Stablecoins: the basics

• A. To maximize price volatility for traders
• B. To maintain a stable value relative to a reference asset such as the US dollar
• C. To replace central bank currencies entirely
• D. To generate high investment returns through staking

• A. Bitcoin
• B. Ether
• C. USDC, backed by cash and short-term US Treasury holdings
• D. Dogecoin

• A. The coin is locked in a vault and cannot be traded
• B. The coin's value is designed to track the value of a reference asset, such as $1 USD
• C. The coin can only be used for government payments
• D. The coin's supply is fixed at one million units

• A. Fiat-collateralized stablecoins
• B. Commodity-backed stablecoins
• C. Algorithmic stablecoins
• D. Crypto-collateralized stablecoins

• A. They guarantee profits when markets rise
• B. They provide a way to hold value and move money on blockchains without the price swings of volatile cryptocurrencies
• C. They are legally required to be used in every transaction
• D. They eliminate the need for blockchain technology

• A. Algorithmic stablecoin
• B. Fiat-collateralized stablecoin ✓
• C. Crypto-collateralized stablecoin
• D. Commodity-backed stablecoin

Why: Fiat-collateralized stablecoins are backed one-to-one by fiat currency, such as US dollars, held as reserves by a custodian or issuer. Each token is intended to be redeemable for the equivalent amount of fiat.

• A. They rely solely on software algorithms with no collateral
• B. They are backed by other cryptocurrencies that are held in smart contracts ✓
• C. They are backed by gold stored in vaults
• D. They are issued only by central banks

Why: Crypto-collateralized stablecoins are backed by other cryptocurrencies, typically locked in smart contracts. Because crypto assets are volatile, these stablecoins are usually over-collateralized to absorb price swings.

• A. Fiat-collateralized stablecoin
• B. Commodity-backed stablecoin
• C. Algorithmic stablecoin ✓
• D. Tokenized deposit

Why: Algorithmic stablecoins use smart contracts to expand or contract the token supply in response to price movements, aiming to keep the price near its target without full reserve backing. This design has proven fragile in several well-known failures.

• A. Commodity-backed stablecoin ✓
• B. Fiat-collateralized stablecoin
• C. Crypto-collateralized stablecoin
• D. Algorithmic stablecoin

Why: Commodity-backed stablecoins are pegged to and backed by physical assets such as gold, silver, or oil. Each token typically represents a claim on a specific quantity of the underlying commodity.

• A. To reduce transaction fees on the blockchain
• B. To comply with securities regulations in most countries
• C. To provide a buffer against the price volatility of the collateral assets ✓
• D. To increase the total number of tokens in circulation

Why: Over-collateralization means the locked crypto value exceeds the stablecoin value issued. This buffer protects the peg if the collateral's price drops sharply, helping ensure the stablecoin remains redeemable or fully backed.

• A. It is backed by a basket of cryptocurrencies held in a smart contract
• B. It is backed by reserves of traditional currency, such as U.S. dollars, held by a custodian ✓
• C. It is backed by gold or other physical commodities stored in vaults
• D. It maintains its peg through algorithmic adjustments to supply without any reserves

Why: Fiat-collateralized stablecoins are backed one-to-one (or close to it) by reserves of traditional government-issued currency, such as U.S. dollars, typically held in bank accounts or short-term Treasury instruments by a custodian. Holders can usually redeem tokens for the underlying fiat.

• A. DAI
• B. Ethereum (ETH)
• C. USDC ✓
• D. Terra (UST)

Why: USDC (USD Coin), issued by Circle, is a widely used fiat-collateralized stablecoin backed by cash and short-duration U.S. Treasuries. DAI is crypto-collateralized, ETH is a non-stable cryptocurrency, and UST was an algorithmic stablecoin that collapsed in 2022.

• A. The token supply will automatically expand during price increases
• B. The issuer may not hold sufficient reserves or may fail to provide transparent attestations, so the peg could break ✓
• C. The token value is directly tied to the price volatility of Bitcoin
• D. Holders are guaranteed high yield returns that can be withdrawn at any time

Why: The key risk is counterparty and reserve risk: if the issuer's reserves are insufficient, poorly managed, or not verifiable through audits or attestations, redemptions may fail and the token may trade below its $1 peg. Transparency about reserve composition is therefore critical.

