Stablecoins: the peg, the backing and the risk

A stablecoin is a token designed to hold a steady value against a reference asset, usually the US dollar. It is still a blockchain token, and its stability is a design goal maintained by a mechanism: reserves, collateral or code. When that mechanism is doubted or fails, the price can fall away from its target. That is called a depeg.

Key takeaways

• Fiat-backed stablecoins rely on an issuer holding reserves. Crypto-backed ones rely on overcollateralized loans and liquidations. Algorithmic designs rely on incentives, and several have failed.
• A peg holds while holders trust that they can redeem or exit near the target value.
• Market price and redemption value are different things, and not every holder can redeem with the issuer.
• Centrally issued stablecoins can usually be frozen at the contract level.

Three ways to support a peg

• Fiat-backed. An issuer holds cash, short-term government debt and similar assets in reserve. The peg can break on doubts about the reserves, banking problems, legal action or halted redemptions.
• Crypto-backed. Crypto locked in smart contracts, worth more than the stablecoins issued against it, backs the token. The peg can break on a sharp fall in collateral, failed liquidations, oracle errors or contract bugs.
• Algorithmic. A mechanism expands or contracts supply, often tied to a second token. The peg can break on a loss of confidence that feeds on itself, as in the 2022 collapse of TerraUSD.

These categories are simplified. Many stablecoins combine features of more than one.

How a peg is held

For a fiat-backed coin, the anchor is redemption. If the token trades at $0.99, an eligible customer can buy it on the market and redeem it with the issuer for $1, which pushes the price back up. That arbitrage works only while redemptions stay open and the reserves are trusted. Many issuers limit direct redemption to verified customers, often with minimum amounts, so most holders rely on selling to someone else.

For a crypto-backed coin, users lock collateral worth more than the stablecoins they create. If the collateral’s value falls too far, the position is liquidated to keep the system solvent. The peg depends on liquidations working in a fast market and on accurate price oracles.

What a depeg looks like

Depegs usually start with a question about backing. In March 2023, USDC traded well below $1 over a weekend after its issuer disclosed that part of its reserves were held at Silicon Valley Bank, which had just failed. It recovered once US authorities guaranteed the bank’s deposits. A depeg can be brief or permanent: the market price shows the fear, while the reserve and redemption facts decide the outcome.

Look behind the price

• Reserves: what backs the token, where it is held and how often an independent firm reports on it. An attestation checks reserves at a point in time and is narrower than a full audit.
• Redemption: who can redeem, at what minimum, with what fees and delays.
• Controls: whether the issuer can freeze addresses or pause transfers, and under what policy.
• Networks: which chains the token is issued on natively, and which versions are bridged copies.
• Regulation: which regime, if any, supervises the issuer. The EU’s MiCA regulation and the US GENIUS Act, signed in July 2025, set reserve and disclosure rules for issuers they cover.

Build a research checklist

Before relying on a stablecoin, write down its reference asset, backing type, issuer or protocol, supported networks, redemption terms and the date of its latest reserve report. Treat “stable” as a claim to check. Two tokens with the same dollar label can behave very differently under stress.