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Smart Contract Risks

Many stablecoins—especially decentralized ones like DAI or algorithmic tokens—depend on smart contracts to manage minting, burning, collateralization, and peg stability. These contracts are often pitched as “trustless” or “automated,” but that doesn’t mean they’re risk-free. Smart contracts introduce a new set of vulnerabilities that businesses, developers, and users should be aware of when dealing with stablecoins.

The core appeal of smart contracts is that they remove middlemen. Instead of relying on a central issuer to mint or manage tokens, logic is encoded directly into the blockchain. This is how MakerDAO controls DAI minting or how algorithmic stablecoins automatically adjust supply in response to price changes. But once deployed, these contracts are hard to change. If there’s a bug, loophole, or flawed assumption in the code, it can be exploited—often with irreversible consequences.

Real-world failures and known vulnerabilities​

Multiple cases of stablecoin-related smart contract failures have been recorded. In some instances, attackers were able to mint unlimited tokens due to a miscalculated collateral ratio. In others, logic errors allowed vaults to be drained or left users unable to redeem their tokens. Even well-audited contracts can run into problems if unexpected market conditions expose flaws in assumptions or incentive structures.

Another challenge is governance. Some “decentralized” stablecoins can be upgraded by a core team or governance vote. If these processes aren’t well designed or sufficiently decentralized, they can become attack vectors themselves—either through malicious proposals or rushed changes pushed live without adequate testing.

Smart contracts also rely on external data, such as price feeds or oracles, to operate. If the oracle providing price information is manipulated or fails, it can trigger incorrect behavior in the contract—leading to mispriced mints, faulty liquidations, or destabilization of the peg. Oracle risk is one of the most underappreciated threats in smart contract systems and should be taken seriously in any production environment.

To manage smart contract risk, it’s important to use stablecoins with:

  • Well-established codebases
  • Multiple audits from independent firms
  • Clear documentation on upgradeability and governance
  • Transparent oracle design, ideally with redundancy or decentralization

For businesses integrating stablecoins into payments or products, these risks can be abstracted away by choosing more mature projects. But if you're working directly with DeFi protocols or custodying significant funds, it’s worth reviewing how the underlying contracts behave—and what happens if something goes wrong.

Smart contracts are powerful, but they’re only as safe as the code, assumptions, and governance that support them. Stability in name doesn't always mean stability in practice.

Next up:​

  • Peg Adjustment Logic – How smart contracts try to enforce price targets
  • DAI and Collateral – Where contracts and economics intersect in decentralized minting
  • Choosing a Stablecoin – Business factors for evaluating risk and stability in token selection