Lesson 9: Stablecoins and Stability Mechanisms

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Lesson 9: Stablecoins and Stability Mechanisms

🎯 Core Concept: The Stability Trilemma

Cryptocurrencies are volatile; a functional financial system requires a stable unit of account. Stablecoins bridge this gap, but their design is constrained by the Stablecoin Trilemma: a stablecoin can only optimize for two of three properties—Decentralization, Stability, and Capital Efficiency.

Stablecoin Trilemma Diagram

📚 Types of Stablecoins

Fiat-Collateralized (e.g., USDC, USDT)

A centralized entity holds $1 in a bank account for every 1 token issued. These are capital efficient (1:1 backing) but suffer from centralization risk (custodian can freeze funds).

Crypto-Collateralized (e.g., DAI)

Decentralized and trustless. Users lock volatile crypto assets in a smart contract to mint stablecoins. This requires over-collateralization to absorb volatility.

Algorithmic

These attempt to maintain a peg via supply elasticity and incentives rather than full collateral backing. History (e.g., Terra/Luna) suggests these are highly risky and prone to "death spirals."

Stablecoin Types Comparison

Stability Mechanism Flowchart

🎮 Interactive: Stablecoin Comparison Tool

Compare different stablecoins on the Trilemma axes—Decentralization, Stability, and Capital Efficiency:

https://defi-university-app.web.app/interactives/defi-concepts/stablecoin-comparison.html?courseId=defi-concepts&interactionId=stablecoin-comparisondefi-university-app.web.app

Interactive DeFi Protocol Explorer

Use this interactive tool to explore and compare different stablecoin protocols:

DeFi Protocol Explorer | DeFi Universitydefi-university-app.web.app

Interactive Token Economics Calculator

Use this interactive tool to analyze stablecoin token economics:

Token Economics Calculator | DeFi Universitydefi-university-app.web.app

🔑 Key Takeaways

1. The Trilemma is Real: No stablecoin perfectly achieves all three properties

2. Fiat-Backed: Most capital efficient but centralized

3. Crypto-Backed: Decentralized but capital inefficient

4. Algorithmic: Risky, prone to failure

5. Choose Based on Priorities: Decentralization vs. efficiency vs. stability

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Next Lesson: In Lesson 10, we'll explore flash loans and advanced DeFi primitives.