• A. Because their price is set by algorithms that respond to market demand
• B. Because holders can redeem each token for approximately one unit of the underlying fiat, creating arbitrage incentives that keep the price near the redemption value ✓
• C. Because governments legally enforce a fixed exchange rate for them
• D. Because they are backed by the issuer's stock market holdings

Why: Redemption rights allow arbitrageurs to buy the token when it trades below $1 and redeem it for $1 of reserves, or mint new tokens when it trades above $1. These actions push the market price back toward the redemption value.

• A. Cash and short-term U.S. Treasury bills ✓
• B. Corporate bonds from high-growth technology firms
• C. Shares of publicly traded cryptocurrency companies
• D. Long-term real estate investments

Why: Cash and short-term U.S. Treasury bills are highly liquid, low-credit-risk assets that can be sold quickly to meet redemptions. Issuers favor them to minimize the chance that reserves lose value or cannot be converted to cash on short notice.

• A. Government-issued bonds held in a bank account
• B. Other cryptocurrencies locked in smart contracts ✓
• C. Gold bars stored in a secure vault
• D. Corporate equity shares held by the issuer

Why: Crypto-collateralized stablecoins are backed by other cryptocurrencies, such as ether, which are locked in smart contracts to secure the value of the stablecoin.

• A. To increase the total supply of the stablecoin
• B. To absorb the volatility of the underlying crypto assets ✓
• C. To eliminate the need for smart contracts
• D. To pay interest to stablecoin holders

Why: Because the collateral itself is volatile, depositing more value than the stablecoin issued (overcollateralization) provides a buffer if collateral prices fall.

• A. The stablecoin holders are refunded in cash
• B. The collateral is automatically liquidated to protect the stablecoin's peg ✓
• C. The stablecoin supply is doubled to restore balance
• D. The system pauses and waits for a government bailout

Why: Most systems use automated liquidation: when collateral drops below the required ratio, part of it is sold to repay debt and keep the stablecoin fully backed.

• A. USDC
• B. Tether (USDT)
• C. DAI
• D. TrueUSD (TUSD)

• A. They are always fully redeemable for US dollars at a bank
• B. They are more capital-intensive due to overcollateralization but are less reliant on centralized custodians ✓
• C. They have no price volatility risk whatsoever
• D. They cannot be used on blockchain networks

Why: Overcollateralization ties up significant capital, but these stablecoins avoid reliance on a single centralized custodian holding reserves, reducing counterparty risk.

• A. Holding a reserve of fiat currency in a bank account for every token issued
• B. Using smart contracts to expand or contract the token supply in response to price deviations
• C. Backing each token with a physical commodity such as gold stored in a vault
• D. Requiring holders to over-collateralize loans with volatile cryptocurrencies

• A. Fiat-backed model
• B. Commodity-backed model
• C. Seigniorage-style (rebase or two-token) model
• D. Custodial escrow model

• A. Mint additional tokens and distribute them to the market
• B. Reduce the circulating supply by incentivizing users to burn or lock tokens
• C. Freeze all transactions until an external auditor verifies reserves
• D. Increase the interest rate paid to holders of the stablecoin

• A. Its reserves were found to be held in a bank that failed to meet withdrawal demands
• B. A large-scale run on the peg caused a death spiral in which its companion token LUNA lost nearly all value while supply expanded rapidly
• C. Regulators banned all algorithmic stablecoins from trading on exchanges that day
• D. A hacker drained the entire reserve of gold that backed each UST token

• A. They always hold more reserves than the total value of tokens in circulation
• B. Their stability depends on market confidence and demand dynamics, so they can lose their peg under stress without hard asset backing
• C. They require regular audits by government agencies before every transaction
• D. They cannot be traded on decentralized exchanges

• A. To maximize returns for investors through price appreciation
• B. To maintain a stable value relative to a reference asset such as the US dollar ✓
• C. To replace central banks as the issuer of national currency
• D. To serve as a long-term store of value that grows faster than inflation

Why: Stablecoins are designed to hold a steady value by pegging to a reference asset, most commonly the US dollar, which makes them useful for payments and trading without the volatility of assets like Bitcoin.

