Stablecoin

A stablecoin is a crypto token engineered to be worth exactly one dollar (or euro), always. It moves like Bitcoin — anywhere in the world in minutes, around the clock, without a bank — but is designed not to have Bitcoin's price chart.

The dominant design is disarmingly simple: for every token in circulation, the issuer holds one real dollar of reserves — mostly short-term US Treasury bills — and stands ready to redeem tokens at par. Tether (USDT) and Circle (USDC) run this model at scale: roughly $300bn of tokens between them, making stablecoin issuers, collectively, a top-20 holder of US government debt — larger than many countries.

Why does anyone want a tokenised dollar? Traders use stablecoins as the cash leg of every crypto trade (most Bitcoin volume is priced against USDT, not dollars). Savers in Argentina, Turkey or Nigeria hold digital dollars their local banks can't offer. And transferring value across borders in minutes for cents undercuts a remittance industry that charges percent.

The three architectures

• Fiat-backed (USDT, USDC): off-chain reserves of T-bills, repo and cash; the token is an IOU on the issuer. Simple, dominant — and dependent on reserve quality and honest attestation.
• Crypto-collateralised (DAI/USDS): on-chain vaults over-collateralised with volatile assets. Transparency by construction, at the cost of capital efficiency:

• Algorithmic: no collateral — the peg maintained by an arbitrage loop against a sister token. Terra's UST proved the design reflexive: $18bn evaporated in May 2022 when the loop ran in reverse. The category is, deservedly, near-extinct.

How the peg actually holds

Not by decree — by arbitrage. Authorised participants can mint at $1.00 and redeem at $1.00 with the issuer. Token trades at $1.002 on an exchange → mint and sell; trades at $0.997 → buy and redeem. The peg is as tight as this loop is fast and open:

where the costs \(c\) include fees, minimums, KYC friction and — decisively — redemption confidence. Widen redemption doubt and the band widens with it.

Money-market economics in a token wrapper

A fiat-backed stablecoin is structurally a constant-NAV money market fund that keeps the yield: reserves earn ~5% in bills at 2023–24 rates while tokens pay 0%, making float the business model — Tether reported annual profits above $10bn with a headcount smaller than a bank branch. The seigniorage invites competition: yield-passing rivals, tokenised MMFs (BlackRock's BUIDL), and exchanges demanding revenue shares. Regulation pushes the other way — the US GENIUS Act (2025) and EU's MiCA both prohibit paying interest on payment stablecoins, fencing them off from deposits and funds, and mandate HQLA-style reserves, redemption at par, and (MiCA) volume caps for non-euro coins.

Run dynamics and reserve design

The 2008 money-fund playbook maps one-to-one: par claim, first-mover advantage, opaque assets. Differences that matter:

• 24/7 secondary vs. banking-hours primary: the token trades continuously but redemption settles through banks — every stress episode (USDT May 2022: $10bn redeemed in days; USDC/SVB) is an interaction between these two clocks.
• Reserve composition history is the credit story: Tether once held ~50% commercial paper and an undisclosed loan book; post-2021 settlements with US authorities pushed it to overwhelmingly T-bills — reserve attestations (not full audits, still) became the market's key disclosure document.
• On-chain observability cuts both ways: DAI's collateral is verifiable block by block; but on-chain runs are also frictionless — no queue at the branch, just a swap.

Macro footprint

• Bill-market demand: stablecoin float is now a policy-relevant buyer of short Treasuries; BIS work shows measurable flow effects on bill yields from large mint/redeem waves.
• Dollarisation channel: USDT is de facto retail dollar infrastructure across the global south — extending dollar dominance through channels no US agency controls, a fact both US strategy papers and emerging-market capital-control regimes have noticed.
• Settlement collateral: perpetual futures margin, DeFi collateral, and increasingly conventional cross-border B2B payments all clear in stablecoins — the "cash leg" of a parallel settlement system that now turns over trillions per year.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.