Educational content, not investment advice. Crypto-asset values fluctuate.

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Stablecoins and depeg risk

Stablecoins are cryptocurrencies whose value is pegged to a real-world currency (usually the US dollar). They're a core tool in DeFi strategies. What sets them apart from each other is what actually backs them — and once you understand that difference, you can judge any stablecoin yourself instead of trusting its name.

A simple analogy

A stablecoin is like a casino chip. One chip should always be worth 1 dollar. But if the casino goes bankrupt — the chips become worthless. What matters is knowing which "casino" stands behind your chip.

Types of stablecoins

1. Fiat-backed (backed by real fiat money — euros or dollars in a bank)

StablecoinIssuerWhat backs itAudit
USDCCircleDollars + short-term TreasuriesMonthly (Deloitte)
USDTTetherClaims Treasuries + cashQuarterly reports

USDC — the main stablecoin in our strategy. Reasons:

USDT — the largest by market cap, but less transparent:

2. Crypto-backed (backed by other cryptocurrency as collateral)

StablecoinProtocolWhat backs itDecentralized?
DAIMakerDAO (now Sky)ETH, USDC, and othersYes

DAI is over-collateralized (for every $1 of DAI, there's more than $1 of collateral behind it). That makes it safer than algorithmic stablecoins.

3. Yield-bearing (stablecoins that pay interest)

StablecoinIssuerBacked byAPY
USDYOndo FinanceUS Treasury bonds~4.5%

USDY is a stablecoin that pays interest. It's backed by US government bonds. ⚠️ Lower liquidity on Solana — we no longer use it as our borrow asset in our strategy (as of spring 2026).

4. Algorithmic (no real collateral)

Algorithmic stablecoins try to hold a $1 value with no real backing — only mathematical formulas and incentives. This is the weakest category, and below you'll see exactly why.

The UST/LUNA collapse — 2022

UST was the largest algorithmic stablecoin (~$18 billion market cap).

What happened in May 2022:

  1. UST started to drift from $1 (depeg)
  2. The algorithm tried to stabilize it — but only accelerated the fall
  3. Within 3 days, UST fell to $0.10
  4. LUNA (the backing token) fell from ~$80 to $0.00001
  5. ~$40 billion in value was lost

The mechanism you can now recognize: UST rested on a formula alone, not on real assets. Once confidence disappeared, the formula had nothing to hold the price up. That's why the first question for any stablecoin is "what real asset actually backs this?" If the answer is just "an algorithm," you know what you're dealing with.

Depeg — what this word tells you

Depeg (breaking the peg) is when a stablecoin drifts away from its pegged value ($1). This can happen to any stablecoin, so it's worth knowing what happens next — so you can tell a temporary wobble apart from a real collapse.

The March 2023 USDC depeg — an example of what recovery looks like

What this shows you: the decisive factor isn't "did it fall," it's "what stands behind it." USDC had real assets, so it recovered within days. UST had nothing — so it never came back. The type of backing is your best compass.

USDC vs USDT — a comparison

AspectUSDCUSDT
IssuerCircle (US)Tether (BVI)
Market capTens of billions of USD>$100 billion
AuditMonthlyQuarterly reports
RegulationStrong (US)Weak
TransparencyHighMedium
DeFi usageWidespreadWidespread
Solana✅✅
Ethereum✅✅

Why USDC in our strategy?

We use USDC because:

  1. It's regulated and audited
  2. It's backed 1:1 by real assets
  3. Circle is a US company with clear rules
  4. It's well integrated into both the Solana and Ethereum ecosystems

USDY — why it's different

Update (spring 2026)

We used to recommend USDY as the borrow currency in our Kamino strategy, for its 4.5% APY. After more experience, we changed course — we now use USDC instead, for deeper liquidity, lower smart contract risk, and faster crisis-management options. USDY is still a good yield-bearing asset to hold, just not our borrow asset.

USDY (Ondo Finance) is a stablecoin backed by US Treasury bonds that pays ~4.5% APY:

FeatureValue
Backed byUS Treasury obligations
APY~4.5% (passive)
NetworkSolana, Ethereum
UseYield-bearing holding (no longer used as a borrow asset)
RiskLow (US govt debt), but limited Solana liquidity

In our strategy: USDY is no longer used as a borrow currency. If you want a passive ~4.5% APY, you can still hold USDY in your wallet or supply it on Kamino — just not as debt.

Depeg risk, and what you do about it

Every risk here has a concrete response. You don't need to fear it — you manage it.

Summary

StablecoinTypeSafetyUse in our strategy
USDCFiat-backed✅ HighPrimary (LP, lending, borrow asset)
USDYYield-bearing✅ HighYield-bearing holding (no longer used in the strategy itself)
USDTFiat-backed⚠️ MediumAlternative — largest volume worldwide, but lower liquidity than USDC on Solana
DAICrypto-backed✅ GoodEthereum DeFi
USTAlgorithmic❌ CollapsedDO NOT USE
Quick check
Why was USDC chosen as the primary stablecoin in our strategy?
Practice task
0 / 5
Check a stablecoin's reserves yourself

This lesson claimed USDC is backed by real assets and that UST collapsed. Verify both claims using real sources — takes about 7 minutes, nothing to buy.

This is learning, not investing — use only small amounts you treat as tuition.

You just compared USDC and UST's backing using primary sources — a skill most crypto holders never pick up.

Blockchains and networksWhy prices swing