Stablecoin

What Is a Stablecoin?

A stablecoin is a cryptocurrency pegged to a stable reference value, almost always the US dollar at a 1:1 ratio. They allow crypto market participants to hold dollar-equivalent value on blockchains without exiting into traditional banking — essential for trading, lending, and DeFi operations.

Types of Stablecoins

Fiat-backed (centralised):

• Tether (USDT): ~$100B+ in circulation; backed by a mix of Treasuries, cash, and other assets; largest stablecoin by volume
• USD Coin (USDC): Issued by Circle; fully backed by Treasuries and cash; more transparent
• Backed by actual reserve assets held 1:1

Crypto-backed (decentralised):

• DAI/USDS: Issued by MakerDAO; over-collateralised with crypto assets
• Requires >150% collateral to maintain peg through price swings

Algorithmic (undercollateralised):

• TerraUSD (UST): Used algorithmic mechanisms to maintain the peg; collapsed spectacularly in May 2022 — $40B wiped out in days as the peg broke

Why Stablecoins Matter for Macro

The total stablecoin market cap (~$200B+) represents an extraordinary private demand for dollars outside the traditional banking system. Implications:

1. Dollar globalisation: Billions of people in emerging markets use stablecoins to access dollars without a US bank account
2. Treasury demand: USDT and USDC hold large amounts of US T-bills — they are now significant sovereign debt buyers
3. Monetary policy leakage: Stablecoin creation creates dollar-denominated purchasing power that operates outside the Fed's direct control

Systemic Risk: The De-Peg

If a major stablecoin loses its peg (as UST did, and as USDC briefly did during the SVB crisis when Circle held reserves there), the contagion is immediate and severe:

• Crypto markets crash as stablecoin holders rush to exit
• DeFi protocols dependent on the stablecoin face cascading liquidations
• The 2022 UST collapse contributed to the broader crypto bear market