What are the risks of stablecoins?
Some people may argue that the risks of stablecoins may outweigh their main advantage and use case, which is stablecoin’s price stability, and they might have a case. Let’s learn what the potential risks associated with stablecoins:
Reserves/Collateral Shortage
The value of stablecoins is directly dependent on the issuer maintaining a stable amount of reserves. In case of mismanagement, which comes from a lack of transparency, investors may lose confidence, and depegging can be the end result.
Liquidity Redemption
Redeeming your stablecoins for the expected 1:1 value is a big challenge when markets aren’t stable which can lead to potential losses due to price fluctuations.
Algorithmic Stability
Complex mechanisms are in place to run the entire process that maintains the peg of algorithmic stablecoins. In case of poor design or failure of these mechanisms, stablecoins can depend significantly, as we witnessed in the case of Terra.