Stablecoins are designed to maintain a 1:1 price peg with fiat currencies (mainly the US Dollar). However, they use different mechanics to support this peg, which carries different levels of risk.
### Fiat-Backed Stablecoins (USDT, USDC)
These are centralized tokens managed by companies (Tether and Circle).
* **Backing:** They hold equivalent dollar assets (cash, short-term treasury bills) in traditional banks.
* **Audit Transparency:** Circle (USDC) runs regular independent audits. Tether (USDT) issues attestation reports.
* **Risks:** Subject to corporate freezes. Both Tether and Circle can blacklist addresses at the request of law enforcement.
### Algorithmic & Synthetic Stablecoins (e.g. historical UST/Terra)
These tokens use smart contracts to maintain parity without physical bank cash backing.
* **How it works:** They rely on game-theory market incentives and sister tokens to burn and mint supply.
* **Risks:** Highly vulnerable to ‘bank runs’ or death spirals. If the sister token crashes, the peg can collapse permanently to zero (as happened with UST in 2022).