How Stablecoins Hold Their Value (and When They Don't)

The three designs

Fiat-reserved stablecoins hold cash and short-term government debt equal to the coins in circulation. Crypto-collateralised coins are minted against crypto worth more than the coins issued. Synthetic coins pair crypto with offsetting short derivatives positions. Fiat-reserved coins dominate, at about $285 billion of supply.

Design	What backs $1	Examples	Supply (DefiLlama, 2 Oct 2026)
Fiat-reserved	Cash, bank deposits, Treasury bills, money funds	USDT, USDC, PYUSD	$285.4B
Crypto-collateralised / synthetic	Excess crypto collateral, or hedged crypto	USDS, DAI, USDe	$27.6B
Algorithmic	A mint-and-burn rule and market confidence	UST (failed 2022)	$0.26B

Fiat-reserved. The issuer takes in dollars, buys safe short-term assets, and redeems on request. USDC's reserve, per Circle's transparency page, sits mostly in the Circle Reserve Fund, an SEC-registered government money market fund managed by BlackRock, plus cash at banks. The US GENIUS Act will limit licensed issuers to exactly this kind of reserve (see the GENIUS Act, explained).

Crypto-collateralised. Users lock crypto in a smart contract and mint stablecoins against it, worth less than the collateral, so a price fall can be absorbed before the coin is undercollateralised; positions that fall too far are liquidated. Sky's USDS and DAI also use a "peg stability module" that, in Sky's documentation, lets users swap them for other stablecoins such as USDC at fixed ratios and fees, which imports some fiat-reserve stability.

Synthetic. Ethena's USDe holds crypto such as ETH and opens an equal short perpetual futures position, so the two legs offset and the portfolio's dollar value stays roughly constant. Its documentation names the main risk as persistently negative funding rates and says a reserve fund is meant to absorb losses. DefiLlama groups USDe with crypto-backed coins.

Algorithmic. These rely on a rule rather than assets: TerraUSD let holders swap 1 UST for $1 of newly minted LUNA. It works while LUNA has value and fails when it doesn't.

Redemption and arbitrage: the real peg

A peg is not a price setting; it is a profit opportunity. If a coin trades at $0.99 and the issuer redeems at $1.00, anyone who can redeem buys and redeems until the gap closes. If it trades at $1.01, they mint at $1 and sell. The peg holds as long as redemption is credible.

The catch is who can redeem. Circle Mint, which mints and redeems USDC and EURC 1:1, is "not available to individuals"; it serves exchanges, trading firms, wallets, banks and apps after KYC and sanctions checks. Ethena says USDe can be minted and redeemed on demand by "authorized, whitelisted users". Ordinary holders rely on those intermediaries to arbitrage, and on market liquidity in the meantime. On Stellar, that liquidity is the order book and AMM pools; stable-to-stable pools are low-risk to provide liquidity to while both coins hold their pegs, which is the point of impermanent loss analysis.

Arbitrage only stops working when traders doubt that a redeemed coin will actually be paid out. Both case studies below are about that doubt.

Case study: USDC and Silicon Valley Bank, March 2023

On 10 March 2023 Silicon Valley Bank failed, and Circle disclosed that $3.3 billion of USDC's reserves, about 8%, was held there. USDC fell to roughly 86–87 cents on 11 March and recovered to near $1 by 13 March, after US authorities said SVB depositors would have access to their funds.

• 10 March 2023 (Friday): SVB is closed. Circle discloses $3.3 billion of reserves at the bank.
• 11 March (Saturday): with banks shut for the weekend and redemptions unable to settle, USDC trades as low as about 87 cents on Kraken, per CoinDesk; CoinDesk later reported lows of 86 cents. Circle says it will cover any shortfall from corporate funds.
• 12 March (Sunday): federal regulators announce that SVB depositors will have access to their funds on Monday.
• 13 March (Monday): USDC trades back near $1.

The lesson is precise. USDC's reserve was real, but 8% of it was briefly frozen, and the redemption channel was closed over a weekend. Arbitrageurs could not be sure of being paid $1, so the price reflected the expected loss. Once the deposits were made safe, the arbitrage became credible again and the peg came back. That is why the GENIUS Act limits reserves to short Treasuries and similar assets, requires the geographic location of custody to be disclosed monthly, and only lets regulators, not issuers, restrict redemptions.

