Stablecoin
A token meant to hold a fixed value - and the question of what holds it
What is it?
Most values in DeFi swing hard. A stablecoin is an attempt to put one beside them that does not.
It is needed to quote prices, to collateralise loans and to lock in gains without leaving the blockchain. Almost every protocol builds on one.
The decisive question is never whether a stablecoin is currently worth a dollar. It is: by virtue of what?
Three ways of holding the same price
| By money in an account | For every token issued, a dollar sits at a bank. The value depends on that being true - and that is an offchain statement you have to take on trust. |
|---|---|
| By deposited crypto assets | More is deposited than is issued, say one and a half times as much. The value depends on the deposit not falling too fast. |
| By a mechanism | A program issues and redeems depending on the price. The value depends solely on enough people taking part - there is nothing behind it. |
Day to day all three look the same: one token, one dollar. Under pressure they behave entirely differently.
Where does a risk come from?
From the fact that the fixed value is a promise, not a law of nature.
When the price comes loose from its target, that is called a depeg. It can be temporary - or permanent. Whoever holds the token loses money, without anyone having been attacked.
The knock-on effect weighs heavier: because so many protocols build on them, a depeg does not only hit the holders. Loans collateralised with it get into trouble at the same time.
Why this matters for cover
Because there are cover products that address exactly this case - and because their conditions have to be unusually precise.
A depeg is not an event with a clear beginning. The price slips, recovers, slips further. A wording therefore has to set out: from what distance to the target, measured against what, over what period. Unless that is answered precisely, it is unclear whether the case ever occurred.
Where this leads
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What happens when the fixed value does not hold.
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Who tells the protocol what the token is worth in the first place.