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Intermediate · Lesson 4 of 6Stablecoins and DeFi
Stablecoins aim to hold a fixed value, usually US$1. Fiat-backed stablecoins (such as USDT and USDC) hold cash and short-term government debt in reserve. Algorithmic stablecoins try to hold the peg with code and incentives; TerraUSD collapsed in May 2022, wiping out about US$40 billion with its sister token LUNA.
Decentralised finance (DeFi) recreates lending, trading and derivatives with smart contracts. Automated market makers like Uniswap use liquidity pools instead of order books. Liquidity providers earn fees but face "impermanent loss" when prices move.
DeFi risks include smart-contract bugs and hacks, oracle manipulation, rug pulls, and regulatory change. High advertised yields usually mean high hidden risk.
Key takeaways
- Fiat-backed stablecoins rely on reserves; algorithmic ones can collapse.
- DeFi uses smart contracts and liquidity pools.
- High DeFi yields signal high risk.
Check your understanding
1. Which stablecoin collapsed in May 2022?
- USDC
- TerraUSD (UST)
- USDT
- Bitcoin
Show the answer
TerraUSD (UST). UST lost its peg and LUNA collapsed with it.
2. Liquidity providers in automated market makers face...
- Guaranteed profit
- Impermanent loss when prices move
- No risk
- Margin calls from banks
Show the answer
Impermanent loss when prices move. Pool rebalancing can leave them worse off than simply holding.
Go deeper
- Wikipedia: Stablecoin
- YouTube videos: stablecoins defi explained impermanent loss
- Investopedia: stablecoin
- Wikipedia: Decentralized finance
- Wikipedia: Terra (blockchain)
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