New on FinoLib · Volume II: Capital Markets
I have added a new article to FinoLib, my finance education website: Smart Contracts and Stablecoins: How Collateral Models Work, part of Volume II: Capital Markets. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
11.3 Smart Contracts and Programmable Money
The idea in plain words
A smart contract is a computer program on a blockchain that carries out agreed rules automatically, with users paying a fee, called gas, to run it. It removes the middleman only partly. Oracles bring in outside data, such as prices, and administrator keys can often change the code. So trust doesn’t vanish; it moves to whoever controls the oracles and the keys.
Key points
■Fee = gas × (base fee + tip): a 21,000-gas transfer at 12 gwei costs 0.000252 ETH.
■Since August 2021 the base fee is burned and rises up to 12.5% per block in congestion.
■The DAO hack (over 3.6 million ETH) was reversed by a hard fork in July 2016.
A closer look
A smart contract is self-executing code stored directly on a blockchain (most prominently, Ethereum, launched in 2015) that automatically carries out an agreed set of rules once specified conditions are met — no intermediary required to enforce or interpret the agreement. This single capability is the technical foundation underneath both stablecoins (11.4) and the DeFi ecosystem (11.6): once money itself can be represented on a blockchain, contracts governing that money can be written directly into code and executed automatically and verifiably, rather than relying on a bank or broker to carry out the agreed terms.
Decision rule
Before relying on a smart contract, answer three questions. Who can upgrade, pause or move funds, how many independent parties must sign, and is there a time delay before changes take effect? Where do its prices come from, and could one trade or one operator move that feed? How much value has it secured, for how long, and has its code been audited?
The costliest mistake
Counting keys instead of key holders. The Ronin bridge needed 5 of 9 validator signatures to release funds, but four keys sat with one company, Sky Mavis, and a fifth was accessible to it. On March 23, 2022, attackers used five compromised keys to take 173,600 ETH and 25.5 million USDC, about $620 million; the FBI attributed the theft to North Korea’s Lazarus Group on April 14, 2022. Ronin then raised the threshold from five to eight signatures. Ask how many independent organizations must collude, not how many signatures the contract checks.
11.4 Stablecoins and Their Collateral Models
The idea in plain words
A stablecoin is a digital token designed to hold a fixed value, usually $1, and it is only as stable as its reserves or its mechanism. Under the GENIUS Act, a payment stablecoin must be backed one-to-one by cash and short-term Treasuries, may not pay holders interest, and gives holders the first claim on the reserves if the issuer fails.
Key points
■GENIUS Act: signed July 18, 2025; effective by January 18, 2027, or 120 days after final rules, which were still proposals in October 2026.
■MiCA has applied to EU stablecoins since June 30, 2024, and bans interest from issuers and platforms.
■Issuer economics: net = C × y × (1 − d) − F; in the worked example losses start below a 2.08% short rate.
A closer look
Bitcoin’s price volatility makes it impractical as everyday money for pricing goods or settling contracts. A stablecoin solves this by being designed to hold a stable value, almost always pegged 1:1 to a fiat currency like the US dollar — but the mechanism used to maintain that peg varies enormously in reliability.
Because reserves must be short Treasuries, stablecoins are now a top-tier T-bill buyer. Dollar stablecoins totaled about $312 billion on October 4, 2026; Tether reported $141 billion of Treasury exposure on March 31, 2026, and ranks itself 17th among holders of US Treasuries when set against countries.
Decision rule
Treat a stablecoin as cash only if the issuer is permitted (GENIUS) or authorized (MiCA) with examined monthly reserve reports, the reserves are short Treasuries, repo and deposits spread across banks, and you or your platform can redeem at par within days. Hold only near-term payment needs in it; idle balances belong in a fund that pays you the yield. Algorithmic and crypto-collateralized tokens fail the test by design.
The costliest mistake
Selling a reserved stablecoin into a panic. When USDC hit $0.88, only 3.3 ÷ 40 = 8.25% of its reserves were at risk and they were made whole within days, yet selling $1,000,000 at the low cost $1,000,000 × (1 − 0.88) = $120,000. Know your redemption right and the reserves’ bank concentration before a run.
What the full article covers
In the full article I take you through these sections:
■11.3 Smart Contracts and Programmable Money
■11.4 Stablecoins and Their Collateral Models
It includes worked examples, a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, Smart Contracts and Stablecoins: How Collateral Models Work, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance