Stablecoins: dollars on rails

Wonder

1. What makes a token stable: its code or its reserves?
2. How does a currency backed by nothing but market confidence fail in days?
3. Why did Tether move off Bitcoin for a decade, then announce its return?

Explore

1. Tether (launched as Realcoin) first issued USDT on the Omni Layer in October 2014, embedding dollar claims directly into Bitcoin transactions. The token circulated as a base currency for altcoin trading and payments without requiring users to hold native bitcoin. This was the first major instance of stable value riding Bitcoin’s rails.
2. From 2017 Tether also issued on Ethereum, and from 2019 on Tron, where much of its supply moved for lower fees and faster settlement. USDC followed in September 2018 on Ethereum. Both became the dominant dollar tokens in crypto, used for trading pairs, lending collateral, and remittances. Their value depended not on code but on issuer reserves: Tether holds cash, Treasury bills and other assets; Circle holds cash and short-term US Treasuries.
3. Terra’s USD (UST) took a different path. Launched by Do Kwon’s Terraform Labs, UST maintained its peg through an algorithmic mechanism: holders could mint or burn LUNA to stabilize the dollar token. No fiat reserves stood behind it; a bitcoin reserve assembled in 2022 by the Luna Foundation Guard was spent in its defense and could not hold the peg. In May 2022, a wave of redemptions triggered a death spiral; UST lost its peg within days, and both tokens collapsed from billions in market cap to near zero.
4. The Terra collapse exposed a core distinction: fiat-backed stablecoins rely on issuer solvency and redemption rights; algorithmic stablecoins rely on reflexive market behavior. When confidence breaks, the latter has no floor. USDT and USDC survived largely because reserves allowed redemption, though USDC briefly lost its peg in March 2023 when Silicon Valley Bank failed, and direct redemption is limited to verified customers; though both carry counterparty risk tied to their issuers’ balance sheets.
5. In January 2025, Tether announced USDT on Lightning via Taproot Assets, a partnership with Lightning Labs that enables dollar transfers over Bitcoin’s second layer. This design went live in March 2026. In August 2025 Tether also announced USDT on RGB, another Bitcoin-native asset standard; by October 2026 its launch had not been confirmed. Dollar tokens are returning to the rails where they first circulated, now with faster settlement and no dependence on Ethereum or Tron.
6. The trade-offs remain unchanged: fiat-backed stablecoins offer convenience and liquidity but require trust in a centralized issuer’s reserves; algorithmic designs eliminate that trust but introduce catastrophic failure modes. Reserves and redemption matter more than code. For Bitcoin, the return of dollar tokens to its layers adds utility without altering its fixed supply or consensus rules—a layer of claims held by others, not a change to the base asset.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Omni Layer documentation; Tether's 2014 launch (as Realcoin)
• TerraUSD collapse reporting, CoinDesk and The Block (May 2022)
• Tether and Lightning Labs joint announcement on Taproot Assets (January 2025)