Stablecoins & Token Mechanics

How stablecoins keep their peg, why tokens have burns and vesting schedules, and the supply mechanics that move prices.

• What Is a Stablecoin?

  A stablecoin is a cryptocurrency designed to maintain a fixed value relative to a reference asset, usually the US dollar. One USDC or USDT is meant to always be worth $1. They exist because traders and DeFi users need a way to hold dollar-denominated value on-chain without converting back to traditional banking every time they want stability.

• What Is a Fiat-Collateralized Stablecoin?

  A fiat-collateralized stablecoin is backed 1:1 by real-world assets held in bank accounts or treasuries. For every token in circulation, the issuer claims to hold one dollar (or equivalent) in reserve. When you redeem, they burn the token and send you actual dollars. USDC (Circle) and USDT (Tether) are the largest examples.

• What Is a Crypto-Collateralized Stablecoin?

  A crypto-collateralized stablecoin is backed by cryptocurrency deposits locked in smart contracts, overcollateralized to absorb price swings. DAI is the primary example: you deposit $150 worth of ETH to mint $100 of DAI. If your collateral drops in value, you get liquidated to protect the system. No single company controls the issuance.

• What Is an Algorithmic Stablecoin (And Why They Are Structurally Riskier)?

  An algorithmic stablecoin attempts to maintain its peg through code-based supply expansion and contraction rather than holding real collateral. When the price rises above $1, new coins are minted (increasing supply, pushing price down). When it falls below $1, coins are burned or incentives redirect demand back. Most attempts have failed catastrophically, most notably Terra/UST in May 2022.

• What Is a Stablecoin Peg?

  The peg is the target price a stablecoin is designed to maintain, almost always $1.00 USD. The "peg holds" when the market price stays at or very near $1. It "depegs" when supply/demand pressure, loss of confidence, or mechanical failure pushes the price away from $1. How the peg is maintained depends on the stablecoin type: redemption arbitrage for fiat-backed, liquidation mechanics for crypto-backed, or algorithmic expansion/contraction.

• What Is a Stablecoin Reserve Attestation?

  A reserve attestation is a report by an independent accounting firm confirming that a stablecoin issuer holds enough assets to back all tokens in circulation at a point in time. Circle publishes monthly USDC attestations through Deloitte. It is not a full audit (which examines internal controls over a period), but a snapshot verification that reserves exist at report date.

• What Is a Wrapped Token?

  A wrapped token is a representation of an asset from one blockchain on a different blockchain. Wrapped Bitcoin (WBTC) is an ERC-20 token on Ethereum that is backed 1:1 by actual BTC held in custody. It lets you use Bitcoin's value in Ethereum DeFi (lending, trading, liquidity) without actually being on the Bitcoin network.

• What Is a Governance Token?

  A governance token gives holders voting power over a protocol's decisions: treasury spending, fee changes, new feature deployments, and parameter adjustments. Holding UNI lets you vote on Uniswap proposals. Holding AAVE lets you vote on Aave upgrades. The more tokens you hold, the more voting weight you carry. It is the DeFi equivalent of shareholder voting rights.

• What Is Tokenomics (The Concept)?

  Tokenomics is the study of a crypto token's economic design: how many tokens exist, how they are distributed, what creates demand for them, what controls supply over time, and how incentives align (or misalign) between the protocol and its users. Good tokenomics creates sustainable demand. Bad tokenomics creates unsustainable inflation and inevitable price collapse.

• What Is Vesting (Token Unlock Mechanics)?

  Vesting is a time-based schedule that restricts when early investors, team members, and advisors can sell their token allocations. Tokens are "locked" and release gradually over months or years (the vesting period), often with an initial cliff (a period before any tokens unlock). Vesting prevents mass sell-offs at launch and aligns early participants' incentives with long-term project health.

• What Is Circulating Supply vs. Total Supply vs. Max Supply?

  Circulating supply is how many tokens are freely tradeable right now. Total supply is all tokens that exist (including locked/vesting ones). Max supply is the maximum that will ever exist (some tokens have no max). These three numbers tell very different stories about a token's scarcity and future dilution. Market cap uses circulating supply; fully diluted valuation uses max supply.

• What Is a Token Burn?

  A token burn permanently removes tokens from circulation by sending them to an unrecoverable address (no one has the private key). Burns reduce total supply, making remaining tokens relatively scarcer. Ethereum burns the base fee of every transaction (EIP-1559). Binance quarterly burns BNB. Some protocols burn tokens as a percentage of fees collected.

• What Is Token Supply (Fixed vs. Inflationary)?

  A fixed-supply token has a hard cap on how many will ever exist (Bitcoin: 21 million, never more). An inflationary token continuously mints new coins (often as staking or mining rewards), growing supply over time. The supply model directly determines whether holding the token preserves your share of the network or dilutes it.