The 5 Major Stablecoin Risks (And How To Evaluate Any Stablecoin)

Cryptocurrency is a historically volatile industry with price fluctuations exceeding 90% as a common occurrence.

As a response to this, founders and builders created stablecoins to allow users access to price stable coins, without the need to leave the blockchain and subject themselves to counterparty risk and censorship. 

But history has shown that even stablecoins are subject to both price fluctuations and censorship. 

So what is the way around this? 

In this article we will explore how YOU can identify a censorship resistance and truly stable stablecoin versus one that is subject to depegging and censorship. 

What Is the Purpose of Stablecoins?

Stablecoins are cryptocurrencies designed to hold a fixed value, usually pegged to the U.S. dollar, without requiring users to exit the blockchain. They solve the volatility problem. Hold Bitcoin and your portfolio can drop 60% in a month. Hold a stablecoin and you stay in the ecosystem while parking value at roughly $1.

The market has grown fast. As of April 6, 2026, the aggregate stablecoin market capitalization reached approximately $317 billion, according to Federal Reserve FEDS Notes. USDT and USDC alone account for around $260 billion of that total. These are no longer niche DeFi instruments. They are embedded in cross-border payments, institutional settlement, and retail savings across dozens of countries.

That scale creates a new problem. The bigger stablecoins get, the more damage a failure causes. The IMF and FSB flagged in 2025 that stablecoins now have meaningful interconnections with traditional financial systems, meaning a large depeg event could ripple well beyond crypto markets.

The 5 Stablecoin Risks: A Quick Comparison

Before going deep on each risk, here is how the five main risk categories map onto the stablecoins most people actually hold.

👉 Quick takeaway: USDT carries the highest risk across every category. USDC is stronger on reserve transparency but still carries censorship and systemic risk. DAI sits in the middle on most dimensions. USDL and LUSD have the lowest risk profile across all five categories — no blacklisting capability and on-chain collateral with no centralized reserve.

Ratings are relative, not absolute. A ‘Low’ rating means the risk is structurally mitigated, not eliminated.

The rest of this article explains each risk category, what has gone wrong historically, and how to use this table to evaluate any stablecoin you are considering.

Stablecoin Risk #1: Censorship

It’s easy to overestimate how decentralized stable assets are. Behind the dollar-backing guarantees, there are large reserves held by Circle, iFinex Inc, and financial institutions. These stablecoin issuers are regulated, and law enforcement can request the blacklisting of wallet addresses.

(That means that blacklisted wallets cannot interact with the stablecoin in any way. Can’t send, trade, swap, nor redeem amounts on other apps)

For someone who never questioned stablecoins, this might sound rare and insignificant. But did you know that Tether has been blacklisting wallets since 2017? That’s $435M USDT from +800 (probably) non-custodial wallets.

While this shouldn’t be possible in crypto, censorship has become more and more common every year without exception. The same can be said about Circle’s USD (USDC):

Paxos Dollar (USDP) has minimal blacklisting history. Binance Dollar (BUSD) is no longer active. Paxos stopped minting BUSD in December 2023 after the New York Department of Financial Services ordered it to halt issuance. That is the clearest example of how regulatory action can end a stablecoin entirely, not just freeze individual wallets.

Censorship is a typical risk with fiat-backed stablecoins. So far, there aren’t crypto-fiat alternatives that don’t involve regulation. And if these companies were to ignore law enforcement, not only can that shut down the business, but also de-peg the stablecoin.

So what is the alternative? 

Decentralized, algorithmic stablecoins that rely on immutable smart contracts on the blockchain. 

Well designed smart contracts, such as Liquid Loans (which creates USDL) or Liquity (LUSD), generate stablecoins which cannot be blacklisted or censored by any individual and central party.

The protocol is completely finished, cannot be altered in any way, and is owned and operated by the people who use it.

Stablecoin Risk #2: De-pegging

Stablecoin de-pegging occurs when the token loses its 1:1 proportion with the underlying asset. One USDT should always equal 1 USD, just like 1 wBTC should always be worth 1 BTC, 1 PAXG 1 gold ounce, and so on. To achieve this standard, stablecoins use different ways to peg their coin to the underlying asset.

