A stablecoin can be designed to represent one US dollar, yet nothing in a public market forces every trade to happen at exactly US$1.
USDC can trade at US$0.99 on an exchange. Another stablecoin might briefly move to US$1.01. These deviations do not automatically mean the system has failed. The more important question is what happens next: what brings the price back towards its target?
The answer is not a single piece of code or a pile of dollars sitting somewhere. A stablecoin peg depends on a system that connects the token to an underlying value, gives market participants a reason to act when the price moves, and keeps redemption credible when demand turns in one direction.
That is why the US$1 price is better understood as the outcome of a mechanism than as a promise that the market can never break.
The peg starts with a credible route back to $1
A peg is simply a target exchange value. For a dollar stablecoin, that target is usually US$1.
But a target by itself has little power. If buyers and sellers are free to trade a token, its market price will move with supply and demand. The stabilising mechanism has to create a reason for someone to trade against those movements.
Consider a stablecoin that falls to US$0.99.
If eligible market participants can buy it for US$0.99 and redeem it with the issuer for US$1, there is a potential US$0.01 arbitrage opportunity. Arbitrage means exploiting a price difference between markets or conversion routes.
Buying the cheap token increases demand. Redeeming it removes the token from circulation. Both actions can help push the market price towards its target.
The reverse can happen above the peg. If a token trades at US$1.01 while it can be issued for US$1, a participant with access to issuance can create the token at the lower value and sell it at the higher market price. Additional supply can put downward pressure on the market price.
This is one of the key ideas behind a stablecoin peg: participants are given an economic incentive to help close the gap.
The catch is simple. The conversion route has to be real.
Reserves give the peg something to point to
For fiat-backed stablecoins, that reference usually comes from reserves held by the issuer.
These can include cash, short-term US government securities and other highly liquid assets. The purpose is not simply to make the issuer look solvent on paper. The reserves are part of the bridge between the token circulating on a blockchain and the dollars that underpin its value.
Circle, for example, says USDC is backed by highly liquid cash and cash-equivalent assets and is redeemable 1:1 for US dollars through its issuer infrastructure, subject to applicable terms and eligibility requirements. It also publishes reserve information and provides third-party assurance on their value.
That distinction matters because a stablecoin is only as useful as its ability to turn its promised value into something users can actually access.
This is where solvency and liquidity come apart.
Solvency asks whether the assets backing the system are sufficient to meet its obligations. Liquidity asks whether those assets can be turned into usable money quickly enough when holders want out.
For a stablecoin, the second question can become the first problem.
The USDC episode showed why access matters
In March 2023, the collapse of Silicon Valley Bank put that distinction under severe pressure.
Circle disclosed that about US$3.3 billion of USDC reserves were held at SVB. As uncertainty spread, traders sold USDC aggressively on secondary markets, and the token fell as low as about US$0.87.
The episode was not simply a story about whether the reserves existed. It was a story about whether holders could be confident that those reserves remained accessible.
Once US authorities announced that depositors would have access to their funds, the pressure on USDC eased and the price returned towards the peg. The banking shock showed something easy to miss in normal conditions: a stablecoin can remain backed while its market price moves sharply because confidence in the route to redemption has been damaged.
This is why reserve composition and disclosure matter. It is not enough to ask how much an issuer holds. The relevant questions include what the assets are, how liquid they are, where they are held and who has the legal ability to redeem.
The Basel Committee’s framework similarly links stablecoin resilience to sufficient reserve assets, rapid liquidation and the ability to meet redemption requests under stress.
Different stablecoins defend the same target in different ways
The objective stays the same, but the mechanism changes with the design.
Fiat-backed stablecoins such as USDC use reserves and issuer redemption as the central anchor. The market is connected to an off-chain pool of assets through a redemption process.
Crypto-backed stablecoins use other crypto assets as collateral. Because those assets can move sharply in value, the system generally requires more collateral than the value of the stablecoins issued. If collateral falls below a required level, it can be liquidated.
Algorithmic models try to maintain the target through programmed changes in supply and economic incentives rather than conventional reserves. Their weakness is that the mechanism can depend heavily on continued demand for the assets involved.
TerraUSD is the clearest historical example. Its design relied on the ability to exchange UST for value in its associated LUNA token. When confidence collapsed in May 2022, large-scale redemptions created new LUNA while the market was increasingly unwilling to absorb it. TerraUSD fell to almost zero.
Synthetic stablecoins use another structure. Ethena’s USDe combines backing assets with derivatives positions designed to hedge their price exposure, making funding rates and futures-market conditions part of the system’s economics.
These models can look very different, but they are solving the same problem: how to keep a token close to its reference asset when the market is free to disagree.
The hardest test begins when everyone wants out
A stablecoin peg is easiest to observe when nothing is going wrong.
In calm markets, arbitrageurs can move between the token, the issuer and other markets with little friction. Confidence is high and small price differences are quickly traded away.
Stress changes the equation.
If many holders want to redeem at once, the system needs sufficient liquid reserves and operational capacity to meet that demand. If collateral falls rapidly, liquidations need to work without overwhelming the market. If the stabilising asset itself loses credibility, an algorithm may stop producing the incentives it was designed to create.
This creates the central tension in the stablecoin peg.
The mechanism is most valuable when the market is under pressure, but the same pressure can make the mechanism harder to use.
A stablecoin therefore cannot be judged only by how often it trades at US$1. The more revealing test is how the system behaves when participants stop assuming that US$1 will be there.
What the $1 price leaves out
Two stablecoins can both show US$1 on an exchange while relying on completely different economic machinery underneath.
One may depend on liquid reserves and direct redemption. Another may depend on overcollateralised crypto positions and liquidations. A third may depend on market incentives, while a synthetic model may rely on derivatives markets to offset risk.
From the outside, the result can look identical.
Under stress, it may not be.
That is the practical way to understand how stablecoins maintain their peg. The dollar price is not the mechanism. It is the visible result of the mechanism working.
The real question is what sits behind the token when the market tests it: whether reserves are there, whether they can be accessed, whether redemption remains credible and whether someone still has a reason to trade when everyone else is trying to leave.
A stablecoin peg is ultimately a confidence system backed by economics. The US$1 figure only tells you where the system is supposed to end up. The structure underneath tells you how it intends to get there.