A stablecoin is designed to track a reference value, often one US dollar. The peg is a target, not a guarantee. Its reliability depends on the stability mechanism, reserves, redemption rights, liquidity, governance, custody, and confidence in the issuer or protocol.
Stablecoin is a category, not one structure
A reserve-backed stablecoin may hold cash and liquid assets intended to support redemption. A crypto-collateralised design may lock other digital assets and use over-collateralisation or liquidation rules. An algorithmic design may rely more heavily on incentives, linked tokens, or supply changes.
Those structures create different claims and failure paths. The SEC noted in a 2025 staff statement that stablecoin risks vary significantly with the stability mechanism and the maintenance of reserves. The name alone does not describe the protection.
Redemption connects the token to the target
A credible ability to exchange a token for the reference asset can pull market price toward the peg. If the token trades below one dollar and eligible participants can redeem it for one dollar, that difference may attract arbitrage. The mechanism depends on access, timing, fees, minimums, and the issuer honoring redemption.
A person buying through an exchange may not have the same direct rights as an approved redemption customer. Read who can redeem, what they receive, how long it takes, and what can suspend the process.
How a depeg can begin
A peg can weaken when holders doubt reserves, a custodian fails, redemptions slow, collateral falls, a linked mechanism breaks, liquidity disappears, or a platform blocks withdrawals. Selling pressure then pushes the market price away from the target.
Confidence can become part of the mechanism. The CFTC's digital-asset risk material warns that a rush for exits can lock some stablecoin owners out. A token designed for stability can therefore face liquidity and counterparty risk even before its price moves visibly.
Proof of reserves is not a full audit
A reserves snapshot can show selected assets at one moment. It may not show all liabilities, controls, related-party exposure, asset quality, or what happened before and after the snapshot. Investor.gov warns that some proof-of-reserves reports are not equivalent to financial-statement audits conducted under established standards.
Look for the reserve composition, custodian, frequency and scope of reporting, liabilities, redemption terms, legal entity, and independent assurance. More transparency helps analysis, but no report makes a peg certain.
A stablecoin structure worksheet
Choose one stablecoin for a research exercise without buying it. Write the target, mechanism, reserve assets or collateral, direct redemption eligibility, custody arrangement, reporting method, main trading venues, and the events that could interrupt conversion.
Finish by describing what right the holder has in one sentence. If the documents do not make that answer clear, the uncertainty is itself part of the risk. A stable price chart cannot fill a missing legal or operational explanation.
Primary references
Reviewed against the following regulator and investor-education material.
- 14 Digital Asset Risks to RememberCFTC
- Proof of Reserves Investor BulletinInvestor.gov
- Statement on StablecoinsU.S. SEC staff
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