Recently, some projects have been offering $1-denominated tokens that represent a combination of collateral and an investment strategy. These tokens are often lumped in with stablecoins, but strategy-backed synthetic dollars should not be considered stablecoins. Here’s why. **Strategy-backed synthetic dollars** (SBSDs) expose users directly to actively managed trading risk. They are typically centralized, undercollateralized tokens layered with financial derivatives. More accurately, SBSDs are dollar shares in an open-ended hedge fund — a structure that is both difficult to audit and that could expose users to centralized exchange (CEX) risk and asset price volatility, if, for instance, there were significant market movements or a persistent downward sentiment.  These attributes make SBSDs a poor choice for a reliable store of value or medium of exchange, which are the main purpose of stablecoins. While SBSDs can be constructed in many ways, with varying levels of risk and stability, all of them offer a dollar-denominated financial product that people may want in their investment portfolios. SBSDs can be built on many strategies — for instance, the [basis trade](https://en.wikipedia.org/wiki/Basis_trading) or participation in  yield-generating protocols like the restaking protocols that help secure actively validated services ([AVSs)](https://docs.eigenlayer.xyz/eigenlayer/overview/key-terms). These projects manage risk and reward, typically allowing users to earn yield on top of a cash position. By managing risk with earnings, including by evaluating AVSs for slashing risk, seeking higher yield opportunities, or monitoring the basis trade for inversion, projects can produce a yield-bearing SBSD.  Users should deeply understand the risks and mechanisms of any SBSD before using it (as with any novel instrument). DeFi users should also consider the consequences of using SBSDs in DeFi strategies due to the substantial cascading consequences of a depeg. When an asset depegs, or suddenly loses value relative to its tracking asset, derivatives that rely on price stability and consistent yield can destabilize suddenly. But underwriting the risk of any given strategy can be hard or impossible when the strategy includes centralized, closed source, or unauditable components. You have to know what you’re underwriting to underwrite it.  While banks do run simple strategies with bank deposits, they’re actively managed and a _de minimis_ part of the overall capital allocation. It’s hard to use these strategies to back stablecoins because they must be actively managed, which makes those strategies hard to reliably decentralize or audit. SBSDs expose users to more concentrated risk than banks allow in deposits. Users would be right to be skeptical if their deposits were held in such a vehicle.  In fact, users have been wary of SBSDs. Despite their popularity among risk-favoring users, few users are transacting with them. Further, the U.S. SEC has brought [enforcement](https://www.sec.gov/newsroom/press-releases/2024-145) [actions](https://www.sec.gov/newsroom/press-releases/2023-32) against issuers of “stablecoins” that functioned like shares in investment funds.