Case study: TerraUSD, May 2022

TerraUSD had no external reserve; its peg relied on swapping UST for newly minted LUNA. After large withdrawals from its main Curve pool on 7 May 2022, UST slipped below $1, holders rushed to exit, LUNA supply ballooned to over 6 trillion, and about $50 billion of value disappeared within a week.

A Federal Reserve staff paper (Badev and Watsky, 2023) traces the sequence. On 7 May the Terra Foundation withdrew about $150 million of UST from the Curve pool that was UST's largest DeFi liquidity source, preparing a move to a new pool. That made the pool shallower, and within the next hour two traders swapped 185 million UST for USDC, pushing UST below its peg. Selling spread to centralised exchanges; holders pulled UST from the Anchor protocol, which had been paying a stable 19.5% APY that the paper says outpaced its revenue; and they swapped UST for LUNA en masse. As LUNA's market value fell below UST's, each redemption minted more LUNA, and LUNA supply grew almost 20,000-fold. The Luna Foundation Guard sold more than $2 billion of bitcoin reserves trying to defend the peg, without success.

The redemption promise was a promise of a token whose value depended on the promise holding. When confidence went, both went together. A double-digit "stable" yield funded by something other than real revenue was the warning sign; see stablecoin yield explained and DeFi risks.

How to read an attestation

An attestation is an accountant's report that, on a given date, an issuer's reserves were at least equal to its coins outstanding. Read it for the date, the asset breakdown, the excess over liabilities and the accounting firm, and remember that it is a snapshot, not a full audit.

1. Date and frequency. Circle publishes monthly reports from a Big Four firm under AICPA attestation standards. Tether publishes quarterly reports prepared by BDO. Monthly is better than quarterly; the GENIUS Act will require monthly reports examined by a registered public accounting firm.
2. Composition. Look for cash, Treasury bills and government money funds, and for anything else. Tether's report for 30 June 2026 lists about $115 billion of Treasuries alongside gold and bitcoin, assets that can fall in value.
3. The buffer. Tether reports its assets exceeding its liabilities by a few billion dollars, and that excess shrank in the first half of 2026 partly because its gold and bitcoin holdings fell (published analyses of the June report put the figure between about $4B and $5B). A buffer that moves with markets is a risk signal.
4. What it does not say. An attestation does not test controls over the period, trace flows between dates, or prove reserves were unencumbered. Treat it as necessary, not sufficient.

What a depeg does to DeFi positions

A depeg hurts most where a stablecoin is assumed to be worth exactly $1: as collateral in lending markets, as one side of a stable-to-stable liquidity pool, or as the unit a vault reports in. Know where your stablecoin sits and what that venue does if the price slips.

• Liquidity pools. In a USDC/USDT-style pool, arbitrageurs sell the depegging coin into the pool and take the healthy one out, so liquidity providers end up holding more of the weaker coin. The Aquarius AMM guide explains how pool pricing works on Stellar.
• Lending. If a lending market prices a stablecoin at a fixed $1 while it trades lower, borrowers can post cheap coins as collateral at full value; if it uses the market price, positions backed by that coin can be liquidated. Either way, the pool's lenders carry the risk; see DeFi lending platforms.
• Contagion. The Federal Reserve paper on Terra found that blockchains sharing bridges with Terra lost market share after its collapse, with the likelihood of loss rising about 40% for each additional bridge in common.

None of this argues against holding stablecoins. It argues for knowing which design you hold, who can redeem it, and which venues assume it is always worth $1.

The takeaway

Every stablecoin peg comes down to one question: will someone who redeems actually get $1? Fiat-reserved coins answer with short, safe assets and published reports, and even then a frozen bank deposit could knock 13 cents off for a weekend. Overcollateralised and hedged designs answer with excess crypto and derivatives, at the cost of market risk. Unbacked algorithmic designs had no good answer, and UST showed what that costs.

Sources: DefiLlama stablecoins API (2 October 2026); Circle transparency page and Circle Mint page; Sky developer docs (LitePSM); Ethena documentation; CoinDesk (11 and 13 March 2023); Badev and Watsky, "Interconnected DeFi: Ripple Effects from the Terra Collapse", Federal Reserve FEDS 2023-044; Stablecoin Insider on Tether's Q2 2026 attestation; GENIUS Act, Public Law 119-27.