, trustless)
- Avoid: Pure algorithmic designs (proven failure mode)
- Diversify: Don't hold 100% in any single stablecoin type
- Monitor: Watch for persistent deviation, declining cap, widening spreads