Cryptocurrency Deep Dive
Stablecoins and Peg Risk
Ethereum, stablecoins, exchange mechanics, and self-custody.
In this lesson
- How stablecoins hold a peg
- Fiat-backed vs algorithmic designs
Key takeaways
- 1Stablecoins aim to hold a steady value, often to the USD
- 2Fiat-backed coins hold real reserves
- 3Algorithmic pegs rely on incentives and can de-peg
Lesson summary
Stablecoins try to keep a steady reference value, often one US dollar.
Mental model
What stablecoins and peg risk really means
Stablecoins try to keep a steady reference value, often one US dollar. The peg depends on reserves, redemption confidence, market liquidity, and sometimes protocol incentives.
- How stablecoins hold a peg
- Fiat-backed vs algorithmic designs
Mechanics
How to reason about stablecoins and peg risk
Fiat-backed stablecoins rely on issuers and reserve assets.
Crypto-collateralized stablecoins rely on overcollateralization and liquidation rules.
Algorithmic designs rely more heavily on market incentives and can break under stress.
- Stablecoins aim to hold a steady value, often to the USD
- Fiat-backed coins hold real reserves
- Algorithmic pegs rely on incentives and can de-peg
Example
A concrete stablecoins and peg risk example
If users believe a fiat-backed stablecoin can be redeemed for dollars, market makers can buy it below peg and redeem, helping restore price.
Common mistakes
How stablecoins and peg risk trips learners up
A stable price on a chart is not proof of safety. Reserve quality, redemption access, jurisdiction, and issuer controls matter.
Risk notes
Reading the risk in stablecoins and peg risk
De-pegs, frozen addresses, reserve losses, regulatory action, and liquidity crises can affect stablecoins differently.
- Identify the backing model.
- Check redemption and issuer risk.
- Watch liquidity during stress.
Practice
Put stablecoins and peg risk to work
- Identify the backing model.
- Check redemption and issuer risk.
- Watch liquidity during stress.
Review
Key terms
- Custody
- Who controls the private keys. Custodial = a third party holds them; non-custodial = you do.
- Ethereum (ETH)
- A programmable blockchain — a 'world computer' that runs smart contracts and dApps.
- Fiat
- Government-issued currency not backed by a physical commodity (e.g. USD, EUR).
- Liquidation
- Forced closure of a leveraged position when margin can no longer cover its losses.
- Liquidity
- How easily an asset can be bought or sold without moving its price much.
Source notes
Editorial references
These references are starting points for verifying the mechanisms, risk checks, and product context behind this lesson.
Before you continue
Can you do these?
- Identify the backing model.
- Check redemption and issuer risk.
- Watch liquidity during stress.
Related learning
Keep reading
Checkpoint
Finish this lesson
Pass the check to save progress, then continue through the track in order.
Lock in this lesson
Answer every question correctly to complete the lesson.
A stablecoin aims to…