The core function of stablecoins is to bring the value of the US dollar onto the blockchain. They serve both cryptocurrency trading and are increasingly used in DeFi, cross-border transfers, and on-chain settlements, making their pegging mechanism and reserve quality key focuses of the market.
Three Main Pegging Methods
The most common type is fiat-collateralized stablecoins. The issuer holds high-liquidity assets such as cash or short-term government bonds at a 1:1 ratio and issues tokens accordingly. As long as users can redeem the tokens at par value, the token price typically fluctuates around $1. USDT, USDC, and RLUSD all fall into this category.
The second type is crypto-collateralized stablecoins. These products lock crypto assets such as ETH into smart contracts and issue stablecoins with over-collateralization. Since the value of the collateral fluctuates, the system maintains a safety buffer and automatically liquidates positions when the collateralization ratio falls below a threshold; DAI is a representative example.
The third category is algorithmic stablecoins. These tokens primarily rely on programmatic supply adjustments to maintain price stability, rather than being backed by sufficient reserves. The article notes that after the depegging and collapse of TerraUSD in 2022, market acceptance of this model declined significantly.
What are the differences between USDT, USDC, and RLUSD?
USDT and USDC are currently the most representative USD-pegged stablecoins, and RLUSD also follows a similar reserve-backed model. Their commonality lies in attempting to link on-chain tokens to real-world USD assets to support circulation and redemption.
The differences among these stablecoins primarily lie in the quality of reserve assets, transparency of disclosure, redemption arrangements, and the creditworthiness of the issuer. For users, whether a stablecoin can maintain its $1 peg over the long term depends not just on its design, but more critically on whether the reserves are real, sufficient, and liquid.
The risks associated with de-pegging and the issuer still require attention.
The article points out that stablecoins are not risk-free assets. The most direct risk is de-pegging, where the price deviates from $1. Stablecoins may experience significant volatility if the market doubts the adequacy of reserves, faces redemption restrictions, or experiences a rapid decline in the value of collateral assets.
In addition, fiat-backed stablecoins rely on centralized entities to hold assets and process redemptions, making reserve audits, custody arrangements, and regulatory requirements crucial. Crypto-collateralized stablecoins, on the other hand, depend more on smart contracts and liquidation mechanisms, which can also come under pressure during extreme market conditions.
As the scale of stablecoins grows, these tokens are no longer just used as trading instruments but are increasingly being adopted for payments, remittances, and cross-border settlements. To assess the reliability of a stablecoin, first examine what backs its $1 value, and only then consider its market size and usage scope.