A stablecoin peg is the intended price relationship between a token and a reference asset, such as a fiat currency or a specified quantity of a commodity. A dollar peg commonly targets one dollar per token, although market prices can trade above or below that value. The peg describes the target, not the mechanisms used to maintain it. Relative price stability can make stablecoins useful for trading, payments and temporarily holding value, but it is not guaranteed.
How the Peg Is Maintained
Where issuance and redemption are available at the target value, price differences create incentives for eligible participants to trade against the deviation. When tokens trade above target, these participants can obtain newly issued tokens at the target value and sell them at the higher market price. The additional supply can put downward pressure on the price.
When tokens trade below target, participants can buy them more cheaply and redeem them at the target value. This buying can support the price, while redemption may remove tokens from circulation. These arbitrage trades can help restore a stablecoin peg, but only if the expected benefit exceeds fees, delays and other risks.
Backing and Protocol Rules
A stablecoin peg can be supported by reserve assets held by an issuer, collateral committed to a protocol, or rules that adjust supply and incentives. Asset-backed arrangements rely on the value and availability of those assets to support the token. Reserves need not consist solely of the reference asset: a dollar-pegged token may be supported by a mix of cash and other assets rather than one cash dollar per token.
Rule-based designs instead, or additionally, seek to influence price by changing token supply or the incentives to hold, issue or redeem tokens. Algorithmic features can therefore coexist with collateral; these are not mutually exclusive categories. Supply adjustments alone do not ensure that buyers will return when confidence weakens.
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Get startedConditions for Maintaining the Peg
Maintaining a stablecoin peg depends on sufficient and accessible backing where applicable, usable redemption arrangements, market liquidity and confidence in the issuer or protocol. Backing that appears sufficient on paper may be difficult to sell quickly without losses. Assets must also be accessible when needed to meet redemption demands.
Direct redemption may be limited to eligible participants, leaving other holders dependent on secondary-market buyers. Redemption terms can include fees, minimum amounts and processing delays, so not every holder can exchange any quantity immediately at the target value. Market liquidity matters because participants need to buy or sell tokens without moving the price so far that the stabilizing trade becomes uneconomic.
Depegging and Relative Stability
Depegging is a market-price departure from the intended relationship, whether above or below the target. Reserve losses, inadequate collateral or redemption disruptions can weaken support for the price. Thin liquidity can magnify selling pressure, while network congestion can slow transfers or transactions needed for arbitrage. Collapsing confidence can undermine demand or trigger redemptions faster than the system can process them. Deviations may reverse when trading and redemption normalize, or become lasting and cause losses.
A stablecoin peg describes relative price stability, not constant purchasing power or safety. A token that tracks a dollar remains exposed to changes in the dollar's purchasing power. Similarly, a commodity-linked token can track its specified quantity of a commodity while fluctuating substantially against the dollar. Successfully following the reference therefore does not mean the token is risk-free or suitable for preserving value in every circumstance.
