How do stablecoins keep their peg?

What does it mean for a stablecoin to be pegged?

A peg is a promise about price: one token should be worth one unit of something else, most often one US dollar. Our guide to what a stablecoin is covers the basics; this page is about the machinery behind that promise.

The important point is that nothing in the token's code fixes its market price. On an exchange, a stablecoin trades like any other asset, and its price is whatever buyers and sellers agree on. The US Treasury's 2021 report describes stablecoins as designed to keep a stable value — design, not certainty. The peg holds because enough people believe a token can be turned into a dollar, and because some of them can actually do it.

Federal Reserve staff group stablecoins by what backs them: reserves held in the traditional financial system, crypto collateral held on a blockchain, or an algorithm with little or no collateral. Each group uses a different tool to hold the peg, compared in the table below and in our guide to types of stablecoins.

How do the primary and secondary markets work together?

A 2024 Federal Reserve note splits stablecoin trading into two markets. The primary market is where the issuer creates (mints) and destroys (burns) tokens in exchange for dollars. The secondary market is everything else: exchanges, trading desks and decentralized pools where existing tokens change hands.

Access to the primary market is narrow for the big dollar stablecoins. Circle's Mint service is open to exchanges, institutional traders and banks but not to individuals; Tether's terms require a verified customer account and its fee page sets a $100,000 minimum. The Fed note counted 79 unique participants in USDT's primary market in its 2022 data, against 88,341 for USDC. For DAI, by contrast, any Ethereum user can reach the smart contracts that issue the token.

Those few primary-market players matter because they are the ones who can close a price gap. When a token trades below $1, they buy it cheaply and redeem it for a full dollar. When it trades above $1, they mint new tokens at $1 and sell them. Each trade nudges the market price back toward the peg.

1. Price slips below $1. Sellers outnumber buyers on exchanges, perhaps after a scare.

2. Arbitrageurs buy the discount. Firms with redemption access buy tokens on the secondary market.

3. They redeem with the issuer. The issuer burns the tokens and pays dollars from its reserves.

4. Supply shrinks and the price recovers. Fewer tokens chase the same demand, so the discount closes.

Why don't fees let the peg sit exactly at $1?

Arbitrage only happens when it pays. Every fee, minimum and delay in the primary market creates a band around $1 inside which no one bothers to trade the gap away. Tether's published schedule (as of October 2026) charges 0.1% to acquire tokens and, on redemption, the greater of $1,000 or 0.1%. That flat $1,000 floor matters more for smaller tickets.

The same logic runs in reverse. If tokens trade at $1.005, a firm can mint 1,000,000 for $1,000,000 plus the 0.1% fee ($1,001,000) and sell them for $1,005,000. Timing also matters: New York's financial regulator expects issuers it supervises to pay out within two business days, and Tether says token withdrawal requests can take several days. Money tied up while waiting is another cost, which is one reason small deviations can linger.

How does a crypto-backed stablecoin hold its peg?

DAI, issued by the Sky protocol (formerly MakerDAO), has no company bank account behind it. Users lock collateral in smart-contract vaults and generate DAI against it. Sky's documentation says each DAI is backed by stable collateral plus an excess of volatile collateral, and a liquidation ratio protects that backing: if a vault's collateral falls too far, it is sold off.

Two further levers help. Governance can raise or lower the stability fee vault owners pay, which encourages them to create or repay DAI. And a Peg Stability Module lets anyone swap another stablecoin such as USDC for DAI at a fixed rate, minus small fees. Sky's own governance manual notes the trade-off: the module helps hold $1, but it ties DAI to the health of the stablecoins it holds. That link showed in March 2023, when the Fed note records DAI losing its peg alongside USDC.

What breaks a stablecoin peg?

Arbitrage pulls a price back only if traders trust the other side of the trade. The Treasury report warns that if an issuer does not honor redemptions, or users stop believing it can, runs could follow. Three triggers stand out:

• Reserve doubts. On 12 March 2023 Circle said $3.3 billion of USDC reserves, about 8%, sat at Silicon Valley Bank, which had just failed. The Fed note records USDC trading under 90 cents and recovering over about three days, after US authorities said all SVB depositors would be made whole.
• A blocked door. If redemptions pause over a weekend or for legal reasons, arbitrageurs cannot lock in the dollar, so they stop buying the discount.
• Weak or circular backing. Designs that rely on their own sister token can lose both legs at once, as TerraUSD did in 2022.

Regulation targets those triggers. The US GENIUS Act requires one-to-one reserves in cash, insured deposits, short-term Treasuries and similar assets, monthly published reserve reports, and public redemption policies; see the GENIUS Act explained. The Bank for International Settlements points out that even small deviations from par undermine the idea that one dollar is always one dollar.

What mistakes do beginners make about stablecoin pegs?

• Assuming you can redeem. Most holders cannot swap tokens with the issuer; your real exit is the exchange price that day, plus the bid-ask spread.
• Reading a flat chart as proof of safety. A peg tested only in calm markets tells you little about a run.
• Ignoring fees and minimums. They decide how far the price can drift before anyone corrects it.
• Forgetting the backing behind the backing. A crypto-backed coin that holds other stablecoins inherits their risks.
• Panic-selling a brief dip without checking why. A depeg caused by a weekend banking freeze is different from one caused by missing reserves; read the issuer's statements and regulator notices first.