Stablecoins
Tokens designed to hold a constant value against a currency. What they hold behind them, and who has a claim on it, differs enormously between them.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- The stability is a design objective, not a property of the token.
- Fully reserved, over-collateralised and algorithmic designs are different things.
- The reserves' composition determines what the token is actually backed by.
- Whether holders have a legal claim on the reserves varies by issuer.
- An algorithmic design failed at scale, and the mechanism of that failure is instructive.
MAD Academy Training Video · 0:46
Stable Depends Entirely on the Backing
A stablecoin holds its peg because of what stands behind it, and that backing ranges from short Treasuries to nothing but an algorithm.
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The three designs
| Design | What backs it | Main risk |
|---|---|---|
| Fully reserved | Cash and short-dated securities held by an issuer | The reserves' quality, and the issuer's solvency |
| Over-collateralised | Other crypto assets, at more than 100 percent | A sharp fall in the collateral's value |
| Algorithmic | A mechanism adjusting supply, with limited or no reserves | The mechanism failing under pressure |
The three are grouped under one name and are structurally different instruments. The first is closest to a money market fund with a token interface; the third is a mechanism rather than a holding.
What the reserves are
For a reserved stablecoin, the composition of the reserves is the substance of the backing. Cash and Treasury bills are one thing; commercial paper, secured loans or other tokens are another.
- Attestations differ from audits, and most disclosure in this sector has been attestation.
- The maturity of the reserves matters: a run requires liquidating them quickly.
- Where reserves include less liquid assets, redemption at scale is harder than the composition suggests.
- Whether a holder has a direct legal claim on the reserves depends on the issuer's terms and jurisdiction.
The fourth item is the one most often assumed rather than checked. A token that references a dollar is not necessarily a claim on one, and the terms state which it is.
How a peg breaks
A peg holds because holders believe they can exchange the token for the reference value. Doubt about that produces selling, which is the mechanism by which the doubt validates itself.
- 1Doubt appearsAbout reserves, about redemption, or about a counterparty holding them.
- 2Holders exitSelling the token, or redeeming it where redemption is available.
- 3The price slips below the referenceWhich is itself evidence supporting the original doubt.
- 4The slip acceleratesAs holders who were confident reassess, which is the classic run dynamic.
This is a bank run in a different wrapper, and the vulnerability is the same one. A fully reserved token with immediate redemption is more resistant to it and is not immune, since the reserves still have to be liquidated.
- 1Doubt appearsAbout reserves, redemption, or a counterparty holding them
- 2Holders exitSelling the token, or redeeming where redemption exists
- 3The price slips below the referenceWhich is itself evidence supporting the doubt
- 4The slip acceleratesAs holders who were confident reassess
The algorithmic failure
An algorithmic stablecoin maintains its value through a mechanism that adjusts supply, typically by allowing conversion into a second token whose value floats. A prominent example collapsed in 2022, losing essentially all of its value within days.
The failure mode is instructive because it is structural rather than a matter of execution. When the peg slipped, the mechanism minted more of the floating token, which diluted its value, which reduced the support available for the peg. The stabilising mechanism became the destabilising one.
Regulatory frameworks in several jurisdictions have subsequently focused on reserve requirements and redemption rights, which is a response to exactly this structural distinction rather than to the sector generally.
Where they are actually used
Understanding what these instruments are for explains the demand for them, which is otherwise puzzling for a token designed not to appreciate.
- As the settlement leg on trading platforms, where they serve the role cash serves elsewhere.
- As a way of holding value between transactions without converting to a bank account.
- For cross-border transfers, where the alternative is slower and more expensive.
- As collateral within lending arrangements on those platforms.
The first is the largest by volume. A platform without banking connections for every currency can quote everything against a token that references a currency, which is an infrastructure role rather than an investment one.
That role is also why a failure propagates. A token used as the settlement asset across many venues affects all of them simultaneously if its peg breaks, which is a concentration risk that its stability makes easy to overlook.