Chapter 9

Stablecoins

Stablecoins are one of DeFi's core building blocks because they make it easier to save, trade, borrow, and compare prices without constantly measuring everything in a volatile asset.

Not all stablecoins stay stable the same way. The important question is what supports the peg and what should happen if demand suddenly rises, falls, or confidence breaks.

The cleanest way to compare stablecoins is by what backs them and how the peg is defended.

Major stablecoin designs

Type	Backing	Typical trade-off
Fiat-backed	Cash and short-term reserves	Simple model but issuer trust
Crypto-backed	On-chain collateral buffer	More transparent but less capital efficient
Algorithmic	Incentives and supply mechanics	Scalable idea but fragile under panic

That design choice shapes transparency, capital efficiency, censorship risk, and what can go wrong during stress.

Fiat-backed coins usually feel familiar because they resemble digital bank dollars, but users depend on an issuer, custodians, and regulators. Crypto-backed coins move more logic on-chain, often requiring overcollateralization to absorb volatility.

Algorithmic systems try to maintain a target price through incentives rather than strong reserves. That can look elegant in calm markets, but history shows that weak backing and reflexive confidence can fail quickly.