How pegs hold and how they break

The peg is an arbitrage, not a promise

No stablecoin holds a dollar price by decree. It holds because a trade exists that pushes the price back. When the coin trades at 0.99, anyone who can redeem it for a dollar buys it and redeems, and that buying lifts the price. When it trades at 1.01, anyone who can mint it for a dollar mints and sells. The peg is a band whose edges are set by the cost of that round trip:

Who can do the round trip matters as much as the cost. For fiat backed coins it is usually verified institutions. Tether’s published fees, for example, set a minimum redemption of 100,000 dollars and a fee of the greater of 1,000 dollars or 0.1%:

Before costs of capital and settlement time. Everyone else relies on those arbitrageurs being willing and able to act, which is why the peg is tightest in calm markets and widest exactly when you need it. The US GENIUS Act, signed July 18, 2025, writes the backing side of this into law for payment stablecoins: per the White House summary, 100% reserves in liquid assets such as dollars or short term Treasuries, with monthly public disclosure of what the reserves hold. That strengthens the solvency side of the peg; the width of the band is still set by who can redeem, how fast, and at what cost. The holder’s view of these choices is in choosing a stablecoin.

Liquidity versus solvency

A stablecoin can fail in two different ways. It is insolvent when its assets are worth less than the coins outstanding: no amount of patience gets every holder a dollar. It is illiquid when the assets are there but cannot be turned into dollars fast enough, because banks are closed, redemptions are queued or the assets are locked. Markets price both, and in the moment they cannot tell them apart, so an illiquid coin trades as if it might be insolvent. The discount is the market’s estimate of loss plus the cost of waiting.

USDC and Silicon Valley Bank, March 2023

On Friday, March 10, 2023, California regulators closed Silicon Valley Bank and appointed the FDIC as receiver. Circle disclosed that about 3.3 billion dollars of USDC’s reserves sat at SVB, against roughly 43 billion USDC outstanding: a hole of under 8% even if every uninsured dollar at SVB were lost. With banks shut for the weekend, redemptions could not settle, and the only exit was the secondary market.

Hourly aggregate prices from CoinGecko via DefiLlama; individual venues printed lower. The market briefly priced a 12% loss on a maximum 8% hole, which is the liquidity premium made visible. DAI fell with it because a large share of DAI was backed by USDC through MakerDAO’s peg stability module, and Maker governance put emergency changes to that module’s fees to a vote the same weekend. On Sunday, March 12, the Treasury, Federal Reserve and FDIC announced that all SVB depositors would be protected, and USDC was back at a dollar by Monday. USDC supply still fell from about 43.2 billion on March 10 to about 37.2 billion by March 16 as holders redeemed.

CDP stablecoins: debt against collateral

A collateralized debt position (CDP) stablecoin such as DAI, issued by MakerDAO, now called Sky, is a loan you take from yourself. You lock collateral in a vault and mint the stablecoin against it, up to a minimum collateral ratio. Every coin in circulation is someone’s debt, and it is backed by more than a dollar of collateral.

The peg levers are rates. Raise the stability fee and vault owners repay, shrinking supply and lifting the price; offer a savings rate on deposited stablecoins and demand rises. When a vault falls below the minimum ratio, its collateral is auctioned to repay the debt, and those auctions are the weak point. On March 12, 2020, Ethereum congestion kept most bidders out of MakerDAO’s auctions, some cleared at zero, and the shortfall had to be covered by minting and selling MKR. The collateral existed; the auction plumbing that was supposed to turn it into repayments failed under load.

Peg stability modules

A peg stability module (PSM) replaces the arbitrage band with a hard one: it swaps a reference stablecoin such as USDC for the protocol’s own coin at 1:1, minus small fees on the way in and out (MakerDAO called them tin and tout). With low fees, the coin can barely leave par in either direction as long as the module has inventory.

The price of that stability is inherited risk. A PSM that holds USDC is, in a stress, a pool of USDC. DAI’s dip to about 0.886 on March 11, 2023 is what that looks like. Every design choice here is a decision about which risk to hold, never whether to hold one.

Synthetic dollars: the delta neutral design

A synthetic dollar such as Ethena’s USDe holds a volatile asset and shorts an equal amount of it with a perpetual future. The two legs cancel:

Illustrative, starting at 2,600 dollars. The yield comes from staking rewards on the collateral and from funding, which longs usually pay shorts. The risks move elsewhere: funding can turn negative (at −10% a year, the position above bleeds about 22 dollars a month), the short sits on centralized venues and with custodians, and the hedge can drift. Ethena runs a reserve fund intended to absorb periods of negative revenue. Minting and redeeming directly is open only to approved, whitelisted counterparties, so the peg depends on their arbitrage (Ethena’s peg arbitrage page walks through both directions), as the mechanics in basis trades and delta neutral positions explain.

Algorithmic designs and reflexivity

An algorithmic stablecoin replaces reserves with a promise to mint: redeem one coin and receive one dollar of a volatile token, newly created. When the coin trades below par, arbitrageurs redeem, the stablecoin supply shrinks and the peg recovers, as long as the volatile token holds its value. The design is reflexive: the defense of the peg is paid in the same asset whose value depends on the peg.

Each wave of redemptions mints more of the token, which pushes its price down, which makes the next redemption mint even more. Terra’s onchain swap also throttled itself: it ran through a virtual constant product pool whose spread widened as net swaps piled up in one direction and relaxed only over a recovery period. That capped how fast UST could be redeemed at face value, so the rest of the exit went through open markets at a discount.

Terra UST, May 2022, mechanically

By May 7, 2022, UST supply stood at about 18.8 billion, much of it parked in the Anchor protocol earning close to 20% a year, a rate subsidized from reserves rather than earned. The Luna Foundation Guard held 80,394 bitcoin as a defense reserve. Then large withdrawals from Anchor and sales of UST began.

Aggregate prices from CoinGecko via DefiLlama. LFG sold almost the entire bitcoin reserve between May 8 and May 10 and had 313 BTC left afterward. The reserve could not outrun the mint: at 33 dollars per LUNA, every billion redeemed added 30 million tokens; at 1.69 dollars, nearly 600 million. LUNA supply went from hundreds of millions of tokens to more than six trillion. Note the rebound on May 11 and 12: runs are rarely a straight line, and each bounce is another exit. The full story is on the Terra and Luna post-mortem.

Early signals: pool imbalance and redemption flows

A StableSwap pool (see AMM math) is built to trade near 1:1, which makes it a superb early warning and a poor price signal. Holders exiting a coin sell it into the pool, so the pool fills up with the stressed coin long before its quoted price moves much. For a two coin pool with amplification A = 100 in the whitepaper form shown in AMM math (a Curve contract’s A() reports A · nⁿ⁻¹, here 200):

Computed from the StableSwap invariant, before fees. The price looks calm until the pool is four fifths one coin, then collapses. So watch composition, not price. Other signals worth watching: net supply changes (a fiat backed coin shrinking fast is being redeemed; see stablecoin supply or DefiLlama’s stablecoin data), utilization of the coin in lending markets, and for synthetic designs the funding rate on the venues they hedge on.

The powers inside the token

Pegs are not the only thing to read. The two largest fiat backed tokens on Ethereum carry issuer controls in the contract itself: USDC exposes isBlacklisted, paused and a masterMinter role, and USDT exposes isBlackListed. Frozen addresses cannot move their balance, and a paused token cannot move at all. These powers let issuers comply with law enforcement and respond to hacks; they also mean a fiat backed dollar is a claim on a company and its keys, not a bearer asset. CDP and synthetic designs have their own versions: governance that sets collateral types and fees, and in Ethena’s case the operator of the hedge. The guide on admin keys and timelocks shows how to find who holds each power and how fast they can use it.

Put together, judging any peg comes down to three questions:

Common questions

Where to go next