Note that depegging is an inevitable reality. Stablecoin prices, just like the price of any crypto or stock, is subject to fluctuations based on buying and selling through order books and liquidity pools. 

This can happen if an individual with a large amount of a certain stablecoin decides to sell it, the sell order will eat through liquidity and push the price down. 

The question is: Is there a redemption mechanism through which arbitrageurs can buy up the stablecoins and make a profit? And, is there enough collateral value to be redeemed? 

When there isn’t enough collateral/liquidity and too many redemptions, the stablecoin can de-peg permanently and go to zero. 

The first ones to find out were the current CEO of EOS and Cardano, who invented the first-ever stablecoin. 

The most prominent example is TerraUST, which fell from $1 to $0.02 in May 2022. The collapse happened in roughly 72 hours. Terra’s design relied on an algorithmic relationship between UST and its sister token LUNA rather than hard collateral. When confidence broke, the redemption mechanism created a hyperinflationary spiral in LUNA that destroyed both tokens simultaneously. Research published through 2025-2026 continues to reference Terra as the defining case study for algorithmic depeg failure, with contagion effects that spread across DeFi and contributed to broader market losses exceeding $200 billion.

We’ve seen Tether, the largest stablecoin, de-peg multiple times, however, it was able to recover. 

It’s worth noting that Tether is neither 1:1 redeemable. At least not in a decentralized way. Many hurdles ensure that most investors don’t get that right:

• Register on Tether.to and pass full KYC verification ($150 fee included)
• You can only redeem the minimum amount of 100,000 USDT
• You redeem 1 USDT for $0.99, as there is a 0.1% fee up to $1,000 (1M USDT)
• Tether excludes US investors with income over $200K or net worth over $1M

What a catch.

So what is the solution to the depegging risk?

Stablecoin Risk #3: Reserve Risk

Every fiat-backed stablecoin claims to hold $1 in reserve for every $1 token in circulation. The question is what actually sits in those reserves, and whether you could ever get your dollar back.

Tether’s reserve composition has been scrutinized for years. For a long time, Tether held a significant portion of its reserves in commercial paper rather than cash or U.S. Treasuries. Commercial paper is short-term corporate debt. It is not the same as a dollar. In a financial stress event, it can lose value fast.

After regulatory pressure, Tether shifted its reserve composition toward U.S. Treasury bills. But reserve transparency remains uneven across the industry. The IMF’s December 2025 departmental paper on stablecoins identifies reserve opacity as one of the primary structural risks in the sector, noting that audit frequency, scope, and independence vary widely between issuers.

Three questions to ask about any stablecoin’s reserves:

1. What assets back it? Cash and short-dated Treasuries carry far less risk than commercial paper, corporate bonds, or other crypto assets.
2. How often are reserves audited? Monthly attestations by a reputable accounting firm are the current standard for compliant issuers under the GENIUS Act framework.
3. Are the audits full audits or attestations? An attestation confirms a balance at a point in time. A full audit tests whether the accounting is accurate. These are not the same thing.

Decentralized stablecoins like USDL and LUSD solve reserve opacity differently. Because their collateral sits in immutable on-chain smart contracts, anyone can verify the collateral ratio in real time without trusting an issuer’s disclosure.

Stablecoin Risk #4: Regulatory Risk

The regulatory landscape for stablecoins changed more in 2025 than in the previous five years combined.

In the United States, the GENIUS Act was enacted on July 18, 2025. It established the first formal federal framework for stablecoin issuers, covering reserve requirements, audit standards, and licensing. Issuers that do not comply face being shut down or forced to restructure. For holders, this means the stablecoins they use today may look different in 12 months if their issuers cannot meet the new requirements.

In the European Union, MiCA (Markets in Crypto-Assets Regulation) has been in full effect since 2024. It imposes strict reserve and disclosure requirements on stablecoin issuers operating in Europe. Non-compliant issuers are barred from the EU market.

