STABLECOINS EXPLAINED
Plain English
Stablecoins are cryptocurrencies pegged to the US dollar (or other assets). $1 of USDC should always be worth $1. They let you stay in crypto without volatility — useful for earning yield, waiting for buy opportunities, or just transacting.
Going deeper
Stablecoins maintain a stable value by different mechanisms: Fiat-backed stablecoins (USDC, USDT) are backed 1:1 by cash or equivalents held by a company — centralized and regulated. Crypto-backed stablecoins (DAI) are over-collateralized with other crypto (e.g., $150 of ETH to mint $100 DAI) — decentralized but capital-inefficient. Algorithmic stablecoins (UST — now failed) used algorithms and incentives to maintain the peg — these carry significant de-peg risk. Stablecoins are the plumbing of DeFi — they allow trading, lending, and earning without exiting crypto. They carry their own risks: regulatory risk (USDC issuer Circle can freeze addresses), counterparty risk (Tether's reserve transparency questions), and smart contract risk.
Examples
Terra/LUNA Collapse
In May 2022, UST (algorithmic stablecoin) lost its peg. The death spiral mechanism between UST and LUNA caused both to collapse to near-zero in 72 hours. $40 billion in value evaporated. This is why stablecoin mechanism matters enormously.
Yield on Stables
You hold $10,000 USDC in a savings account earning 0.5%. On Aave, USDC lending rates have varied from 2-12% depending on demand. Crypto stablecoin yields reflect the borrowing demand in the ecosystem — higher market activity = higher rates.