Is a stablecoin actually stable?Some background helps

It is stable exactly as long as everyone believes it can be swapped back for a dollar. That belief has failed before, at speed.

A stablecoin is a token designed to be worth one dollar, always. Most of the time it is. What holds it there is not physics or code — it is the belief that you can always hand the token back and get a real dollar. Everything worth knowing is about how solid that belief is.

What is supposed to be backing it?

In the dominant design, one real dollar for every token. In practice the reserves are mostly short-term US government bills, plus some cash at banks. The issuer promises to swap tokens back for dollars at face value, on demand.

That is not a novel arrangement. It is a money market fund with a different distribution system: hold safe short-term paper, promise a fixed value, honour redemptions. The economics are a century old; only the plumbing is new.

What actually breaks one?

The same thing that breaks a money market fund. If enough holders redeem at once, the issuer has to sell reserves quickly. Selling quickly means selling below value. Now the reserves are worth less than the tokens outstanding, which gives everyone else a reason to redeem too.

It is a run, and it does not require fraud or bad assets. It only requires everyone to want out at the same time, which is the one thing that reliably happens when people get nervous.

Two live examples. In March 2023 USDC fell to about 87 cents over a weekend because part of its reserves sat at Silicon Valley Bank, which had just failed. The dollars were eventually fine and the peg came back — but anyone who had to sell that weekend sold at 87. And in May 2022 TerraUSD, which was backed by nothing but its own algorithm, went from a dollar to nearly nothing in three days and took roughly $40bn with it.

Are they all the same design?

No, and the differences decide everything.

• Backed by real reserves — Tether, USDC. The question is what the reserves are and whether you can verify it.
• Backed by other crypto, over-collateralised — you post more than a dollar of volatile assets per dollar issued. Survives ordinary moves; the buffer is what is tested in extraordinary ones.
• Backed by an algorithm — nothing is held; a mechanism is supposed to keep the price at a dollar. This is the design that failed catastrophically, and it failed for reasons that were predictable in advance.

What can I actually check?

Ask what the reserves are held in, who says so, and how recently. An attestation by an accounting firm is a snapshot, not an audit, and the distinction matters. Then ask who can redeem: for many stablecoins only large institutional clients can go directly to the issuer for real dollars. Everyone else sells on an exchange, at whatever the market offers on the day — which is precisely how 87 cents happened.

Is this covered by deposit insurance?

No. A stablecoin is not a bank deposit and no government scheme stands behind it. If the issuer fails, holders are creditors of a company. Regulation is arriving — the EU's rules are in force and the US has legislated — and it mostly addresses what the reserves must be and who may issue. It does not make the token a deposit.

What is the honest summary?

Stable in normal weather, and useful: crypto markets run on them, and people in countries with failing currencies use them to hold dollars. But treating one as identical to cash in a bank is a category error. It is a claim on a company, backed by assets you mostly cannot inspect, redeemable at par by people who are usually not you.