What Is the Difference between Fiat-Backed and Algorithmic Stablecoins in Terms of Peg Risk for Derivatives?

Fiat-backed stablecoins, like USDC, maintain their peg by holding an equivalent amount of fiat currency or highly liquid assets in reserve. Their peg risk primarily stems from reserve transparency, regulatory issues, or custodian insolvency.

Algorithmic stablecoins rely on smart contracts and on-chain incentives to manage supply and demand, often involving a second, volatile token to maintain the peg. Algorithmic stablecoins inherently carry a higher, more complex risk profile, as they are vulnerable to 'death spirals' during extreme market stress, making them less suitable for reliable derivatives settlement.