• A. Their value is determined entirely by market demand with no backing
• B. The issuer may not hold sufficient reserves to redeem all tokens at par ✓
• C. They cannot be transferred between wallets
• D. They are always subject to the same tax rules as government bonds

Why: If the issuer's reserves are insufficient, or are not held in liquid and safe assets, holders may be unable to redeem tokens at their stated value, which can cause the peg to break.

• A. A process where the stablecoin is converted into a physical commodity
• B. When a stablecoin's market price moves significantly away from its pegged value ✓
• C. The removal of a stablecoin from a centralized exchange listing
• D. A regulatory approval granted to a new stablecoin issuer

Why: A depeg occurs when the market price of a stablecoin falls below or rises above its target peg, such as trading at $0.90 instead of $1.00, signaling a loss of confidence or a failure in the stabilization mechanism.

• A. Because stablecoins are legally classified as physical gold
• B. Because they can pose systemic risks to financial stability and consumer protection if poorly managed ✓
• C. Because stablecoins are only used for illegal activity
• D. Because stablecoins generate guaranteed interest for all holders

Why: Stablecoins are widely used for payments and trading, so a failure could harm consumers and spread into broader financial markets, prompting regulators to set rules on reserves, redemption rights, and transparency.

• A. Guaranteeing a fixed annual return to every token holder
• B. Maintaining regular public disclosure of reserve composition and redemption rights ✓
• C. Allowing issuers to use customer reserves for speculative investments
• D. Prohibiting any holder from redeeming tokens for fiat currency

Why: Transparency about reserves and clear redemption rights help holders verify that tokens are backed and can be exchanged for their stated value, which is a core goal of most proposed stablecoin regulations.

• A. To maximize returns for investors through price speculation
• B. To maintain a stable value relative to a reference asset such as the US dollar ✓
• C. To replace central banks entirely as the issuer of money
• D. To be mined by users with high-powered computers

Why: Stablecoins are designed to hold a steady value, typically pegged to a currency like the US dollar, so users can transact and store value without the volatility of assets like Bitcoin.

• A. By adjusting its supply algorithmically based on demand alone
• B. By holding reserves of the pegged asset, such as cash or short-term Treasuries, in a ratio that backs issued tokens ✓
• C. By requiring users to stake a different volatile cryptocurrency
• D. By guaranteeing returns through interest paid to holders

Why: Fiat-collateralized stablecoins hold reserves equal to or greater than the tokens in circulation, allowing holders to redeem tokens for the underlying currency and anchoring the price to the peg.

• A. They cannot be transferred across borders
• B. They can be sent on blockchain networks, often settling in minutes at lower fees than some traditional remittance channels ✓
• C. They only work within a single bank's network
• D. They require the recipient to have a physical crypto ATM

Why: Because stablecoins run on blockchain networks, transfers can settle quickly and often at lower cost than traditional international wire or remittance services, though recipients still need a way to convert to local currency.

• A. The token will automatically double in value every year
• B. The issuer may not hold adequate reserves, so the peg could break and the token may trade below its intended value ✓
• C. Stablecoin transactions are always reversible by the sender
• D. Stablecoins can only be stored on paper wallets

Why: If an issuer's reserves are insufficient or poorly managed, or confidence is lost, a stablecoin can depeg, meaning its market price falls below the reference value. Checking reserve transparency and issuer reputation is an important precaution.

• A. Sharing your private keys or seed phrase with the exchange support team
• B. Choosing a reputable wallet or exchange, enabling security features like two-factor authentication, and keeping recovery phrases private ✓
• C. Storing all funds in a single unverified browser extension
• D. Ignoring network fees since stablecoins have none

Why: Safe use depends on protecting access to your funds: using trusted custodians or wallets, enabling strong account security, and never revealing private keys or recovery phrases, since anyone holding them can move your funds.