How Stablecoins Actually Maintain Their Peg (and When They Don't)

The term 'stablecoin' covers several fundamentally different mechanisms: fiat-collateralized reserves, crypto-collateralized (overcollateralized) positions, and algorithmic supply-adjustment models. Each carries a different risk profile.

Fiat-collateralized stablecoins depend on the quality, custody, and regular auditing of their reserve assets. Crypto-collateralized models depend on the volatility of the underlying collateral and the liquidation mechanisms that maintain the peg.

Algorithmic models, which rely on incentive mechanisms rather than direct collateral, have historically shown they can de-peg rapidly under stress, as seen in several widely covered failures in past market cycles.

Before treating any stablecoin as a cash-equivalent within a portfolio, it's worth confirming publicly which mechanism it uses and what transparency (audits, attestations) is available on its backing.