The $40B Collapse That Changed Crypto Forever

Not All Stablecoins Are Stable

You've heard the term. But have you ever asked what keeps a "stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold" stable? Stablecoins were supposed to be crypto's answer to volatility. Instead, one of them erased $40 billion in days. Here's the story behind stablecoins, and what happened.

Why No One Wanted to Get Paid in Bitcoin

BitcoinThe first decentralized cryptocurrency, created in 2009 by Satoshi Nakamoto moves like a rollercoaster. EthereumA decentralized blockchain platform that enables smart contracts and decentralized applications too. That's fine for speculation - but terrible for payments, contracts, or anything that needs price stability. Just like real world inflation cuts your purchasing power - ask anyone in Venezuela or Turkey. So stablecoins were created. To solve one of crypto's biggest problems: volatility.

The idea was to have a crypto asset pegged to the value of a real-world currency - usually the U.S. dollar - that would promise something familiar and predictable. But pegged doesn't always mean backed by that currency in a vault, like the US dollar used to be backed by gold . . . until it wasn't. Some stablecoins are supported by real reserves. Others rely on code, incentives, or a complex system of swaps.

In the end, it's all about trust - and whether that trust holds in moments of panic. As long as users trust the system, the peg holds. But if that trust breaks - and too many people try to cash out at once - the result isn't just volatility. It's a stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold panic bank run. And in that scenario, even a $1 coin can go to zero - fast.

Stable on the Surface. Wild Underneath.

Stablecoins are crypto assets meant to holdA misspelling of 'hold,' used to mean holding onto cryptocurrency for long-term gains a steady value - usually $1. But how do they stay stable? That's where things get interesting.

Fiat-Backed (e.g. USDC, USDT, EURC, TUSD)

These stablecoins are pegged to fiatTraditional government-issued currency, such as USD, EUR, or NIS (usually USD or EUR) and claim to be backed by real-world assets like cash or short-term Treasuries.

• USDCA fully-reserved stablecoin pegged 1:1 to the US Dollar, issued by Circle and backed by regulated financial institutions (by Circle) is considered the most transparent and regulated, with regular attestations and U.S. oversight.
• USDTThe largest stablecoin by market cap, pegged 1:1 to the US Dollar and issued by Tether Limited (Tether) is the most traded but less transparent - backed by a mix of assets and historically slow to disclose reserves.
• EURC (formerly Euro CoinEuro-backed stablecoin issued by Circle maintaining 1:1 parity with EUR) is Circle's euro-pegged version, slowly gaining traction in Europe.
• TUSDA fiat-backed stablecoin pegged 1:1 to the US Dollar with independent attestations of its reserves is another USD-pegged coin gaining popularity in Asia, particularly on Binance pairs.

Crypto-Backed (e.g. DAI, sUSD)

These are overcollateralized with crypto - for example, DAIA decentralized, algorithmic stablecoin pegged to the US Dollar and backed by crypto collateral through the MakerDAO protocol is backed by ETHA decentralized blockchain platform that enables smart contracts and decentralized applications and other tokens locked in smart contractsSelf-executing code on a blockchain that automates transactions via MakerDAO.

• More decentralized than fiatTraditional government-issued currency, such as USD, EUR, or NIS-backed coins.
• But exposed to crypto market swings.
• Often require 150%+ collateral to mint $1 worth of stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold.

Algorithmic (e.g. UST, USDN, AMPL)

These rely on code and game theory to maintain their peg.

No real reserves.

No collateral.

Just incentives.

• UST (Terra) is the most famous failure - it lost its peg in 2022, wiping out $40B.
• Other algorithmic coins (like USDN) have also collapsed or depegged.
• Most serious projects now avoid this model entirely.

The $40B that evaporated

In May 2022, the crypto world witnessed a seismic event: the collapse of Terra's UST stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold. This wasn't just another market dip - it was a dramatic unraveling that erased over $40 billion in value and sent shockwaves through the entire digital asset ecosystem.

