day 18/30 of learning blockchain a stablecoin says $1. but what actually keeps it worth $1? the honest answer: not the price. the promise behind it. there are 3 ways to make that promise. 1. fiat-backed (USDC, USDT) the issuer holds real dollars and short-term treasuries in reserve. you give them 1 USDC, you can redeem $1. the peg holds because redemption is real. if the token trades at $0.99, big players buy it and redeem it for $1, pocketing the gap, and the price gets pulled back up. the risk is trust. you’re trusting that the reserves exist, are liquid, and are held somewhere safe. in march 2023, USDC briefly fell well below $1 because part of its reserves was stuck at silicon valley bank when it failed. once the reserves were confirmed safe, the peg recovered. 2. crypto-collateralized (DAI) there’s no bank. users lock crypto into smart contracts and borrow stablecoins against it. but they lock more than they borrow, around $150 of ETH for every $100 of stablecoin. that extra cushion is called overcollateralization. if ETH falls and the cushion thins, the system liquidates the position automatically, selling collateral to stay solvent. the risk is a fast crash. if collateral drops faster than liquidations can keep up, the system can end up short. and it depends on oracles (day 16), because it has to know what the collateral is worth. 3. algorithmic (terra’s UST) no vault, and not enough collateral. just code and incentives. UST was held up by a sister token, LUNA. the system let you swap $1 of LUNA for 1 UST and vice versa, so arbitrage was supposed to hold the price. it worked while people believed in LUNA. when confidence broke in may 2022, UST slipped, people dumped it, and the system printed huge amounts of LUNA to absorb the selling. that crashed LUNA, which removed the backing, which pushed UST down further. a death spiral. tens of billions of dollars vanished in days. the pattern every stablecoin answers one question: what’s standing behind the dollar? - fiat-backed: real reserves, so the risk is the issuer - crypto backed: excess collateral, so the risk is a crash - algorithmic: confidence and incentives, so the risk is everything a peg isn’t a price. it’s a promise. and a promise is only as strong as what backs it. before trusting any stablecoin, ask: what’s the reserve or collateral? - can i actually redeem 1:1, and who can? - how fast can it be liquidated or verified? - what happens if confidence disappears? tomorrow, day 19: why a token can be up 100% while its future supply is quietly becoming a problem.