How Stablecoins Maintain Steady Value

A stablecoin keeps a steady price mainly because someone can profit when it drifts: if a fiat-backed token trades below $1 and its issuer still redeems it for $1, firms with redemption accounts buy the cheap tokens and cash them in, pushing the price back up. Crypto-collateralized coins rely on overcollateralized loans and liquidations instead, and algorithmic coins on a mint-and-burn rule. Each design holds only while its mechanism keeps working.

Key takeaways

Only approved firms can mint and redeem fiat-backed coins with the issuer; their arbitrage against the open market is what holds the price near $1.
Fees and minimums create a band where correcting the price does not pay: with a 0.1% fee alone, roughly $0.999 to $1.001.
When redemptions stalled over a weekend in March 2023, USDC fell to 86 cents; it recovered once depositors were protected and redemptions restarted.
From January 2023 to October 13, 2026, USDC and USDT closed within ±0.5% of $1 on more than 99% of days in two data sets, but daily closes hide intraday lows.
TerraUSD had no outside asset behind its swap rule, so in May 2022 minting more of its sister token could not restore the peg.

The redemption arbitrage loop

A fiat-backed stablecoin is a token that its issuer promises to exchange for dollars. Circle's USDC terms, for example, commit to redeem one USDC for one dollar, subject to the terms and any applicable fees, while stating that Circle does not guarantee that USDC will be worth $1 on other platforms. That distinction is the whole mechanism: the promise applies in the issuer's primary market, while the price most people see is set in the secondary market, on exchanges and trading pools.

Access to the primary market is narrow. Under the same terms, only holders with a Circle Mint account can redeem directly, and Circle states that Circle Mint is not available to individuals; it is typically used by exchanges, institutional traders, wallet providers, banks and consumer-app companies. Tether's published fee schedule sets a minimum of $100,000 per acquisition or redemption for verified customers.

The loop runs in both directions:

Price below $1: an approved firm buys tokens on an exchange and redeems them with the issuer for $1 each. Its buying lifts the price and its redemptions shrink the supply.
Price above $1: the firm buys newly minted tokens from the issuer at $1 and sells them on the market, pulling the price down.

Research shows that access to this loop matters. A study by Lyons and Viswanath-Natraj (NBER working paper, 2020) links Tether's 2019 introduction on the Ethereum blockchain to wider investor access to arbitrage and a fall in arbitrage spreads from 70 to 30 basis points (0.7% to 0.3%).

The loop also assumes the issuer can pay. Redemptions are met from reserve assets, and the GENIUS Act, signed July 18, 2025, requires permitted US issuers to hold at least one dollar of permitted reserves for each dollar of stablecoins issued and to disclose their redemption procedures. Under Section 20 of the law, those rules take effect on January 18, 2027, or 120 days after regulators issue final implementing rules, whichever comes first.

Fees and minimums set a band

Arbitrage only happens when the gap is larger than the cost of closing it, which is why prices wander slightly around $1. The profit on one round trip below the peg is:

Profit = Q × (R × (1 − f) − P) − F

Break-even price:  P* = R × (1 − f) − F / Q

Q = number of tokens bought and redeemed
P = market price paid per token
R = redemption value per token ($1.00)
f = percentage redemption fee (0.1% = 0.001)
F = fixed costs: flat fees, trading and transfer costs

Illustrative example. A firm with redemption access buys 100,000 tokens at $0.995 and redeems them at $1.00 with a 0.1% fee and no other costs.

Cost of the tokens: 100,000 × $0.995 = $99,500
Redemption value: 100,000 × $1.00 = $100,000, minus a $100 fee = $99,900
Profit: $99,900 − $99,500 = $400, about 0.4% of the money used
Break-even price: $1.00 × (1 − 0.001) = $0.999. At $0.9985 the profit falls to $50; at $0.999 it is zero.

The mirror trade sets the upper edge. Minting 100,000 tokens at $1.00 plus a 0.1% fee costs $100,100; selling them at $1.005 brings in $100,500, a $400 profit. With these fees alone, arbitrage does not pay between about $0.999 and $1.001. Exchange fees, the bid-ask spread and money tied up while a bank transfer settles widen the band: an extra 0.1% of trading cost moves the break-even buying price to about $0.998.

Fee structure matters as much as the rate. Tether charges the greater of $1,000 or 0.1% per redemption, so on the same 100,000 tokens the fee is $1,000, not $100: redemption returns $99,000 against a $99,500 cost, a $500 loss. The trade breaks even at 200,000 tokens and earns $4,000 at 1,000,000 tokens, before the one-time $150 verification fee.