UST was designed as an algorithmic stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold, aiming to maintain a 1:1 peg with the U.S. dollar through a complex mechanism involving its sister tokenA digital asset built on an existing blockchain, often representing utility or value, LUNA. The system relied on minting and burningThe process of permanently removing cryptocurrency from circulation to reduce supply LUNA to stabilize UST's price. A delicate, complicated balance - like a house of cards. The moment the first gust of doubt hit, fear spread, and the whole thing collapsed. Panic triggered massive withdrawals the mechanism couldn't handle, leading to a downward spiral. As UST lost its peg, both UST and LUNA's value evaporated.

The collapse was so significant that it drew widespread media attention. As reported by The Guardian on May 13, 2022, the event prompted major crypto exchanges to delist TerraUSD, effectively eliminating the project.

This incident served as a starkCryptographic proof system providing transparent, scalable zero-knowledge proofs without trusted setup reminder of the vulnerabilities inherent in algorithmic stablecoins and underscored the importance of robust, transparent mechanisms to maintain stability in the volatile world of cryptocurrency.

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"Stablecoins are often compared by technical specs - but sometimes, metaphors work better. Think of stablecoins like bridges. USDCA fully-reserved stablecoin pegged 1:1 to the US Dollar, issued by Circle and backed by regulated financial institutions is a bridgeA connection between two blockchains that allows the transfer of assets or data made of steel, with bank inspectors. DAIA decentralized, algorithmic stablecoin pegged to the US Dollar and backed by crypto collateral through the MakerDAO protocol is a suspension bridge made of crypto cables. Terra was… matchsticks and vibes."

Pro Tip

Don't just look at the peg - look at the redemption engine. Can the stablecoinA cryptocurrency pegged to a stable asset, such as USD or gold actually be redeemed for fiatTraditional government-issued currency, such as USD, EUR, or NIS? Who controls that process? What happens in a liquidityThe ease with which an asset can be bought or sold without affecting its price crunch?

The peg is the illusion. Redemption is reality.

Where Stablecoins Fit In the Bigger Picture

• Coins vs. Tokens: Coins (like Bitcoin or ETH) are native to their own blockchain. Tokens are built on top of existing blockchains using smart contracts. → Stablecoins are tokens, not coins. Most are issued on blockchains like Ethereum (as ERC-20 tokens), Solana, or BNB Chain - meaning they don't have their own chain, but live on others.
• On the Blockchain: Stablecoins live on blockchains for transparency, programmability, and 24/7 global transfers. Every transaction is recorded publicly - but the backing is off-chain (e.g. Treasuries, dollars in a bank). That's why they're called "blockchain-based representations of fiat." → The peg is on-chain. The backing is off-chain. The trust lives in between.
• Why It Matters: Stablecoins let users interact with DeFi, NFTs, games, and cross-border transfers - without being exposed to crypto's wild price swings. They're also the on-ramp and off-ramp layer for most users, connecting the fiat world to the crypto ecosystem.

So, is there no solution to this stability and trust issue?

Like the proverbial chicken-and-egg loop - volatility kills adoption, but without adoption, trust never builds.

There might be one.

Central Bank Digital Currencies (CBDCs) sound like the perfect fix. No volatility. No redemption risk. No shady reserves. Unlike stablecoins, they're not pegged to fiatTraditional government-issued currency, such as USD, EUR, or NIS - they are fiat. Issued and guaranteed by the state.

In theory, they offer everything crypto has been chasing: Trust, transparency, and stability - without volatility or middlemen.

But here's the cost.

With CBDCs, every transactionA transfer of value or data recorded on a blockchain, verified by network participants, and permanently added to the distributed ledger can be tracked, limited, or reversed. Money becomes programmable - not just by code, but by policy. Want to spend your digital dollars on something off script? They might not go through. Too much red meat this month? Too much travel? Too political?

It's the most stable currency you've ever used - until it doesn't let you use it.

Next Up

Crypto isn't dead. It's just maturing. While everyone in the West debates regulation and watches charts, real-world asset tokenizationConverting real-world assets into digital tokens on a blockchain is already happening, especially in emerging markets. The use cases are real, the rails are built, and some of the smartest builders are bypassing Wall Street entirely.