How Stablecoins Hold a Dollar

Stablecoins look simple because the user experience is simple: one token is intended to remain worth one dollar or one euro. Underneath that promise sits a chain of custody, banking, collateral, redemption, market-making, and legal claims. The quality of the peg depends on the quality of that chain.

Three different promises

A reserve-backed stablecoin is an issuer’s liability. The issuer receives conventional money or eligible assets, issues tokens, and promises redemption under stated terms. The token is not the reserve itself; it is a claim whose usefulness depends on the issuer, its custodians, banking access, and the holder’s ability to redeem.

A crypto-collateralised stablecoin uses on-chain assets and smart contracts. It normally requires more collateral than the stablecoins created, because the collateral can fall quickly. Liquidation rules attempt to close unsafe positions before the backing becomes insufficient.

An algorithmic design tries to stabilise price mainly through incentives, supply changes, or a related token. If confidence and liquidity fail together, the mechanism can become reflexive: falling confidence weakens the support asset, which weakens the peg, which causes more selling.

Why market price can differ from redemption value

A stablecoin can trade below one dollar even when reserves appear sufficient. Holders may be uncertain about redemption, banks may be closed, transaction costs may be high, or exchanges may have an imbalance of sellers. Market price reflects the immediate ability to exit; redemption value reflects a contractual process that may have limits, fees, eligibility rules, and settlement delays.

The reverse can also happen. During a shortage of liquid dollars on a trading venue, a stablecoin may trade above its target until arbitrageurs can issue or transfer more units.

Questions worth asking

• Who is legally responsible for redemption, and which holders can redeem directly?
• What assets back the token, where are they held, and how frequently are they reported?
• Are disclosures audits, attestations, management reports, or real-time account balances?
• What happens if a bank, custodian, bridge, smart contract, or front end becomes unavailable?
• Can the issuer freeze addresses, refuse redemption, or change the terms?
• How concentrated are issuance, custody, liquidity, and governance?

Stability is a system property

No single reserve ratio answers every question. A resilient design combines high-quality assets, clear legal claims, reliable redemption, operational controls, transparent reporting, and deep liquidity. A token may work well for years and still remain exposed to a particular bank, jurisdiction, administrator, or software contract.