Stablecoins Are Meant to Be Safe — But What Would Happen If a Stablecoin Has Vulnerabilities?

In the constantly changing world of cryptocurrency, stablecoins offer some stability. They are designed to keep their value tied to traditional currencies like the US dollar, making them a crucial link between traditional finance and the often unpredictable crypto market. Stablecoins help make everyday transactions easier, power decentralized finance (DeFi) apps, and provide a safe place for funds during market downturns.

But what if a stablecoin faces problems? This guide explores the risks stablecoins might encounter, what could happen if these risks become real, and what it means for investors, users, and regulators. It provides a balanced view of both the benefits and potential challenges of this important part of the crypto world.

What Are Stablecoins and How Do They Work?

Stablecoins are a special type of cryptocurrency designed to keep their value steady by linking or “pegging” to an external asset like a fiat currency, commodities, or even other cryptocurrencies. There are two main types:

• Collateralised Stablecoins: These are backed by real reserves such as cash held in bank accounts or other cryptocurrencies. Examples include Tether (USDT) and USD Coin (USDC).

• Algorithmic Stablecoins: Instead of backing with reserves, these use smart contracts and algorithms to automatically adjust supply and demand to keep their price stable without needing collateral. TerraUSD (UST), which is now defunct, was an example.

Stablecoins are super important in the crypto world. They make up a large share of trading volume on centralised exchanges and provide liquidity for decentralised finance (DeFi) platforms.

What Happens When Stablecoins Have Vulnerabilities?

If a stablecoin runs into problems, the effects can ripple across users, the crypto market, and even the broader financial system.

Loss of Peg and Market Panic:

The biggest risk is losing its peg that is, the stablecoin’s value drifts away from the target (usually $1). This can cause panic among holders and trigger massive sell-offs. TerraUSD’s collapse is a prime example, wiping out billions and shaking confidence. Since stablecoins make up over 80% of trading volume on major crypto exchanges, their failure can cause widespread market disruption.

Hacks and Exploits:

Stablecoins relying on smart contracts can be vulnerable to hacks. For example, the Euler Finance hack in 2023 drained nearly $200 million, much involving stablecoins. Similarly, the Curve Finance exploit put hundreds of millions at risk. Such breaches cause financial losses and damage trust in stablecoin security.

Regulatory Scrutiny and Bans:

When stablecoins show weaknesses, regulators step in. The IMF and other bodies stress the need to manage risks to protect markets and consumers. If vulnerabilities lead to big losses or instability, regulators might impose strict rules or even bans something that happened after TerraUSD’s downfall.

Centralisation Risks:

Many stablecoins, like Tether and USDC, are issued by centralised companies. If those companies face financial trouble or lack transparency about their reserves, it can spark loss of confidence and runs on the stablecoin. This adds another layer of risk tied to the issuer, not just the coin itself.

Broader Economic Impact:

Stablecoins are widely used for payments, remittances, and as a safe store of value, especially in countries with unstable currencies. If a popular stablecoin fails, it can disrupt these important financial functions, potentially affecting global money flows and even traditional markets if the stablecoin is deeply integrated into the economy.

How Can Stablecoin Vulnerabilities Be Managed?

While stablecoins face real risks, there are ways to reduce those dangers and build confidence:

• Transparency and Audits: Collateralised stablecoins can gain trust by regularly auditing their reserves and openly sharing what backs the coin. The Reserve Bank of Australia recommends holding more high-quality liquid assets than needed to handle times of stress and ensure users can redeem their coins fully.

• Stronger Algorithms for Algorithmic Stablecoins: These coins need solid, tested algorithms that can adjust supply and demand even during market turbulence. However, because they’re experimental by nature, they remain riskier than collateralised stablecoins.

• Clear Regulatory Oversight: Regulatory frameworks, like those suggested by the IMF, can help keep stablecoins safe by requiring issuers to maintain enough reserves and meet financial standards. Oversight also helps prevent misuse and protects consumers.

• Ongoing Market Vigilance: As of mid-2025, no major new developments have been reported, but the crypto market keeps evolving. It’s important for investors and users to stay alert to regulatory changes and market trends.

• Stable Price Outlook but Caution Needed: Price forecasts for leading stablecoins like USDT and USDC suggest they will remain stable. However, any vulnerabilities could upset this balance, making security and compliance top priorities for issuers.

Understanding Stablecoin Risks and How to Stay Safe

Stablecoins are meant to be stable and secure, but they can run into problems. These problems include losing their value (depegging), causing panic in the market, being hacked, facing strict regulations, or having issues due to being controlled by one central group. Big failures, like what happened with TerraUSD, show how these problems can impact the whole crypto market.

To reduce these risks, it’s important for stablecoins to have regular audits, be transparent, and follow strong regulations. If you’re using or investing in stablecoins, you should understand how they work, check if they provide clear information about their backing, and stay updated on market conditions.

FAQs

1. What does it mean if a stablecoin has vulnerabilities?
   If a stablecoin has vulnerabilities, it may lose its peg, face hacks, trigger market panic, or attract regulatory scrutiny, leading to financial losses and disrupted trust.
2. What would happen if a stablecoin loses its peg?
   If a stablecoin has vulnerabilities causing depegging, it could lead to rapid value loss, market sell-offs, and broader crypto market contagion, as seen with TerraUSD’s collapse.
3. Can hacks occur if a stablecoin has vulnerabilities?
   Yes, especially in decentralized stablecoins, vulnerabilities in smart contracts could lead to hacks, with losses like the $197 million from Euler Finance in 2023.
4. How do regulations impact stablecoins with vulnerabilities?
   If a stablecoin has vulnerabilities, regulators may impose stricter rules or bans, limiting its use, as seen in calls for oversight after TerraUSD’s failure.
5. How can users protect themselves from stablecoin vulnerabilities?
   To mitigate risks if a stablecoin has vulnerabilities, users should research transparency, check for audits, use reputable platforms, and stay informed via CoinMarketCap or Chainalysis.