✧ intheloop ✧Volatile assets make poor money. Stablecoins are the answer DeFi converged on: tokens engineered to hold a peg, usually to the dollar, so that saving, pricing, and lending have a stable unit.
Three designs
- Fiat-backed: a company holds dollars and T-bills, issues tokens 1:1. Simple, scalable, and custodial: you trust the issuer.
- Crypto-collateralized: lock $150 of ETH in a contract, mint $100 of stablecoin. Trustless, but capital-inefficient and liquidation-prone.
- Algorithmic: the peg is defended by incentives and a sister token instead of collateral.
An algorithmic peg is a promise that arbitrageurs will always show up. In a panic, they don't.
The 2022 Terra collapse erased roughly forty billion dollars in days and remains the canonical case study: a death spiral where redeeming the stablecoin minted more of a token that was itself collapsing.