Understanding Stablecoins

Duke University via Coursera

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Coursera
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Paid Course
Languages

English
Certificate

Paid Certificate Available
Duration & workload

8 hours 15 minutes
Sessions

On-Demand
Level

Intermediate
Subtitles

English

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Overview

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Stablecoins have emerged as the first "killer app" of the crypto space, with annual on-chain transaction volume now exceeding $30 trillion — surpassing Visa and Mastercard combined. Yet most people, including many finance professionals, do not understand how they work, what distinguishes one type from another, or what risks they carry. This course, taught by Duke University Professor Campbell R. Harvey, provides a rigorous yet accessible foundation in stablecoin design, mechanics, and risk. You will learn how fiat-backed stablecoins like USDT and USDC maintain their peg, why tokenized gold could revive a voluntary gold standard, how crypto-collateralized systems like MakerDAO mirror central bank operations, and what caused the $40 billion Terra/Luna collapse. The course details a comprehensive risk taxonomy and an overview of emerging regulatory frameworks, including the GENIUS Act. It concludes that stablecoins will be the currency of the new world of AI-enabled agent-to-agent commerce. Whether you are a finance professional, policymaker, developer, or informed investor, this course equips you to evaluate stablecoins critically - understanding not just the opportunity, but the risks that come with a technology reshaping global payments.

Syllabus

Stablecoin Foundations

This module introduces stablecoins as a critical innovation in the crypto landscape, designed to provide a payment alternative that avoids the extreme volatility that plagues uncollateralized cryptocurrencies like Bitcoin and Ether. Traditional fund transfers through the SWIFT correspondent banking system are slow, expensive, and potentially insecure, while stablecoins enable cheap, transparent, and near-instant global transfers. The module explores two unique blockchain risks – network attacks (contrasting Bitcoin’s vulnerability to a 51% proof-of-work attack with Ethereum’s more resilient proof-of-stake model) and quantum computing threats (currently distant but growing exponentially, with quantum-resistant cryptographic solutions already available). A taxonomy of five stablecoin types is presented: fiat-collateralized, commodity-backed, crypto-over-collateralized, algorithmic, and dynamically hedged. The module draws historical parallels to the U.S. Free Banking Era, when privately issued banknotes served similar functions. It concludes by surveying today’s stablecoin landscape, where on-chain transaction volume now exceeds $30 trillion annually, surpassing Visa and Mastercard combined, with striking U.S. dollar dominance across issuances.

Fiat-Backed Stablecoins

This module examines fiat-collateralized stablecoins, the dominant category, where centralized issuers hold reserve assets and mint or burn tokens to maintain a dollar peg -- functioning as a digital “I owe you.” It contrasts the two market leaders: Tether (USDT), which has faced regulatory settlements, auditor departures, and persistent questions about reserve transparency despite generating billions in annual profit, and Circle (USDC), which has pursued transparency with its BlackRock-managed reserve fund for most of its collateral. The module uses the Silicon Valley Bank (SVB) collapse of March 2023 as a pivotal case study, showing how Circle’s $3.3 billion in uninsured deposits – the day-to-day float not in the reserve fund – at SVB temporarily depegged USDC and exposed counterparty risk. The SVB failure is diagnosed in detail, showing excessive duration risk, removed interest rate hedges, and increases in executive compensation. The module highlights broader banking fragility, with 10% of U.S. banks exhibiting similar risk profiles and $400 billion in unrealized losses system-wide, and explains why stablecoin issuers structurally resemble narrow banks with no leverage or lending.