In the UK, the House of Lords Financial Services Regulation Committee published a report in June 2026 warning that without clear regulatory frameworks, the UK risks falling behind global peers on stablecoin adoption and oversight.

What does this mean for you as a holder?

Fiat-backed stablecoins like USDT and USDC operate under the direct jurisdiction of these laws. Regulatory action against an issuer, including forced reserve restructuring or license revocation, could trigger a depeg or redemption freeze. This is not theoretical. Binance’s BUSD was shut down in December 2023 after the New York Department of Financial Services ordered Paxos to stop minting it.

Decentralized stablecoins built on immutable smart contracts sit outside the direct reach of issuer-level regulation. No regulator can order a smart contract to freeze. However, the on-ramps and off-ramps to those stablecoins (exchanges, wallets, fiat gateways) remain regulated, which creates indirect exposure.

Stablecoin Risk #5: Systemic and Contagion Risk

When TerraUST collapsed in May 2022, it wiped out approximately $40 billion in value within 72 hours. The damage did not stay inside Terra’s ecosystem. It triggered a wave of liquidations across DeFi, contributed to the collapse of Three Arrows Capital and Celsius, and sent Bitcoin down more than 30% in two weeks.

That is contagion risk. A single stablecoin failure can destabilize assets and protocols far beyond its own market.

By April 2026, the stablecoin market had grown to $317 billion. That scale changes the math on contagion. The Federal Reserve noted in April 2026 that stablecoins now have increased interconnections with traditional finance, meaning a large-scale run on a major stablecoin could affect money market funds, Treasury bill markets, and bank funding conditions, not just crypto prices.

The IMF’s October 2025 Global Financial Stability Report identified stablecoin run dynamics as a key vulnerability. The concern is simple: if USDT or USDC holders lose confidence simultaneously, the issuers would need to liquidate tens of billions of dollars in Treasury bills within days to meet redemptions. That kind of forced selling moves markets.

Research published in 2025-2026 using copula-GARCH models found predictive signals for depegging events in major stablecoins, suggesting that tail-risk dynamics are measurable and that current monitoring tools can identify fragility before it becomes a crisis.

For individual holders, systemic risk is hard to hedge directly. The practical takeaway is this: diversify across stablecoin types (fiat-backed and decentralized), avoid concentrating large balances in a single issuer, and watch reserve audit schedules as a leading indicator of issuer health.

How Over-Collateralization Solves De-pegging

Over-collateralization and decentralized redemption mechanisms are the way to solve depegging risk of stablecoins. 

In USDL and LUSD, there will ALWAYS be more ETH value than the borrowed stablecoins.

So in the instance of a bank run, all users will be able to redeem their stablecoin for the underlying collateral.

In addition, a user holding either stablecoin will not need to KYC, or hold a ridiculously sized value in order to redeem.

Redemptions are instant and permissionless. 

Better Stablecoins

If we are to make blockchains more usable for nations, businesses, and people, we need to build stablecoins which are truly censorship resistant and do not run the risk of losing their value by de-pegging. 

Luckily, we do have stablecoins which contain these properties. 

USDL

USDL is a fully-backed, algorithmic stablecoin which is generated when PLS is locked up in the Liquid Loans contract. 

The system is designed in such a way that there will never be more USDL minted from the total value of PLS locked in all of the vaults. 

This ensures that any holder of USDL can always redeem their stablecoin for a $1 worth of PLS. 

This is important because in the event of a huge market sell of USDL, arbitrageurs can buy it off market and redeem it within the protocol, to push the price back up. 

In addition, USDL cannot be censored. There is no central party within Liquid Loans that has the admin keys to blacklist or invalidate certain USDL coins. The Liquid Loans protocol is a completely immutable, finished product. 

LUSD

LUSD is the Ethereum equivalent of USDL. It is a crypto-backed algorithmic stablecoin created by Liquity. 

Like the Liquid Loans Protocol, it’s a governance-free, censorship-resistant protocol. LUSD is directly redeemable for $1 worth of ETH and has no borrowing interest rates.