A holder of 1,000 tokens cannot redeem with the issuer at all. Sold on the open market at $0.995, the tokens fetch $995. Some exchanges and apps convert stablecoins to dollars for customers, but on the platform's own terms, not as a right against the issuer. Either way, the small holder's $1 depends on large firms finding the arbitrage worth doing.

When redemption stops: USDC 2023

According to a Federal Reserve FEDS Note by Du, Sonawane and Watsky (December 17, 2025), Circle announced at 10 p.m. on Friday, March 10, that it could not withdraw $3.3 billion of USDC reserves from Silicon Valley Bank, about 8% of reserves at the time. Redemption ran on US banking hours, so over the weekend it fell to minimal levels while market trading reached nearly $2 billion an hour on March 11. At its trough USDC traded at 86 cents.

Without redemption the loop had no exit: buying USDC at 90 cents paid only if Circle would later honor $1, which depended on the frozen deposit. On Sunday, March 12, the Treasury, Federal Reserve and FDIC issued a joint statement saying all Silicon Valley Bank depositors would have access to their money from Monday, March 13. The FEDS Note reports that USDC recovered sharply after the announcement and returned fully to its peg once Circle resumed redemptions on Monday; by March 15 Circle had redeemed $3.8 billion and minted $0.8 billion.

Overcollateralized coins like DAI

DAI, issued through the Sky protocol (formerly MakerDAO), is created when a borrower locks crypto in a smart-contract vault and draws DAI against it. Three levers keep it near $1:

Overcollateralization. Each vault must hold collateral worth more than the DAI drawn, so the system can absorb price falls before a loan becomes unbacked.
Liquidation auctions. When collateral value falls too far, keepers trigger a collateral liquidation: the assets are sold in a Dutch auction whose price falls over time, and the owner owes a penalty on top of the debt (the documentation's example uses 13%).
Interest and conversion. Vaults pay a stability fee on outstanding debt, which affects how much DAI borrowers want to keep drawn. A peg stability module, the LitePSM, swaps between DAI or USDS and USDC with no slippage; the documentation says fees are not activated for DAI–USDC swaps but could change.

When DAI trades below $1, the FEDS Note explains, borrowers buy cheap DAI to repay loans, which retires it and lifts the price. The swap module adds a direct arbitrage route but ties DAI to USDC: on each of March 10 and 11, 2023, about 1 billion USDC was deposited as holders fled USDC, the 950 million daily cap was swiftly reached, and DAI, with no direct exposure to Silicon Valley Bank, lost its peg too.

The design's other weak point appeared on March 12, 2020, known as Black Thursday. In a study published in Mathematical Finance, Klages-Mundt and Minca describe an ether price fall of about 50% that triggered waves of liquidations. Borrowers needed DAI to repay debt, so it traded at premiums above 10%, with premiums above 2% lingering for weeks: the peg broke upward. Network congestion let many auctions clear at near-zero prices, leaving a $4 million shortfall covered by selling newly created governance tokens.

Algorithmic pegs and Terra

An algorithmic stablecoin replaces outside reserves with a rule. According to the superseding indictment of Terraform's founder, Terraform's materials claimed one TerraUSD (UST) could always be exchanged for $1 worth of the sister token LUNA, and $1 of LUNA for one UST. If UST fell to 95 cents, an arbitrageur could buy it, swap it for $1 of newly minted LUNA and sell the LUNA, shrinking UST supply. The weakness is that the $1 paid out is in LUNA, whose value depends on confidence in UST itself.

That circularity produces a death spiral. Heavy redemptions mint large amounts of LUNA; selling it drives LUNA's price down; each later redemption needs even more LUNA, and confidence in UST falls further. The indictment states that when UST fell below 92 cents in May 2021, the protocol did not restore the peg on its own; it returned after a trading firm secretly bought large amounts of UST under an agreement with Terraform's founder.

In May 2022, UST lost its peg again and UST and LUNA fell close to zero. Research by Liu, Makarov and Schoar (NBER, 2023) traces the run to a few large holders cutting positions on May 7, 2022; wealthier, more sophisticated investors exited earlier and lost less. The founder was sentenced on December 11, 2025, to 15 years in prison.

