How stablecoins actually stay stable

A stablecoin aims to hold a steady value, usually pegged to a currency like the US dollar. How that peg is actually maintained varies a lot between different stablecoins.

Fiat-collateralized: backed by real reserves

The most common model holds cash or cash-equivalent reserves — supposedly one dollar in reserve for every token issued — redeemable through the issuing company. Stability here depends on the reserves actually existing and being managed as claimed, which is why reserve audits and attestations matter.

Crypto-collateralized: backed by other crypto assets

Some stablecoins are backed by other cryptocurrencies locked in smart contracts, typically over-collateralized (more value locked than tokens issued) to absorb price swings in the underlying collateral.

Algorithmic: no direct collateral

These attempt to maintain a peg through supply adjustments and market incentives rather than holding reserves. Several prominent algorithmic stablecoins have historically lost their peg entirely during periods of market stress, which is the clearest illustration of this model's added risk.

Why the mechanism matters to you

Not all "stable" coins carry the same risk. A fiat-backed stablecoin with regularly audited reserves and an algorithmic stablecoin with no collateral are fundamentally different risk propositions, even when both are marketed the same way.