Stablecoin Systems Overview
system overview
Understanding Stablecoin Systems ÔÇö Design, Risk, and Purpose
Stablecoins are digital assets designed to maintain a consistent value, most commonly pegged to the U.S. dollar. They form the backbone of decentralized finance (DeFi), allowing for stable transactions, on-chain savings, liquidity provision, and cross-border payments. Stablecoin systems vary in design ÔÇö from fiat-backed to crypto-collateralized to fully algorithmic ÔÇö each with different trade-offs in decentralization, transparency, and stability.
Use Case: This overview provides a foundational understanding of how stablecoins are structured and why each model matters in the broader crypto economy.
Key Concepts:
- Fiat Pegs
- Collateral Models
- Algorithmic Design
- Decentralization
- Liquidity
- Capital Efficiency
Main Stablecoin Categories:
- Fiat-Backed Stablecoins
- Examples: $USDC, $USDT, $XUSD, $RLUSD
- Backed 1:1 by real-world dollars held in banks or trust accounts
- Most trusted for redemptions but centralized by nature
- Crypto-Collateralized Stablecoins
- Examples: $DAI
- Backed by overcollateralized crypto assets (like ETH, wBTC, USDC)
- Fully on-chain and decentralized but exposed to market volatility
- Algorithmic Stablecoins
- Examples: $UST (collapsed), $AMPL, partially $FRAX
- Use smart contracts to expand/contract supply based on demand
- Most experimental and prone to failure if peg breaks
- Hybrid Models
- Examples: $FRAX
- Combine real collateral with algorithmic controls
- Aims for decentralization without full reliance on external reserves
Why Stablecoin Design Matters:
- Determines reliability in times of market stress
- Impacts whether users trust a stablecoin for savings, trading, or payments
- Defines whether control lies with a centralized issuer or smart contracts
Connected Indexes: