stablecoins: who guarantees price stability and how does it work?

Introduction: Why Stability is Needed in Crypto

The cryptocurrency market is known for its high volatility. Bitcoin (BTC) and Ethereum (ETH) can fluctuate by tens of percent in a day, making them difficult to use in everyday transactions and payments. Imagine a coffee shop that accepts payments in BTC: today a coffee costs $5, tomorrow it may cost $2.50 due to a market crash. Such unpredictability makes normal business operations impossible.

Stablecoins were created specifically to address this issue — digital assets pegged to stable assets: fiat currencies like the dollar, euro, precious metals, or even oil. They retain the advantages of blockchain — speed, transparency, low transaction costs — while remaining relatively stable in price.

Three Approaches to Creating Stability: Who Guarantees Price Stability?

The question of who guarantees the stability of the price of cryptocurrency becomes paramount when considering stablecoins. The answer depends on the type of stablecoin.

( Fiat-backed stablecoins: a central issuer guarantees

In this model, the issuer of the stablecoin acts as the guarantor. For every token issued, an equivalent amount of fiat currency is held in reserves - usually US dollars or British pounds.

Example: TrueUSD )TUSD### — each TUSD token is backed by exactly one dollar held in reserves off the blockchain. The reserves undergo regular verification through the Proof of Reserves (PoR) mechanism from Chainlink, allowing users to independently verify the availability of funds.

Advantage: simplicity and reliability. Disadvantage: high centralization and dependence on the issuer.

( Crypto-backed stablecoins: smart contracts and game theory

Here, the system itself becomes the guarantor — a combination of algorithms, smart contracts, and economic incentives. The collateral is stored in the form of cryptocurrency, often with over-collateralization.

MakerDAO )DAI### — a striking example. To create 100 DAI, a user must deposit cryptocurrency worth at least ( with a collateral of 150%). The project is managed by the community, and MKR token holders vote on key decisions.

Pegging preservation mechanism:

• If DAI falls below $1: users are incentivized to return tokens in exchange for collateral, reducing supply and raising the price.
• If DAI rises above $1: users are incentivized to create new DAI, increasing supply and lowering the price.

This balance is maintained not by a central organization, but by the network itself and the interests of the participants.

$150 Algorithmic stablecoins: a dangerous path to automation

The most ambitious approach is full automation through algorithms and smart contracts without reserves. The system simply expands or reduces the number of tokens in circulation to maintain the price.

When the price falls below the target level, the system burns tokens or rewards staking. When the price rises, new tokens are issued. Theoretically, it makes sense; practically, it is extremely risky and often leads to the collapse of such projects.

Where are stablecoins used?

Trading and portfolio management. Traders use stablecoins as a refuge during market volatility. Instead of withdrawing money into fiat, they convert their position to USDT or DAI, avoiding tax complications and withdrawal delays.

Everyday Payments. The main advantage of stablecoins is that they are suitable for payments and transfers. Thanks to blockchain, a transaction can be conducted to any point in the world in just a few minutes, unlike traditional bank transfers.

International Transactions. Stablecoins allow for the avoidance of fees associated with traditional payment systems and SWIFT transfers, especially when working with emerging markets.

Lending and DeFi. Stablecoins serve as the foundation of decentralized finance - they are used as collateral, a means of borrowing, and liquidity for trading pairs.

Real Risks to Be Aware Of

Despite their usefulness, stablecoins carry their own risks.

Risk of losing peg. Not all projects successfully maintain their price. History has seen cases where stablecoins devalued by 50-90% due to a lack of reserves or technical failures.

Lack of transparency. Fiat-backed stablecoins often undergo only periodic audits by private accountants, rather than full independent reviews. How can one know if the issuer truly has the promised reserves?

Centralization. Fiat-backed stablecoins store collateral with a single organization that is subject to financial regulation. This gives it significant control.

Dependence on the community. Crypto-collateralized stablecoins like DAI rely on active participation from the DAO. If the community makes incorrect decisions, it can lead to destabilization.

Regulation: what to pay attention to

Stablecoins are increasingly attracting the attention of regulators. In many countries, the issuance of stablecoins requires a license, and reserves are subject to government oversight. This trend is likely to tighten.

What is important to remember

Stablecoins are not just cryptocurrency; they are a tool that guarantees relative price stability in a volatile ecosystem. But who specifically guarantees this stability depends on the model:

• Fiat-backed — trust the issuer
• Crypto-backed — trust the system and the community
• Algorithmic - expose yourself to maximum risk

Before using any stablecoin, conduct your own research, check reserve audits, and study the peg mechanism. Stablecoins are useful, but they are still a cryptocurrency with inherent risks.