Stablecoins explained

What is a stablecoin?

A stablecoin is a cryptocurrency designed to maintain a fixed value, usually pegged to the US dollar. While Bitcoin and Ethereum can swing 10% in a day, a stablecoin aims to always be worth $1.00.

Why do they exist? Because people need a stable unit of value in crypto — to save without volatility risk, to price goods and services, to move money between services, and to take a break from market exposure without converting back to fiat.

Types of stablecoins

What keeps a stablecoin at $1 is called its backing mechanism. There are several approaches, each with different trade-offs:

Fiat-collateralized (backed by real dollars)

The simplest model: a company holds real dollars (or equivalents like US Treasury bills) in a bank, and issues one token for each dollar held.

Key risk: You're trusting the issuing company to actually hold the reserves they claim. You're also trusting that they won't freeze your tokens. This is called counterparty risk — the risk that the other party doesn't deliver on their promise.

Crypto-collateralized (backed by other crypto)

Instead of holding dollars in a bank, these stablecoins are backed by crypto locked in smart contracts. Because crypto is volatile, they require over-collateralization — more collateral than the value of stablecoins issued.

Key risk: If the underlying crypto collateral crashes very fast, the system might not liquidate positions quickly enough, and the stablecoin could temporarily lose its peg.

Yield-bearing stablecoins

Some stablecoins automatically earn interest just by holding them. The token itself grows in value over time, or the underlying reserves generate yield that accrues to holders.

Algorithmic stablecoins

These attempt to maintain their peg through algorithms and incentive mechanisms rather than collateral. They expand and contract the supply based on demand.

History lesson: The most notable algorithmic stablecoin, UST (Terra), collapsed in May 2022, losing its peg entirely and going to near zero. Approximately $40 billion in value was destroyed in days. This event demonstrated that algorithmic stability mechanisms can fail catastrophically under stress.

Very few purely algorithmic stablecoins exist today. The industry has largely moved toward collateralized models.

The peg: what happens when it breaks

A stablecoin "depegging" means its market price moves away from $1. This can happen for various reasons:

• Loss of confidence in the reserves or backing (e.g., doubts about Tether's reserves)
• Liquidity crisis — More people selling than buying, temporarily pushing the price down
• Smart contract exploit — A hack that compromises the collateral
• Regulatory action — A government freezing the reserves or banning the stablecoin
• Cascade failure — If one stablecoin is used as collateral for another, a problem in one can spread

Minor depegs (0.99-1.01) are common and usually resolve quickly. Major depegs (below 0.95) are rare for established stablecoins but represent serious risk events.

Sovereignty risk: can someone freeze your stablecoins?

This is a question many users don't think to ask. Some stablecoins can be frozen.

• USDC and USDT — The issuing companies can blacklist specific addresses, making the tokens at those addresses unusable. This is typically done in response to law enforcement requests or sanctions compliance.
• DAI and BOLD — These are governed by smart contracts, not companies. No single entity can freeze them. However, DAI is partially backed by USDC, which introduces indirect sovereignty risk.

CleanSky measures this as the sovereignty dimension in its risk analysis — the degree to which an external entity can control or restrict your access to an asset.

Stablecoins across different networks

The same stablecoin can exist on multiple networks. USDC exists on Ethereum, Solana, Polygon, Arbitrum, Base, and others. But they're not all identical:

• Native issuance — The stablecoin issuer directly supports the network (e.g., USDC on Ethereum or Solana). These are the safest versions.
• Bridged versions — The stablecoin is locked on one network and a wrapped version is created on another. This adds bridge risk on top of the stablecoin risk.

CleanSky shows you which version of each stablecoin you hold and on which network, so you can assess the full risk picture.

Why this matters for your portfolio

Stablecoins often represent the "safe" portion of a crypto portfolio — the money you're not willing to risk on volatile assets. But "stable" doesn't mean "risk-free." Understanding what backs your stablecoins helps you make informed decisions about where to keep your savings.