Stablecoins: Types, Risks and Their Role in Crypto Lending

Definition

A stablecoin is a token designed to track the value of another asset, almost always the US dollar. The stability does not come from the blockchain. It comes from whatever backs the token and from the mechanism that lets holders swap it back for that backing.

The three main designs

Fiat-backed

A company issues one token for each dollar, or near-dollar asset such as short-term government debt, that it holds in reserve. Holders who pass the issuer’s checks can redeem tokens for dollars. USDT, issued by Tether, and USDC, issued by Circle, are the largest examples. The risk sits with the issuer: the quality of its reserves, the banks that hold them, and whether it honours redemptions under pressure.

Crypto-collateralized

Users lock more crypto than the value of stablecoins they mint, much like taking out a crypto loan. DAI, created by MakerDAO, is the best-known example; in 2024 the project rebranded as Sky and introduced a successor token, USDS. Here the risk moves from a company to the collateral and the liquidation system. A crash fast enough can leave the system without enough backing.

Algorithmic and synthetic

These designs hold their value through market incentives or hedged trading positions rather than full reserves. Purely algorithmic stablecoins have the worst record: TerraUSD lost its peg in May 2022 and collapsed together with its sister token LUNA. Newer “synthetic dollars” back their tokens with hedged derivatives positions, which adds exchange risk and the risk that funding rates turn against them.

How a peg breaks

Reserve shock

In March 2023 USDC briefly traded well below one dollar after Circle disclosed that part of its reserves was held at Silicon Valley Bank, which had just failed. The peg recovered once those deposits were secured.

Run on redemptions

If holders doubt the backing, many try to exit at once and the market price falls below the redemption value.

Collateral crash

For crypto-backed coins, a sudden fall in collateral prices can outrun liquidations.

Design failure

An algorithmic model can enter a spiral in which every attempt to defend the peg makes it worse.

Regulatory action

An issuer can be ordered to stop minting, or a token can be delisted in a region.

Why this matters for loans and lending

For a borrower, a stablecoin loan means debt that does not move with crypto prices, so only the collateral side is volatile. If the borrowed stablecoin trades above its peg, the debt becomes more expensive to buy back.

For a lender, stablecoin pools avoid the price swings of volatile tokens, which is why most yield products marketed as low-risk are built on them. The risks that remain are the peg itself and the platform where the coins are lent.

Stablecoins are also the settlement currency of most on-chain business credit, from trade finance to emerging-market lending.

Regulation, briefly

Rules are changing quickly. In the EU, the MiCA regulation has applied to stablecoin issuers since June 2024, with authorisation and reserve requirements. In the United States, a federal stablecoin law, the GENIUS Act, was signed in July 2025, with detailed rules to follow. Other jurisdictions are drafting their own regimes, so check the current position where you live.

Judging a stablecoin before you use it

1. What backs it, and who publishes reports on those reserves?
2. Who can redeem it for dollars, and at what cost?
3. How deep is its market on the exchanges or pools you use?
4. How did it behave during past market stress?
5. May it be offered in your country?