Stablecoins: Mechanics, Uses and Hidden Risks

How fiat-backed, over-collateralised and algorithmic stablecoins differ, and where the real risk sits.

Three designs, three risk profiles

Fiat-backed tokens hold reserves off-chain and carry issuer and banking risk. Over-collateralised tokens hold on-chain collateral and carry liquidation risk. Algorithmic designs rely on incentives and have repeatedly failed under stress.

Reserve quality matters

Read the attestations. Short-dated treasury bills and cash at regulated institutions behave very differently from commercial paper in a liquidity squeeze.

Operational uses

Stablecoins are used for settlement between venues, treasury operations and as a base pair for trading. Treat them as short-duration instruments with counterparty exposure, not as cash.

Key takeaways

• Three designs, three risk profiles: Fiat-backed tokens hold reserves off-chain and carry issuer and banking risk.
• Reserve quality matters: Read the attestations.
• Operational uses: Stablecoins are used for settlement between venues, treasury operations and as a base pair for trading.

Risk disclosure

This article is educational content published by Vaultero Capital and is not investment advice, a recommendation, or an offer to buy or sell any asset. Digital assets are highly volatile and you may lose some or all of the capital you commit. Projected or historical returns are not a reliable indicator of future performance. Consider your objectives, time horizon and tolerance for loss, and seek independent professional advice where appropriate. Full terms are set out in our risk disclosure.