Design	What anchors the price	Who restores the peg	Typical failure
Fiat-backed (USDC, USDT)	Redemption at $1 with the issuer	Firms with redemption accounts	Redemptions halted or reserves in doubt: price falls below $1
Crypto-collateralized (DAI)	Overcollateralized vaults, liquidations, swap module	Borrowers, keepers, module arbitrage	Fast collateral crash or stress in the linked stablecoin; price can break up or down
Algorithmic (UST)	Swap rule with a sister token	Arbitrage paid in the sister token	Loss of confidence: minting dilutes the sister token and the loop feeds on itself

What daily prices show, 2023–2026

Daily prices were pulled on October 14, 2026, from two free sources: the Coin Metrics Community API's PriceUSD metric, defined as the price at the end of each UTC day, and DefiLlama's stablecoin price history, whose midnight-UTC snapshots were shifted back one day to line up. The window runs from January 1, 2023, to October 13, 2026 (PYUSD from its August 2023 launch).

Coin	Days (CM / DL)	Within ±0.5% of $1 (CM / DL)	Within ±0.1% of $1 (CM / DL)	Largest daily gap, Coin Metrics
USDC	1,382 / 1,377	99.8% / 99.4%	99.0% / 91.1%	$0.9706 on Mar 11, 2023
USDT	1,382 / 1,377	99.9% / 99.2%	89.1% / 86.9%	$1.0078 on Mar 11, 2023
PYUSD	1,149 / 1,145	99.7% / 99.3%	95.7% / 82.4%	$0.9919 on Apr 3, 2024
DAI	1,382 / 1,377	99.4% / 99.8%	92.7% / 87.0%	$1.0908 on Apr 30, 2025 (not in DL); low $0.9670 on Mar 11, 2023

CM = Coin Metrics; DL = DefiLlama. Shares of daily observations, computed from each source's published values.

Three readings follow. First, the large fiat-backed coins closed within half a cent of $1 on more than 99% of days in both sources, and most days outside that range fall in March 2023. Second, at ±0.1% the sources disagree far more (91.1% versus 99.0% for USDC) because each draws on different trading venues, so small deviations depend on where the price is measured. Third, daily figures understate stress: USDC's lowest daily value is about 96–97 cents in either source, yet the FEDS Note puts its intraday trough at 86 cents.

A single-source spike like DAI's $1.0908 may reflect thin trading or a data error. Neither series shows what a given holder could get on a given exchange, or predicts future behavior.

Frequently asked questions

Why did USDT trade above $1 while USDC fell in March 2023?

Coin Metrics put USDT at about $1.0078 at the end of March 11, 2023, when USDC closed near 97 cents. A New York Fed staff report on stablecoin runs (2023, revised 2024) documents this flight to safety: under stress, money moves from riskier to safer stablecoins, as among money market funds, and redemptions accelerate once a coin falls below $1.

Does a gold-backed token keep a steady dollar value?

No. It tracks the commodity, not the dollar. Paxos states that each PAX Gold token is backed by one fine troy ounce of gold stored in London vaults and redeemable for gold bars or for dollars at market prices, so its dollar price moves with gold.

Can a stablecoin issuer pause redemptions?

Issuer terms usually allow it. Circle's USDC terms reserve the right to change, suspend or discontinue any aspect of its USDC services at any time, to decline to process any issuance or redemption without prior notice, and to delay transactions it reasonably believes are suspicious. A pause removes the arbitrage exit, so the price can slip below $1 even if reserves are intact.

Would letting everyone redeem directly make the peg safer?

Not necessarily. Ma, Zeng and Zhang (NBER, 2025), who find that Tether lets only about six agents redeem in an average month, show that more efficient arbitrage steadies everyday prices but makes runs more likely, because each investor's own selling moves the price less. Rules aimed only at price stability could therefore raise run risk.

Is a stablecoin worth the same on every exchange?

Not always. The Bank for International Settlements' 2025 annual report notes that stablecoins trade in secondary markets at an "exchange rate" that can deviate from par, which undermines the "singleness" that bank money provides. Each venue has its own order book and fees.

Checking a peg before relying on it

Identify the design: issuer redemption, overcollateralized vaults, or a swap rule with a sister token.
Read the issuer's terms: who may redeem, the minimum, the fee formula (percentage, flat or "greater of") and whether redemptions can be paused.
Note when redemptions settle; a primary market on bank hours cannot respond at weekends.
For crypto-backed coins, check which other stablecoins the protocol depends on.
Compare the price on the venue in use with an aggregate source; daily closes hide intraday lows.