How stablecoins work and where they fail

Why stablecoins exist

Most coins swing wildly in price. When you want to step out of a position on an exchange for a while, or send value over a blockchain, large daily swings are a nuisance. Coins designed to hold a one-to-one value against a currency such as the US dollar emerged to fill that gap, and they are called stablecoins. Today they also act as the base currency for trading other coins on many exchanges. The crucial point is that the fixed price is not an inherent property; it is the result of a structure built to keep it there.

Three ways to hold the peg

Stablecoins fall into three broad groups depending on what supports the fixed price. Each relies on something different and has different weaknesses.

• Fiat-backed: the issuer holds reserves such as cash and short-term government bonds
• Crypto-backed: issued against a larger deposit of other coins
• Algorithmic: tries to hold the price through supply rules instead of collateral
• Designs vary widely even within one category

Risks of fiat-backed coins

The most widely used model has the issuer hold reserves equal to the money it receives and promise to redeem each coin for a dollar. The questions that matter are whether the reserves are really sufficient, how quickly they can be turned into cash, and who verifies that. In 2023 a major dollar stablecoin briefly fell below a dollar after a bank holding part of its reserves failed, then recovered. Many issuers can also freeze coins held at specific addresses, and who can redeem directly, and on what terms, is set by the issuer's own terms.

Risks of crypto-backed and algorithmic coins

Crypto-backed coins use volatile coins as collateral, so they usually require far more collateral than the amount issued. Automatic liquidation kicks in if the collateral falls sharply, but in a violent market liquidations may lag or the collateral may run short. Algorithmic coins try to hold the price by expanding and shrinking supply without collateral, so once confidence breaks the structure struggles to hold at all. In 2022 one algorithmic stablecoin lost its peg and became almost worthless within a short time, leaving many people with heavy losses.

How a peg breaks

A collapse of the fixed price is commonly called a depeg. It usually starts with doubts about the collateral or the issuer, followed by people rushing to sell or redeem before others do. Heavy selling pushes the market price below a dollar, which can feed more fear in a vicious cycle. Unlike bank deposits, stablecoins are not covered by deposit insurance. Rules are taking shape country by country. The European Union began applying the stablecoin provisions of its Markets in Crypto-Assets Regulation (MiCA) at the end of June 2024, and the United States passed a law in July 2025 (the GENIUS Act) setting licensing and reserve requirements for payment stablecoins. Korea is debating a Digital Asset Basic Act that would cover won-denominated stablecoins, but as of October 2026 it has not passed the National Assembly. Regulatory changes can restrict trading or transfers on particular exchanges, so check the latest official guidance.

Exchange prices versus underlying value

On Korean won exchanges, the won price of a dollar stablecoin does not always match the exchange rate. Depending on demand to move money abroad and on market mood, it can trade above or below the rate, a gap sometimes called the tether premium. So the result in won can differ depending on which market you buy or sell in. Being pegged to a dollar is the goal of the issuance structure; it does not mean the won price on a local exchange is fixed too.

Common misconceptions

Treating stablecoins as the same thing as bank deposits or cash makes it easy to miss the risks. These misconceptions come up often.

• A fixed price means the principal is guaranteed
• Anything with dollar in its name works the same way
• Products paying high interest on stablecoins are safe too
• Nobody can freeze coins held in my own wallet

What to check

Before using a stablecoin, start by finding out how it maintains its price. Look at whether the issuer publishes its reserves regularly, whether an outside firm checks them, and what the redemption terms are. If a product offers high interest on stablecoins, ask separately where that interest comes from. This article explains structure and risk; it does not recommend or rate any stablecoin and is not investment advice.

• How the price is maintained and what the collateral is
• How often reserves are published and whether they are verified
• The issuer's freezing powers and redemption terms
• For interest products, where the yield comes from