Imagine you walk into a crypto city.

In this city, everything is noisy and dramatic.

One day, ETH is up 20%.

The next day, ETH is down 30%.

That’s exciting if you’re gambling…

but if you’re trying to save money, pay someone, set prices, or borrow, it’s a nightmare.

So people in this city created something boring on purpose:

That’s a stablecoin.

A stablecoin’s job is simple:

Try to stay close to $1.

That target is called the peg.

Think of $1 as a magnet.

When the coin goes to $0.98, something should pull it back up.

When it goes to $1.02, something should push it back down.

A good stablecoin isn’t “stable by magic”… It’s stable because it has a system that fights to bring it back to $1.

And different stablecoins fight in different ways.

Before the types, one key idea:

• Secondary market = where most people buy/sell stablecoins (DEXs, exchanges).

  The price can move to $0.99, $1.01, etc.

• Primary market = where stablecoins are created or cashed out at the source (issuer/protocol).

  This is where minting and redemption usually happen.

This matters because not every stablecoin lets everyone redeem directly. Some only let big institutions do it, and everyone else trades on the secondary market.

Picture a big company with a vault.

Inside the vault: real dollars (or dollar-like assets).

On the blockchain: tokens that represent those dollars.

So the company says:

“Give me $1, I’ll give you 1 token.

Give me 1 token, I’ll give you $1 back.”

That “swap it back for $1” is called redemption.

Because people love easy profit.

• If the coin is trading at $0.98, traders buy it cheap, redeem it for $1, and make $0.02 profit.

  That buying pushes the price back up.

• If the coin is trading at $1.02, traders create new coins for $1, sell them for $1.02, and profit.

  That selling pushes the price back down.

That profit-driven balancing is called arbitrage.

Pros: usually the most stable and widely used

Cons: you must trust the company and the banking system behind it

• If people fear reserves aren’t solid, or redemption becomes limited, confidence drops → price can drift below $1.

• Some designs can freeze funds (issuer/policy risk).

Now imagine a smart-contract pawn shop.

You walk in with your ETH.

The shop says:

“If you lock up $150 worth of ETH, I’ll let you borrow $100 worth of stablecoins.”

That extra safety cushion is called overcollateralization.

The safety level is often described by a collateral ratio (how much collateral backs the debt).

• If the stablecoin becomes too expensive (like $1.05):

  people are tempted to mint/borrow more, sell it for $1.05, and profit.

  More supply pushes it back toward $1.

• If the stablecoin becomes too cheap (like $0.95):

  borrowers buy it cheap, repay their debt, and unlock their ETH.

  Buying reduces supply and pushes it back toward $1.

If your collateral becomes too low, the system forces a sale to protect itself.

That forced sale is called liquidation.

Pros: more transparent (you can often see collateral on-chain)

Cons: relies on liquidations + price feeds working during chaos

• A fast crash can overload liquidations.

• Bad price feeds (oracles) can cause incorrect liquidations or under-backing.

• Smart contract risk is always real.

Now we enter the risky neighborhood.

Here, there is no simple “always redeem for $1” promise.

Instead, there’s a robot that tries to manage the price using rules.

Think:

“If the price is low, I’ll do things to push it up.”

“If the price is high, I’ll do things to push it down.”

How?

• Some designs mint more coins when price is above $1

• Some designs reduce supply when price is below $1

• Some use a second token as a shock absorber

• Some use incentives that try to “force” good behavior

This system depends heavily on confidence.

If people stop believing the robot can defend $1, they rush to exit — and the peg can break fast.

That’s why algorithmic stablecoins are usually considered the highest risk category.

• Confidence breaks → selling accelerates → peg defense can’t keep up.

• Some designs can spiral (“death spiral”) when the helper token collapses.

Some algorithmic/hybrid stablecoins create a “protocol treasury”.

That treasury is called PCV.

PCV = money the protocol controls to defend the peg.

Mental picture:

A central bank keeping reserves to buy/sell in the market to protect the price.

Important detail:

• Users usually can’t directly redeem PCV like a normal $1 redemption system.

PCV can help defend the peg… but it’s still a strategy, not a guarantee.

