How stablecoins hold their peg, and why they sometimes lose it

A stablecoin is a crypto token designed to keep a steady price, almost always one US dollar. Traders use stablecoins to park money between trades, businesses use them to move dollars across borders in minutes, and DeFi apps use them as the unit for loans. How well a stablecoin keeps its peg depends on what stands behind it.

Fiat-backed stablecoins

The largest stablecoins, such as USDT (Tether) and USDC (Circle), are backed by reserves held off-chain: cash, bank deposits and short-term US government debt. The issuer creates new tokens when a customer deposits dollars and destroys them when the customer redeems.

That redemption promise is what keeps the price near $1. If the token trades at $0.99 on an exchange, a verified customer can buy it there and redeem it with the issuer for $1. If it trades at $1.01, they can mint new tokens for $1 and sell them. This arbitrage pulls the price back towards the peg, as long as people trust the reserves.

Crypto-collateralised stablecoins

Designs such as DAI lock other crypto, for example ether, in smart contracts as collateral. Because crypto prices swing, these systems demand more collateral than the stablecoins issued, often 150% or more. If the collateral falls too far in value, the position is automatically liquidated: the collateral is sold to repay the loan. Everything is visible on-chain, but a sharp market crash can test the liquidation system.

Algorithmic stablecoins

Algorithmic stablecoins try to hold their peg with code and a second token instead of reserves. The best-known example, TerraUST (UST), lost its peg in May 2022. Holders rushed to exit, the mechanism printed huge amounts of its sister token LUNA, and both collapsed within days, wiping out tens of billions of dollars of value.

When pegs break

• Reserve risk: in March 2023, USDC briefly fell to about $0.87 after Circle disclosed that $3.3 billion of its reserves were held at Silicon Valley Bank, which had just failed. It recovered once US authorities guaranteed the bank's deposits.
• Run risk: if many holders redeem at once, an issuer must sell reserves quickly. Short-term government debt is easier to sell than riskier assets.
• Design risk: systems without hard reserves depend on confidence, and confidence can disappear fast.
• Freeze risk: fiat-backed issuers can freeze tokens at specific addresses, for example on a court order or sanctions.

Rules are arriving

Regulators now treat dollar stablecoins as payment instruments. In the EU, MiCA requires stablecoin issuers to be authorised, hold reserves and honour redemptions; see our MiCA explainer. In the US, the GENIUS Act, signed into law in July 2025, sets federal rules for payment stablecoin issuers, including one-to-one reserves of cash and short-term Treasuries.

Key takeaways

• A stablecoin is only as stable as what backs it and your ability to redeem.
• Check whether the issuer publishes regular reserve reports, and who audits or attests them.
• "Stable" does not mean risk-free: depegs have happened to large and small stablecoins.