Crypto · Explainer
What actually holds a stablecoin's peg
A peg is a promise plus a redemption mechanism. The reserve behind it, and who may access it, decides whether the promise survives stress.
The short answer
- Fiat-backed tokens hold the peg through redeemability at par, not through market sentiment.
- Reserve composition and maturity determine how fast redemptions can be met.
- Algorithmic designs replace reserves with incentives, which fail together under stress.
A stablecoin trades near a reference value because market participants believe they can convert it into that value. The belief is only as strong as the redemption channel behind it: who is entitled to redeem, at what size, how quickly, and against what assets.
Reserves are a maturity question
Short-dated government bills and overnight deposits can be turned into cash on the day. Longer bonds, commercial paper or loans to affiliates cannot, at least not at par. A reserve that is fully backed on paper can still be unable to meet a same-day redemption wave, which is the classic mechanics of a run.
- Who can redeem: retail holders directly, or only authorised distributors?
- What is held: cash, treasury bills, repo, or credit-sensitive assets?
- Who verifies it: an audit, a limited assurance report, or a self-published dashboard?
- What happens in insolvency: are holders creditors of the issuer, or beneficiaries of segregated assets?
Secondary price is a signal, not the peg
On an exchange, the token trades wherever supply and demand put it. When redemption works, arbitrageurs close any gap for profit. A persistent discount is therefore information about the redemption channel — a blockage, a fee, a queue — rather than a mood.
Regulation is converging on the same tests
Frameworks emerging across major jurisdictions concentrate on the identical points: high-quality liquid reserves, segregation from the issuer's own assets, a legal right of redemption at par, and disclosure of the reserve composition at a stated frequency.
Sources
- Markets in Crypto-Assets (MiCA) framework — ESMA
- Stablecoin analysis — Bank for International Settlements
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