How stablecoins stay pegged to the dollar, and why some fail

A stablecoin is a crypto token built to hold one steady value, almost always a single US dollar. Most keep that value by holding real reserves, cash and short-term government debt, and by promising to swap each coin back for a dollar whenever a holder asks. When that promise looks solid, the price sits near a dollar. When traders stop believing it, the peg slips.

Stablecoins are now a large market. The combined supply of all dollar stablecoins stood near $313 billion on 11 October 2026, according to DefiLlama, and two coins, Tether's USDT and Circle's USDC, made up more than four fifths of it. Billions of dollars in trades settle in these tokens every day. So the question of what keeps them at a dollar reaches well past crypto traders.

How a dollar peg actually holds

At its simplest, the mechanism rests on one promise. A credible issuer holds a dollar of safe assets for every coin in circulation, and it lets holders redeem coins for dollars at par, one for one. That redemption right does the real work.

Arbitrage traders enforce the peg minute by minute. If a coin trades at 99 cents, a trader can buy it cheap, redeem it with the issuer for a full dollar, and pocket the difference. That buying pushes the price back up. The same works in reverse above a dollar. As long as people trust that redemption will clear, few of them ever need to use it.

Think of it like a cloakroom ticket. It is worth a dollar only while the coat is still on the rack and the counter stays open. Take away either one and the ticket is just paper.

The three ways stablecoins are backed

Not all stablecoins hold the same thing behind the coin. Three models dominate, and they fail in different ways.

Fiat-backed coins are the largest group. USDT and USDC both sit here. The issuer takes in dollars, holds them as cash and short-term US Treasury bills, and issues coins against that pile. USD1, the dollar coin from World Liberty Financial, follows the same design. The strength of the model is that the backing is plain. The weakness is that holders must trust the issuer's word about what the reserves hold and where they sit.

Crypto-backed coins take a different route. DAI is the best known. Because crypto prices swing, these coins lock up more collateral than the coins they issue, sometimes 150 dollars of ether for 100 dollars of stablecoin. The buffer absorbs a fall in the collateral. A sharp enough drop can still force the system to sell collateral in a hurry.

Algorithmic coins hold little or no reserve at all. They try to hold the peg with code and a second token, using trading incentives to expand or shrink supply. On paper it is elegant. In a panic it is fragile, as the next section shows.

These models also differ in how much a holder can check. Fiat-backed issuers can show bank statements and monthly reserve reports. Crypto-backed systems are visible on the blockchain, where anyone can see the collateral locked up. Algorithmic coins offer the least to verify, because there is no pile of assets to point at. That gap in proof matters most on the day everyone wants out at once.

When a backed coin wobbled: USDC in 2023

A full reserve does not make a coin immune. Circle's USDC, the second-largest stablecoin, proved that over one weekend in March 2023.

On 10 March 2023, US regulators shut Silicon Valley Bank. Circle held part of its cash reserves there. The firm said $3.3 billion of USDC reserves, about 8 percent of the total, were stuck at the failed bank. Traders did the math. They sold. USDC fell to about 88 cents on 11 March, according to The Block, below its dollar peg.

In the end the peg held. Over that weekend, Treasury Secretary Janet Yellen and US banking regulators said depositors at Silicon Valley Bank would be made whole. Circle said the trapped $3.3 billion would be available once banks reopened, and titled its 13 March statement "Dollar De-peg Closes." USDC climbed back to a dollar within days.

USDC was not unbacked. It was fully backed. The money was simply in the wrong place at the wrong time, and a coin is only as liquid as the bank holding its cash.

When a peg broke for good: TerraUSD

Some pegs do not come back. TerraUSD, or UST, was the largest algorithmic stablecoin until it collapsed in May 2022 and wiped out tens of billions of dollars in days.

UST held no cash reserve. It kept its dollar value through a swap with a sister token called LUNA. Do Kwon, co-founder of Terraform Labs, described the mechanism this way: "The idea is that at any given time a person can burn a dollar's worth of Luna in order to mint one TerraUSD." A holder could also hand in one UST for a dollar's worth of LUNA. In calm markets, arbitrage kept UST near a dollar.

Much of the demand came from Anchor, a lending app on Terra's network that paid about 19.5 percent a year to people who deposited UST. That yield pulled in billions. It was also hard to sustain.

A run started over the weekend of 7 May 2022 as large holders pulled UST out of a key trading pool. By Monday, 9 May, UST had fallen as low as 61 cents on Binance. The next day it dropped to around 30 cents. LUNA, meant to backstop the peg, fell from about $84 to $1.25 in a week, then kept sliding toward zero. Each UST redemption minted more LUNA, which drove LUNA's price down, which made the next redemption worse.

There was no reserve to tap and no outside buyer large enough to stop it. The peg broke. It never came back. Both tokens are worth almost nothing next to their old prices, and the wreck pushed lawmakers in several countries to write stablecoin rules.

What regulators now require

Terra's collapse and the USDC scare both fed into new law. Two sets of rules matter most, and they rhyme.

In the United States, the GENIUS Act, signed in 2025, requires payment stablecoins to be backed at least one for one by safe assets such as bank deposits and short-term Treasury bills, kept in segregated accounts and reported every month, with the reserve makeup certified by the issuer's chief executive and chief financial officer, according to The Block. Commercial paper and corporate bonds do not count.

Europe got there first. MiCA has governed these tokens across the European Union since 2024. It requires full one-to-one backing at all times, forces issuers to keep reserves apart from their own money, and makes them hold at least 30 percent of reserves in bank deposits, rising to 60 percent for the largest coins. European regulators have already told exchanges to drop stablecoins that fail the rules.

Rules raise the floor. They do not turn a peg into a law of nature. A monthly report is a snapshot, not a live view of the money, and neither a report nor an audit tells a holder the cash is there at the exact second they want out.

Where the risks still sit

A few plain points are worth keeping in mind before trusting any coin to hold a dollar.

Backing is not the same as safety. A coin can be fully reserved and still trade below a dollar for days if the reserves are stuck or the market panics, as USDC showed. Read what the reserves actually hold.

Redemption is often wholesale, not retail. The one-for-one swap that anchors the peg is usually open to large, vetted clients, not to someone holding a few hundred dollars on an exchange. Ordinary holders rely on the market price, which can move faster than any guarantee. Panic moves faster than proof.

Algorithmic designs deserve the most caution. The model that broke Terra has been tried again under new names. Not all are equal. A token that calls itself a stablecoin is not automatically backed by anything.

For most holders the practical takeaway is modest. A stablecoin is a promise to pay a dollar, backed by someone's balance sheet and someone's good faith. Check whose, and check what sits behind it.