Stablecoin basics.
A stablecoin is a digital token designed to hold a stable value against a reference asset — usually the US dollar. The mechanism that keeps the token near its peg is the most important thing about it, and the mechanisms differ materially between stablecoins.
Fiat-backed
Each token is intended to be redeemable for one dollar, with the issuer holding dollar-denominated reserves — cash, short-duration treasuries, and related instruments — at least equal to circulating supply. Examples include the largest stablecoins by market capitalisation. Risk is concentrated in the issuer's reserves and policies.
Crypto-collateralised
The peg is held by over-collateralising the token with other crypto assets. Smart contracts liquidate collateral when the ratio falls below a threshold. The model is transparent on-chain but introduces collateral volatility and oracle dependence as new risks.
Algorithmic
The peg is held by code — typically by minting and burning a paired governance token to arbitrage the peg back. This category has a poor historical track record and includes the largest stablecoin failure to date. Northvault does not allocate to algorithmic stablecoins.
How the peg actually holds.
For fiat-backed stablecoins, the peg is enforced by primary-market redemption: authorised participants can mint new tokens by depositing dollars and redeem tokens by withdrawing dollars. Secondary-market price converges on the peg through arbitrage. When that arbitrage breaks down — because of redemption frictions, banking failures, or a loss of confidence — the secondary price can drift, sometimes sharply.
Authorised participants mint and redeem at $1 directly with the issuer. The size and reliability of this channel determines how quickly secondary prices return to peg.
Centralised and decentralised exchanges where most users transact. Prices here can deviate from $1 — usually by basis points, occasionally by more during stress.
Periodic third-party reports describing reserve composition. They are point-in-time and confirm reserves exist but do not audit operational controls or capture liabilities.
The reliability of an issuer's banking partners directly affects how quickly mints and redemptions can be processed. Banking failures have historically been a primary cause of depeg.
Historical depeg events.
Material depeg events have occurred across all three categories. None of the examples below are exhaustive — but they shape how serious operators think about exposure.
Fiat-backed stablecoins have depegged briefly during banking-partner failures, reserve-disclosure concerns, and broad market-stress events. Recovery generally followed restoration of primary-market redemption.
Crypto-collateralised stablecoins have held their peg under most conditions but have experienced governance and oracle-related stress events that materially affected user balances.
Algorithmic stablecoins have suffered the largest absolute failures in the sector, including a multi-billion-dollar collapse. The mechanism is structurally vulnerable to reflexive sell pressure once confidence breaks.