Stablecoins: Why 'Stable' Is Doing a Lot of Work in That Name
How coins pegged to a currency actually hold that peg, and what happens to holders on the occasions the mechanism fails.
By Firoz Khan|4 September 2026|Updated 20 September 2026|8 min read
A stablecoin is designed to track the value of a real currency, almost always the US dollar, rather than to go up. That makes it look like the boring corner of crypto, and most of the time it is, but the word 'stable' describes an intended outcome, not a guarantee, and the mechanism behind that outcome varies a lot more than the branding suggests.
Three ways a peg is actually held
Fiat-backed stablecoins hold real dollars or equivalent low-risk assets in reserve for every coin issued, at least in theory, and the peg depends entirely on those reserves genuinely existing and being accessible. Crypto-collateralised stablecoins are backed by other cryptocurrencies held in excess of the value issued, to absorb the underlying asset's volatility. Algorithmic stablecoins hold no real backing at all, relying instead on code and market incentives to maintain the peg, which is the riskiest of the three by a clear margin.
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What 'backed 1:1' actually requires you to trust
A reserve attestation, a snapshot confirming assets existed at one point in time, is not the same as a full independent audit, and most stablecoin issuers publish the former rather than the latter. Holding a fiat-backed stablecoin means trusting the issuer's solvency and honesty about its reserves, a different kind of risk to the market risk you're taking on with a volatile coin, and one that's much harder for an individual holder to verify directly.
Why they matter more than most beginners realise
Stablecoins are the base layer almost all crypto trading and DeFi activity actually runs through, used to move between other assets, to price trades, and to earn yield in lending protocols. Anyone active in crypto is very likely holding or interacting with a stablecoin regularly, whether or not they've thought of it as a distinct kind of asset with its own risks.
De-pegging is a real, recurring event
TerraUSD, an algorithmic stablecoin, collapsed in May 2022, wiping out tens of billions of dollars in value within days as its peg failed entirely. Fiat-backed stablecoins have also traded briefly below their peg during periods of acute market stress or concern over an issuer's reserves. These aren't hypothetical tail risks, they've happened to coins that looked secure right up until they weren't.
The UK regulatory picture
UK policy has been moving toward bringing stablecoin issuers under direct regulatory oversight, with more formal requirements around reserves and redemption. That framework isn't yet fully in force, which means most stablecoins in everyday use today should still be treated as unregulated for practical purposes, whatever the direction of travel looks like.
A reminder
The FCA risk warning still applies to higher-risk crypto content. Always assess how much risk you are willing to take before buying.
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