1) Fiat-Backed (USDC, USDT)

1.1 How to Buy

• Retail: Purchase directly on exchanges like Upbit or Binance with USD or crypto pairs.
• Institutions/Whales: Wire USD to the issuer (e.g., Circle for USDC, Tether for USDT) to mint 1:1. KYC is required, and small transactions are typically not supported.

1.2 Mechanisms That Maintain $1

• Reserves: The issuer holds safe assets (bank cash, U.S. Treasury bills) to back tokens 1:1.
• Mint/Redeem Window: If the price falls below $1, arbitrageurs buy tokens cheaply on the market and redeem them with the issuer at $1, pulling the price back up. If the price rises above $1, the issuer mints at $1 and sells higher, increasing supply to stabilize the price.
• Regulatory Attestations: Regular disclosures and attestations on reserves bolster market confidence.

Core idea: The belief that one token is always redeemable for $1 anchors the price.

2) Over-Collateralized Crypto-Backed (DAI, etc.)

2.1 How to Buy

• Purchase on exchanges/DEXs: Trade on platforms like Upbit, Binance, or Uniswap, swapping ETH, USDC, or other assets.
• Mint directly: Lock crypto (e.g., ETH) in a smart contract as collateral and borrow DAI against a fraction of its value (e.g., $1.5M of ETH to mint $1.0M of DAI).

2.2 Mechanisms That Maintain $1

2.2.1 Over-Collateralization — Always Post More Than You Owe

DAI operates as a secured loan. To borrow $1.0M worth of DAI, the system requires significantly more collateral—typically ≥150% (e.g., $1.5M of ETH).

Why? Because ETH prices can fluctuate. If you posted exactly $1.0M and the price dropped, the collateral could fall below the debt, creating a shortfall. Over-collateralization provides a safety margin.

Analogy: Banks lend only 50–70% of a home’s value (loan-to-value ratio) to ensure a price drop still leaves enough to recover the principal.

2.2.2 Liquidations — Auto-Auction When Risky

If the market crashes and the collateral becomes risky, the protocol automatically auctions it to repay the debt.

Example: You post $1.5M of ETH and borrow $1.0M DAI. If ETH drops and the collateral is worth $1.2M, the system flags the risk and sells ETH to repay the $1.0M debt.

You may lose collateral, but the system remains solvent because outstanding DAI is backed by real sale proceeds.

Analogy: Similar to a bank foreclosing and auctioning a house to recover a loan when default risk increases.

2.2.3 Governance — Community Rules

A DAO (e.g., MakerDAO) sets collateral ratios, stability fees (interest), and acceptable assets. Holders of the governance token (MKR) vote on parameters, such as:

• Lowering the collateral ratio from 150% to 130%.
• Raising the stability fee from 2% to 4%.
• Adding USDC, stETH, or other assets as collateral besides ETH.

Like a condominium board deciding on building rules, sensible governance keeps DAI near $1.

2.2.4 Oracles — The Price Billboard

Accurate and timely ETH prices are critical for liquidation timing. If an oracle reports prices too high, liquidations are delayed; if too low, users face unnecessary liquidations. Protocols aggregate prices from multiple sources to determine liquidation triggers.

Accurate oracles are essential to maintaining the $1 peg.

Summary: Fiat-backed and over-collateralized models both target $1 but rely on different trust anchors: • Fiat-backed: issuer’s bank reserves. • Over-collateralized: collateral, liquidations, governance, and oracles.

3) Algorithmic Stablecoins (e.g., TerraUSD/UST)

3.1 How to Buy

3.1.1 On Exchanges

The simplest way for retail users is to buy on exchanges (e.g., Upbit, Binance). Trade USD, BTC, or ETH for pairs like UST/USDT, UST/BTC, or UST/ETH, similar to currency exchange.

For most users: Sell another asset to buy UST on the exchange. Straightforward.

3.1.2 By Participating in the Protocol

A more active route involves the LUNA ↔ UST swap mechanism:

• When UST > $1: Deposit LUNA to mint $1 of UST, then sell UST at, say, $1.02 for profit.
• When UST < $1: Burn 1 UST with the protocol to receive $1 of LUNA; buy UST at $0.97, redeem for $1 of LUNA, and capture the spread.

Direct participation allows users to earn by helping the system stabilize the price at $1.

3.2 Mechanisms That Aim to Maintain $1

3.2.1 Basic Idea — Twin-Token Rebalancing

Two tokens operate as a pair: • Stablecoin (S): Targets $1. • Volatile share token (E): Absorbs price adjustments.

• If S > $1: Mint S and burn E, increasing S supply to lower its price.
• If S < $1: Burn S and mint $1 of E, reducing S supply to raise its price.

In theory, arbitrage drives S back to $1.

3.2.2 Why Market Trust Is Essential

• E must retain sufficient market value and liquidity. When S < $1, users trade S for $1 of E. If E’s price collapses, arbitrage stops, and S remains below $1.
• Arbitrage must be profitable after fees and slippage. A theoretical $0.03 spread is meaningless if fees or price impact cost $0.04.

In summary: The mechanism depends on participants’ confidence that the system will function, encouraging continued participation.

3.2.3 The Death Spiral — Why Collapse Accelerates

• S falls below $1, triggering fear.
• Holders redeem S for $1 of E, surging E’s supply.
• E’s price crashes due to oversupply.
• The promise '1 S ↔ $1 of E' loses value, stalling arbitrage.
• With arbitrage halted, S remains below $1, deepening fear.
• Sell-off accelerates, leading to a cascading collapse.

In summary: When the defense asset (E) loses value, the system cannot defend the peg and may unravel, as seen with TerraUSD (UST) in 2022.

4) Conclusion

• Fiat-backed: Maintains $1 peg via bank reserves and mint/redeem mechanisms.
• Over-collateralized: Maintains $1 peg via excess collateral, liquidations, governance, and oracles.
• Algorithmic: Maintains $1 peg via twin-token arbitrage loops but is highly sensitive to trust and can fail rapidly if confidence erodes.

In summary, all three types aim for a $1 peg but rely on distinct trust assumptions.