How Do Stablecoins Stay Pegged?
The three mechanisms that hold a stablecoin at $1, and what the UST collapse and the USDC wobble reveal about each.
TL;DR
- Three peg mechanisms: issuer reserves with $1 redemption, overcollateralised crypto (DAI), or algorithmic supply with nothing hard behind it (UST).
- Redemption arbitrage does the daily work: desks buy discounted coins and redeem at $1 until the price snaps back.
- UST collapsed in days in May 2022; USDC dipped to about $0.87 in March 2023 and recovered once its banked reserves were secured.
- In the EU, MiCA's e-money token rules (since 30 June 2024) shape which stablecoins platforms can offer.
- An explainer, not financial advice: a peg is an engineering claim, so check the engineering.
A stablecoin is a crypto token that promises to hold one steady price, almost always a dollar. Bitcoin does not do calm, and stablecoins exist so that something on a blockchain does. The catch is the promise itself: a peg is not a law of nature, it is a mechanism, and someone has to do the work of holding it.
Three mechanisms exist, and two are still standing. One died in public in May 2022, and the way it died explains the other two better than any diagram.
The three ways a peg gets held
Every pegged coin you will meet uses one of these:
Fiat-reserve coins, like USDT and USDC: an issuer holds reserves, and big traders who can redeem coins at exactly $1 pull the market price back whenever it drifts.
Overcollateralised crypto-backed coins, like DAI: more value sits locked as collateral than coins in circulation, and automatic liquidations defend the line.
Algorithmic coins, like UST was: supply adjustments and confidence, with nothing hard underneath.
The mechanism tells you what has to break before the price does, and learning it takes ten minutes. UST holders learned it in days, the expensive way.
Cash-backed coins: arbitrage does the daily work
USDT and USDC are claims on an issuer: Tether and Circle hold the reserves, and large trading firms can mint new coins or redeem old ones with the issuer at exactly one dollar apiece.
That redemption right is the whole trick, and it kicks in the moment USDC slips to $0.99 on some exchange: a desk buys millions at the discount, redeems each coin with the issuer for a full dollar, keeps the cent, and all that buying pressure drags the market price back towards the dollar. At $1.01 the same game runs in reverse. Nobody does this out of loyalty, they do it for the cent, which is exactly why it keeps working.
You will probably never redeem anything yourself: retail buys at market price through exchanges and on-ramp plumbing like Banxa, which has been converting money into crypto since 2014, and the desks keep that market price honest.
The belief doing the heavy lifting is that redemption will pay out, so issuers publish evidence: Circle puts out monthly reserve attestations for USDC, and Tether publishes quarterly attestations for USDT. That is the territory of proof of reserves, published checks on what backs the coins. Go and read one: five minutes, and it is your money.
Crypto-backed coins: locked collateral, automatic liquidations
DAI holds its peg without a bank account. MakerDAO has run it since 2017: users lock crypto collateral worth more than the DAI they create, and when someone's collateral thins towards the line, the system liquidates it automatically so every DAI stays covered.
The overcollateralisation is the point: the backing is volatile, so the system holds more of it than it owes and lets the margin absorb the swings, more spring under tension than vault. Running since 2017 means it has seen some genuinely ugly markets, though the machinery takes most newcomers a weekend to get their head around.
May 2022: the algorithmic funeral
UST was the third model: no reserve account, no collateral buffer, just a supply mechanism tied to its sister token LUNA, plus a great deal of confidence.
In May 2022 the confidence went, UST slipped off the dollar, holders ran for the exit, and the supply mechanism that was supposed to steady things fed the panic instead. The spiral pulled LUNA down with it, and within days both had collapsed and tens of billions of dollars of market value were gone. Not a dip. Gone.
The lesson is blunt: a peg with nothing hard behind it holds exactly as long as nobody tests it, and markets exist to test things.
March 2023: the weekend USDC bent
Reserve-backed does not mean drama-free: in March 2023 Silicon Valley Bank failed, and Circle disclosed that $3.3bn of USDC reserves sat inside it. The market did the maths before breakfast: on 11 March 2023, USDC traded down to roughly $0.87.
The recovery teaches as much as the dip: on 12 March, US authorities announced that SVB depositors would be made whole, which turned the stuck $3.3bn back into money, and USDC climbed to a dollar again within days.
Set the two cases side by side and the rule falls out on its own. UST broke because nothing stood behind it, and USDC bent because something real stood behind it and was briefly in doubt. A peg is only as good as what backs it, and how fast that backing turns into cash when everyone asks at once.
Where regulation fits, MiCA included
Pegs now have a legal layer too: in the EU, MiCA's stablecoin rules, the e-money token regime, have applied since 30 June 2024, and from early 2025 several venues restricted stablecoins that did not meet the requirements for their EU customers.
None of that tells you whether a coin will hold its dollar. What it changes is availability: which pegged coins a platform will offer you depends partly on where you live. If a coin you expected is missing from the menu in Europe, regulation is often the unglamorous reason. Check your platform's list for your country before you plan around any particular coin.
How to read a peg before you trust it
Three questions sort most of it.
What stands behind the coin: reserves at an issuer, locked crypto collateral, or nothing hard at all?
Who can redeem, and how quickly, since a peg that leans on redemption leans on that pipe staying open?
What does the issuer publish, and how often? Circle's monthly and Tether's quarterly attestations are public, so read before you rely.
And keep the job description straight: a stablecoin is working crypto, a way to park value between trades or move it across borders without riding bitcoin's mood swings. The days a stablecoin makes headlines are the days it is failing at its one job. This is an explainer, not financial advice. Treat every peg as an engineering claim, then go and check the engineering.
Frequently Asked Questions
The market price drifts away from the promised $1. Tiny drift happens all day and arbitrage pulls it back. A depeg worth the name is a big, stubborn gap: USDC at roughly $0.87 on 11 March 2023, or UST in May 2022, which never came back. The size and the stubbornness are what matter, and what stands behind the coin decides both.
Mostly arbitrage desks. Firms that can mint and redeem with the issuer at exactly $1 profit from any drift, and their trading pushes the market price back into line. Regular buyers just trade at market price and free-ride on that plumbing.
It has happened briefly. USDC traded near $0.87 in March 2023 when $3.3bn of its reserves were stuck in a failed bank, then recovered within days once those deposits were secured. Reserve-backed coins can wobble when their backing is questioned. Nobody can promise you a peg holds forever, which is why issuers publish reserve attestations and why reading them is worth your time.
The backing. USDT and USDC point at reserves held by an issuer, with Circle publishing monthly attestations and Tether quarterly ones. DAI, run by MakerDAO since 2017, is backed by crypto collateral locked on-chain, worth more than the DAI issued, with automatic liquidations if collateral thins. Different machinery, same goal: a coin that sits at a dollar.
MiCA's e-money token rules have applied across the EU since 30 June 2024, and from early 2025 several platforms restricted coins that did not meet them for EU customers. It is an availability question, decided platform by platform and country by country, so check what your platform lists where you live. The rules do not tell you whether any coin's peg will hold.
A published, point-in-time breakdown of what stands behind a coin, checked by an outside firm. Circle publishes them monthly for USDC and Tether quarterly for USDT. An attestation is a snapshot rather than a running audit, so treat it as evidence with a date on it. Ten minutes with one tells you more than any marketing page.
About the author — Dan Clarke
Dan Clarke is the author of Bitcoin: The Complete Guide and a former content lead at Binance Academy, where he wrote crypto education for readers arriving with no background in the subject. He has worked in the cryptocurrency industry since 2017. His rule for these guides: plain language first, precision where it matters, no cheerleading.