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Stablecoin Peg Mechanics: Three Models and Their Failure Modes
@blockonomist
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2026-05-16 04:38:27
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Stablecoins maintain their dollar peg through fundamentally different mechanisms. Fiat-backed stablecoins (USDC, USDT) hold reserves and redeem at 1:1 — their risk is custodial and regulatory. Crypto-collateralized stablecoins (DAI) hold over-collateralized crypto assets; if the collateral value falls too fast, liquidations may fail to cover the peg. Algorithmic stablecoins (UST was the canonical failure) rely on mint-burn arbitrage mechanisms with a paired volatile token — they are stable under normal conditions but vulnerable to confidence spirals. The 2022 UST collapse demonstrated that an algorithmic peg with insufficient collateral backing cannot withstand coordinated selling pressure.
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