Compared to fiat-backed stablecoins, LUSD has historically maintained a price at or above $1, supported by its direct ETH redemption mechanism. Verify current peg performance on a live price aggregator before relying on any historical claim, as market conditions change.

DAI

DAI deserves an honorable mention as a semi-decentralized stablecoin on Ethereum. It is generated by the Sky Protocol, which rebranded from MakerDAO, and allows users to mint DAI from a range of overcollateralized crypto assets.

DAI has no central issuer with admin keys. No single party can invalidate your coins. That is a genuine advantage over USDT and USDC.

The catch is collateral composition. DAI has historically used USDC as a significant portion of its backing, which reintroduces censorship risk at the collateral level. If Circle froze the USDC sitting in MakerDAO’s vaults, it would affect DAI’s backing. The 2023 collateral image previously shown in this article is outdated. The Sky Protocol has adjusted its collateral mix since then, but the structural dependence on centralized assets remains a design tradeoff to understand before holding DAI.

Sky Protocol also operates with governance via token voting, meaning protocol rules can change. That is a different risk profile than the fully immutable contracts behind USDL and LUSD.

How To Choose a Stablecoin: A Decision Framework

You now know the five risk categories. Here is how to apply them to any stablecoin you are evaluating.

Step 1: Identify the backing type.

Is it fiat-backed (USDT, USDC), crypto-backed (DAI, LUSD, USDL), or algorithmic with no real collateral (avoid)? Algorithmic stablecoins with no hard collateral have a near-perfect failure record.

Step 2: Check censorship exposure.

Can the issuer blacklist your wallet? Fiat-backed stablecoins can and do. If censorship resistance matters to you, crypto-backed stablecoins on immutable contracts are the only structural solution available today.

Step 3: Evaluate reserve quality.

For fiat-backed coins: what assets back the reserves? Look for issuers holding cash and short-dated U.S. Treasuries, audited monthly by a named accounting firm. Under the GENIUS Act framework, compliant U.S. issuers must meet specific reserve standards. Non-U.S. issuers may not.

Step 4: Assess regulatory jurisdiction.

Where is the issuer incorporated? Issuers in the U.S. now operate under the GENIUS Act. Issuers in the EU operate under MiCA. Issuers in jurisdictions with no stablecoin regulation carry higher regulatory risk.

Step 5: Size your exposure.

Do not concentrate large balances in a single stablecoin issuer. The systemic risk evidence from the IMF and Federal Reserve suggests that even the largest stablecoins carry run risk under stress. Spreading across two or three structurally different stablecoins reduces single-point-of-failure exposure.

The comparison table at the top of this article maps these five steps onto the most common stablecoins. Use it as your starting point.

Frequently Asked Questions About Stablecoin Risks

How big is the stablecoin market in 2026?

Approximately $317 billion as of April 6, 2026, according to Federal Reserve FEDS Notes. USDT and USDC account for roughly $260 billion of that total.

What happened to BUSD?

Binance USD was shut down in December 2023 after the New York Department of Financial Services ordered Paxos to stop minting it. It is no longer an active stablecoin.

What is the GENIUS Act?

The GENIUS Act is a U.S. federal law enacted on July 18, 2025. It established the first formal regulatory framework for stablecoin issuers in the United States, covering reserve requirements, audit standards, and licensing obligations.

Can a decentralized stablecoin be shut down by regulators?

The smart contract itself cannot be ordered to stop by a regulator. However, the exchanges, wallets, and fiat gateways that connect users to decentralized stablecoins are regulated and could be restricted. This creates indirect regulatory exposure even for fully decentralized stablecoins.

What is the safest type of stablecoin?

No stablecoin is risk-free. Fiat-backed stablecoins carry censorship and reserve risk. Decentralized over-collateralized stablecoins carry smart contract and collateral volatility risk. Algorithmic stablecoins with no hard collateral have the worst historical failure rate. Use the comparison table and decision framework in this article to match a stablecoin to your specific risk tolerance.