Stablecoins are the “cash” of crypto. You’ll see them everywhere:

• Trading pairs: most crypto trades happen through stablecoins

• Lending/Borrowing: borrow stablecoins using ETH as collateral

• Yield strategies: “stablecoin vaults” that pay interest (with risk)

• Payments: quick transfers that don’t swing like ETH

Stablecoins try to stabilize price, not eliminate risk.

Different stablecoins come with different risks:

• Fiat-backed: issuer/bank/regulatory risk (and sometimes freeze risk)

• Crypto-backed: smart contract/oracle/liquidation risk

• Algorithmic: reflexive/confidence risk (can break fast)

So don’t ask only: “Is it stable?”

Ask: “What makes it stable?”

When you see a stablecoin, ask:

1. What backs it?

   Cash in banks? Crypto in smart contracts? Mostly incentives?

2. Who can redeem?

   Everyone, or only institutions?

3. What happens at $0.95?

   Who is guaranteed to buy it back, and with what money?

4. What’s the worst-case failure?

   Freeze risk? Liquidation failure? Death spiral?

• Peg: the target price (usually $1)

• Depeg: when it drifts away (like $0.97 or $1.04)

• Mint: create new tokens

• Burn: destroy tokens (reduce supply)

• Redemption: swapping 1 coin back for $1 (or $1 equivalent)

• Collateral: assets backing the stablecoin

• Collateral ratio: how much collateral backs the debt (safety buffer)

• Overcollateralized: backed by more than 1:1 (like $150 backing $100)

• Liquidation: forced selling of collateral when a loan becomes unsafe

• Liquidity: how easily you can buy/sell without moving the price much

• Arbitrage: people making profit by buying cheap and selling/redeeming higher

• PCV: protocol-controlled treasury used to defend the peg

Whenever you see a stablecoin, ask this one question:

If it drops to $0.95, what force pushes it back to $1?

• “You can redeem it for $1” → strongest

• “It’s backed by collateral + liquidations” → strong if the system is robust

• “The protocol will defend it with incentives/treasury” → depends, riskier

Imagine you walk into a crypto city.

In this city, everything is noisy and dramatic.

One day, ETH is up 20%.

The next day, ETH is down 30%.

That’s exciting if you’re gambling…

but if you’re trying to save money, pay someone, set prices, or borrow, it’s a nightmare.

So people in this city created something boring on purpose:

That’s a stablecoin.

A stablecoin’s job is simple:

Try to stay close to $1.

That target is called the peg.

Think of $1 as a magnet.

When the coin goes to $0.98, something should pull it back up.

When it goes to $1.02, something should push it back down.

A good stablecoin isn’t “stable by magic”… It’s stable because it has a system that fights to bring it back to $1.

And different stablecoins fight in different ways.

Before the types, one key idea:

• Secondary market = where most people buy/sell stablecoins (DEXs, exchanges).

  The price can move to $0.99, $1.01, etc.

• Primary market = where stablecoins are created or cashed out at the source (issuer/protocol).

  This is where minting and redemption usually happen.

This matters because not every stablecoin lets everyone redeem directly. Some only let big institutions do it, and everyone else trades on the secondary market.

Picture a big company with a vault.

Inside the vault: real dollars (or dollar-like assets).

On the blockchain: tokens that represent those dollars.

So the company says:

“Give me $1, I’ll give you 1 token.

Give me 1 token, I’ll give you $1 back.”

That “swap it back for $1” is called redemption.

Because people love easy profit.

• If the coin is trading at $0.98, traders buy it cheap, redeem it for $1, and make $0.02 profit.

  That buying pushes the price back up.

• If the coin is trading at $1.02, traders create new coins for $1, sell them for $1.02, and profit.

  That selling pushes the price back down.

That profit-driven balancing is called arbitrage.

Pros: usually the most stable and widely used

Cons: you must trust the company and the banking system behind it

• If people fear reserves aren’t solid, or redemption becomes limited, confidence drops → price can drift below $1.

• Some designs can freeze funds (issuer/policy risk).

Now imagine a smart-contract pawn shop.

You walk in with your ETH.

