Stablecoins: How the Peg Actually Holds

A stablecoin is a token that trades at one dollar. Nothing in the software makes that happen. The contract does not know what a dollar is, and there is no mechanism in it that pushes the price anywhere.

The price holds because somebody stands ready to exchange the token for a real dollar, and traders believe it.

Which makes the interesting question not "what is backing it" but "who is allowed to redeem, at what size, and what happens when they cannot." In March 2023, USDC fell to 88 cents while every dollar of reserve existed and no funds were lost. Understanding why is understanding the mechanics behind the technology.

All figures below are from filings and published reports as of June 30, 2026 unless dated otherwise.

Three mechanisms

Fiat-reserve backed. Somebody holds dollars and short-term instruments, and issues tokens against them. USDC and USDT.

Crypto-overcollateralized. You lock up more crypto than you borrow, and the system liquidates you if the collateral falls. Sky's USDS and its predecessor Dai.

Algorithmic. No meaningful collateral. The peg is maintained by a mint-and-burn relationship with a second token. This category is mostly a historical one now, for reasons covered below.

The first two work by different routes to the same place: somebody can always get a dollar out. The third tried to skip that step.

What actually backs USDC

Circle is a public company. Deloitte audits it, it files 10-Qs and 10-Ks, and those filings are probably the strongest available source on any stablecoin.

Per the Form 10-Q for the quarter ended June 30, 2026:

The Circle Reserve Fund is a Rule 2a-7 government money market fund managed by BlackRock, holding US Treasuries with three months or less remaining, overnight Treasury repo, and cash. The $11.43 billion of bank cash sits across seven FDIC-insured institutions, and the filing states FDIC deposit insurance is limited to an aggregate amount of $1.8 million.

That is 0.016% of the bank cash. Deposit insurance is per depositor per institution, not per dollar, so at this scale it rounds to nothing. The bank cash is a bank credit exposure and it is not insured in any meaningful sense.

What actually backs USDT

The issuer is not who you think. Effective January 27, 2025, Tether Limited assigned its terms to Tether International, S.A. de C.V., an El Salvador company registered with FinCEN as a money services business.

The reserves:

So "USDT is backed by cash and Treasuries" is wrong as usually stated. Three quarters is. The other quarter is gold, loans, bitcoin and equities. Reserves exceed liabilities by $4.11 billion. That excess is the buffer absorbing any fall in asset values.

The non-cash assets are $47.11 billion, which is 11.5 times that buffer. A 9% drawdown across gold, loans, bitcoin and equities together consumes the entire excess. Those are not correlated in normal conditions, which is the argument for holding them. They have correlated before, which is the argument against.

Who can actually redeem

The peg holds because of arbitrage. If the token trades at $0.99, somebody buys it, redeems it for $1.00, and pockets a cent. That buying pressure pushes the price back. The mechanism requires that somebody can actually redeem.

USDT. Direct redemption from Tether requires a verified account. The published fee schedule sets a minimum of $100,000, a redemption fee of "the greater of $1,000 or 0.1%," and a one-time verification fee of $150. Tether's terms state the right to redeem is "a contractual right personal to you," which is to say it does not travel with the token.

USDC. Circle's terms distinguish holders with a Circle Mint account from those without. Direct redemption is gated on Mint eligibility. Under MiCA, EEA retail holders can redeem against Circle France without a Mint account by registering through a form and supplying an EEA bank IBAN.

So for almost everyone holding either token, direct redemption is not available. You sell on an exchange to somebody who can redeem, and their arbitrage is what holds your price. You are relying on an intermediary you have no relationship with, whose access is what makes your dollar worth a dollar.

The freeze functions

Both major issuers can freeze tokens at specific addresses. This is not hidden. USDC's contracts include a Blacklistable module, and Circle's filings state redemption may be refused "when prohibited by law or court order or instances where fraud is suspected."

Worth being accurate about what this is. It is used mostly at law enforcement request, and both issuers publish about it. A dollar-denominated instrument issued by a regulated company is expected to do this. The point is not that it is sinister; it is that it exists.

March 2023, and what a depeg actually is

On March 11, 2023, USDC traded down to $0.880000, per the Chainlink USDC/USD aggregator at 07:51 UTC. Different venues printed different lows, so cite a venue when quoting one.

Here is what did not happen: the reserves were not missing, and no funds were lost.

What happened was that Circle held more than $3 billion at Silicon Valley Bank. Per Circle's own filings, transfers out had already been initiated. They failed to settle before the FDIC took the bank into receivership on Friday, March 10. The money existed and was accounted for. It could not move, and the banking system was closed for the weekend.

So the redemption channel stopped clearing. Nobody could reliably turn USDC into dollars, the arbitrage that holds the peg had nothing to work with, and the price went where sellers took it.

The peg broke because access broke, not because backing failed.

What restored it was not a reserve disclosure. On March 12, 2023, the Treasury, the Federal Reserve and the FDIC issued a joint statement guaranteeing all SVB depositors, with access from Monday the 13th. The redemption channel reopened and the price followed.

A government backstop fixed it. That is worth sitting with when assessing how a fully reserved stablecoin behaves under stress.

Why algorithmic pegs failed

Terra's UST is the case everyone cites, and the mechanism is usually described incorrectly.

The system let you burn $1 of UST for $1 of LUNA and vice versa, which sounds symmetrical and safe. The problem is what happens when UST falls and stays there. Redeeming UST mints LUNA, which increases LUNA supply, which lowers the LUNA price, which means the next redemption mints more LUNA. The mechanism that is supposed to defend the peg accelerates its own collapse.

Demand had been sustained by Anchor Protocol paying roughly 20% on UST deposits, subsidized rather than earned. The peg depended on a yield that depended on the peg.

Compare that to the two mechanisms above. USDC has a money market fund. USDS has overcollateralized positions that get liquidated. UST had a second token whose value came from the first one working.

Securing the unseen

Five questions, all answerable from published filings, about any stablecoin you hold.

Who is the issuing entity, legally and in which jurisdiction? Is the reserve report an audit or an assurance engagement? What fraction of reserves is not cash or short-term government paper, and how does that compare to the excess reserve buffer? Can you personally redeem, or only sell to someone who can, and what is their minimum? And what would have to break for the redemption channel to stop clearing?

A stablecoin is a claim on an institution wearing the interface of a bearer token. The interface is genuinely useful and the claim is genuinely real. They are different things, and every stablecoin failure has been a failure of the claim rather than the interface.

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