Stablecoins occupy a critical place in the digital-asset ecosystem. Designed to maintain parity with a fiat currency such as the US dollar, they offer valuable stability in an otherwise volatile market. Yet not all stablecoins are created equal, and insufficient collateral or lack of proof of reserves can trigger major disruptions—as illustrated by the Terra Luna collapse. This article explores the different categories of stablecoins, the importance of collateral and proof of reserves, and the lessons learned from recent events.

What is a stablecoin?

A stablecoin is a cryptocurrency engineered to maintain a stable value, usually pegged to a fiat currency like the dollar (USD), the euro (EUR), or to other assets such as gold. They act as a bridge between volatile cryptocurrencies and traditional currencies, facilitating transactions and providing a more predictable store of value.

The different types of stablecoins

Several categories of stablecoins exist, each with its own mechanism for maintaining stability:

• Fiat-collateralised stablecoins: Examples include Tether (USDT) and USD Coin (USDC).
• Crypto-collateralised stablecoins: Example: Dai (DAI).
• Algorithmic stablecoins: Examples: TerraUSD (UST), Ampleforth (AMPL).

The importance of collateral and proof of reserves

Collateral guarantees that each token issued is backed by a real asset. Without sufficient collateral:

• Depeg risk: The stablecoin can lose parity with the reference currency.
• Loss of confidence: Users may lose trust, triggering massive sell-offs.
• Market instability: A failing stablecoin can have ripple effects across the entire crypto market.

Case study: the Terra Luna collapse

The Terra Luna project demonstrated the dangers of poor stability management. In May 2022, the TerraUSD (UST) stablecoin lost its peg to the US dollar, causing the project to collapse and inflicting huge losses on investors.

Conclusion

Stablecoins are indispensable to the crypto world, but they are not risk-free. Collateral and proof of reserves are critical safeguards. As a digital-asset accounting specialist, I strongly encourage companies and investors to stay informed and adopt a prudent approach.