Tokenized Gold

This module focuses on tokenized gold as the second-largest category of real-world asset tokenization and a potential pathway to a voluntary, decentralized gold standard that requires no central bank coordination. It compares the two leading tokens: PAXG, custodied by a New York Department of Financial Services-regulated trust company with a bailment arrangement giving holders direct title to specific London Good Delivery bars stored in Brinks vaults, and XAUt, held in a Swiss vault by an unregulated Tether subsidiary. The module systematically compares tokenized gold to ETFs and futures across multiple dimensions – trading hours (24/7 versus market hours), settlement speed (seconds versus one day), divisibility (small fractions of a cent per unit), and payment utility (usable as currency versus not). Empirical analysis shows tight correlation with spot gold, declining tracking error over time, and a persistent convenience premium for PAXG or spot gold reflecting its transferability and DeFi composability. The module demonstrates that tokenized gold integrates into decentralized finance through lending, staking, and flashloans, and proved resilient during stress events, including a ten-standard-deviation gold price move in January 2026.

Crypto-Collateralized Stablecoins

This module covers stablecoins backed by on-chain crypto assets, enabling fully decentralized operation without custodial trust but requiring overcollateralization to absorb volatility. It provides a detailed walkthrough of MakerDAO’s DAI: users deposit ETH or alternative tokens into smart contract vaults, mint DAI against a 150% or higher collateralization ratio, and face automated liquidation by keepers if collateral value drops below the threshold. The module explains Maker’s three monetary policy tools – the stability fee, DAI savings rate, and debt ceiling –drawing explicit parallels to central bank operations. A safety net hierarchy is outlined from overcollateralization through MKR token dilution to global settlement as a last-resort mechanism. The module then examines Ethena’s USDe, which takes a fundamentally different approach: deposited crypto is hedged with perpetual futures short positions, freezing collateral value and eliminating the need for overcollateralization. USDe’s business model earns yield from funding rates and staking rather than Treasury interest. The module concludes with a detailed risk analysis covering negative funding rates, exchange counterparty failure, liquidation cascades, and structural run risk.

Algorithmic Stablecoins

This module examines algorithmic stablecoins, which maintain their peg through programmatic supply adjustments rather than collateral, offering scalability but sacrificing stability guarantees. It covers the rebasing model (Ampleforth’s AMPL, which expands or contracts each holder’s token balance proportionally) before focusing on Terra’s seigniorage model, where UST’s dollar peg depended on burning and minting its sister token LUNA. The module exposes the fatal structural flaw: because LUNA’s value was reflexively tied to UST’s success, the collateral backing collapsed precisely when it was needed most. Anchor Protocol’s unsustainable 20% yield attracted 80% of UST supply into a single protocol vulnerable to withdrawal cascades. The May 2022 death spiral is chronicled in detail – from the initial large swap that depegged UST, through panic withdrawals from Anchor, LUNA’s hyperinflation from 340 million to 6.5 trillion tokens, to the destruction of approximately $40 billion in value. The module covers the legal aftermath, including Do Kwon’s arrest and the GENIUS Act’s effective prohibition on unregulated algorithmic stablecoins.

Risks and Critiques

This module provides a comprehensive risk taxonomy across five categories. Macro and systemic critiques – including bank deposit drain, shadow banking parallels, run risk, pro-cyclicality, and threats to monetary sovereignty – are examined and rebutted, noting that fully-backed stablecoins are structurally safer than fractional-reserve banks. Financial stability and market structure risks cover potential Treasury market disruption from large issuers, concentration in two dominant players, and DeFi-enabled recursive leverage, though on-chain transparency enables real-time monitoring unavailable in traditional finance. Micro-level risks span smart contract vulnerabilities, custodial mismanagement, counterparty failure, KYC/AML concerns, depegging events, oracle manipulation, and governance capture. Legal and regulatory challenges include cross-jurisdictional arbitrage, securities law ambiguity around yield-bearing stablecoins, and sanctions evasion. The module concludes with a detailed overview of the GENIUS Act – the first major U.S. federal stablecoin law – covering permitted issuers, 100% liquid reserve requirements, monthly attestations, AML/KYC compliance, bankruptcy protections giving holders first claim on reserves, treatment of foreign issuers, and the controversial prohibition on paying interest to stablecoin holders.