Stablecoin

How It Works

Stablecoins attempt to combine blockchain technology with the price stability of fiat currencies. The most common type — exemplified by Tether (USDT) and USD Coin (USDC) — is backed by reserves held by a centralized company. You send them dollars (or crypto), they mint tokens on a blockchain that are supposed to be redeemable 1:1 for dollars. Algorithmic stablecoins try to maintain their peg through code and incentive mechanisms, though this approach failed catastrophically with Terra/UST's $40 billion collapse in 2022.

The fundamental contradiction of stablecoins is clear: they use decentralized technology to represent centralized, government-controlled fiat currency. The issuer can freeze your tokens. The issuer can be shut down by regulators. The issuer might not actually hold the reserves they claim — Tether has faced years of questions about its backing. You are trusting a company, which is exactly the trust model Bitcoin was built to make obsolete.

Stablecoins do serve a practical function in the current transitional period. They provide a dollar-denominated on-ramp, enable trading between exchanges, and give people in countries with currency controls access to dollar stability. But they should be understood for what they are: a temporary bridge technology, not a destination. The goal is Bitcoin — self-sovereign money with no counterparty risk, no issuer, and no possibility of a freeze or rug pull.

Key Points

• Stablecoins peg to fiat currencies, reintroducing the centralized trust Bitcoin was designed to eliminate
• Issuers like Tether and Circle can freeze addresses and censor transactions at will
• Algorithmic stablecoins have failed catastrophically — Terra/UST lost $40 billion in days
• Useful as a temporary bridge but fundamentally at odds with financial self-sovereignty
• Holding stablecoins is trusting a company, not practicing self-custody of sound money