The shop says:

“If you lock up $150 worth of ETH, I’ll let you borrow $100 worth of stablecoins.”

That extra safety cushion is called overcollateralization.

The safety level is often described by a collateral ratio (how much collateral backs the debt).

• If the stablecoin becomes too expensive (like $1.05):

  people are tempted to mint/borrow more, sell it for $1.05, and profit.

  More supply pushes it back toward $1.

• If the stablecoin becomes too cheap (like $0.95):

  borrowers buy it cheap, repay their debt, and unlock their ETH.

  Buying reduces supply and pushes it back toward $1.

If your collateral becomes too low, the system forces a sale to protect itself.

That forced sale is called liquidation.

Pros: more transparent (you can often see collateral on-chain)

Cons: relies on liquidations + price feeds working during chaos

• A fast crash can overload liquidations.

• Bad price feeds (oracles) can cause incorrect liquidations or under-backing.

• Smart contract risk is always real.

Now we enter the risky neighborhood.

Here, there is no simple “always redeem for $1” promise.

Instead, there’s a robot that tries to manage the price using rules.

Think:

“If the price is low, I’ll do things to push it up.”

“If the price is high, I’ll do things to push it down.”

How?

• Some designs mint more coins when price is above $1

• Some designs reduce supply when price is below $1

• Some use a second token as a shock absorber

• Some use incentives that try to “force” good behavior

This system depends heavily on confidence.

If people stop believing the robot can defend $1, they rush to exit — and the peg can break fast.

That’s why algorithmic stablecoins are usually considered the highest risk category.

• Confidence breaks → selling accelerates → peg defense can’t keep up.

• Some designs can spiral (“death spiral”) when the helper token collapses.

Some algorithmic/hybrid stablecoins create a “protocol treasury”.

That treasury is called PCV.

PCV = money the protocol controls to defend the peg.

Mental picture:

A central bank keeping reserves to buy/sell in the market to protect the price.

Important detail:

• Users usually can’t directly redeem PCV like a normal $1 redemption system.

PCV can help defend the peg… but it’s still a strategy, not a guarantee.

Stablecoins are the “cash” of crypto. You’ll see them everywhere:

• Trading pairs: most crypto trades happen through stablecoins

• Lending/Borrowing: borrow stablecoins using ETH as collateral

• Yield strategies: “stablecoin vaults” that pay interest (with risk)

• Payments: quick transfers that don’t swing like ETH

Stablecoins try to stabilize price, not eliminate risk.

Different stablecoins come with different risks:

• Fiat-backed: issuer/bank/regulatory risk (and sometimes freeze risk)

• Crypto-backed: smart contract/oracle/liquidation risk

• Algorithmic: reflexive/confidence risk (can break fast)

So don’t ask only: “Is it stable?”

Ask: “What makes it stable?”

When you see a stablecoin, ask:

1. What backs it?

   Cash in banks? Crypto in smart contracts? Mostly incentives?

2. Who can redeem?

   Everyone, or only institutions?

3. What happens at $0.95?

   Who is guaranteed to buy it back, and with what money?

4. What’s the worst-case failure?

   Freeze risk? Liquidation failure? Death spiral?

• Peg: the target price (usually $1)

• Depeg: when it drifts away (like $0.97 or $1.04)

• Mint: create new tokens

• Burn: destroy tokens (reduce supply)

• Redemption: swapping 1 coin back for $1 (or $1 equivalent)

• Collateral: assets backing the stablecoin

• Collateral ratio: how much collateral backs the debt (safety buffer)

• Overcollateralized: backed by more than 1:1 (like $150 backing $100)

• Liquidation: forced selling of collateral when a loan becomes unsafe

• Liquidity: how easily you can buy/sell without moving the price much

• Arbitrage: people making profit by buying cheap and selling/redeeming higher

• PCV: protocol-controlled treasury used to defend the peg

Whenever you see a stablecoin, ask this one question:

If it drops to $0.95, what force pushes it back to $1?

• “You can redeem it for $1” → strongest

• “It’s backed by collateral + liquidations” → strong if the system is robust

• “The protocol will defend it with incentives/treasury” → depends, riskier