What Keeps a Stablecoin Stable?

Most cryptocurrencies are famous for their wild price swings. Stablecoins are designed to be the opposite: digital tokens whose value is pegged to a traditional currency, usually the US dollar. In theory, one stablecoin can always be exchanged for one dollar, which makes them useful for trading, for sending money across borders, and for storing value on a blockchain without exposure to volatility.

The most common way to maintain the peg is to hold reserves. For every token issued, the company behind it keeps a dollar, or an equally safe asset such as a short-term government bond, in a bank or custody account. The credibility of such a stablecoin therefore depends on whether those reserves really exist and whether they can be sold quickly when many users want their money back at once.

Other designs have tried to do without full reserves, relying instead on algorithms that adjust supply automatically. The risks of this approach became clear in 2022, when a prominent algorithmic stablecoin lost its peg and collapsed within days, wiping out tens of billions of dollars in value and shaking confidence across the entire crypto market.

Regulators have since moved to impose clearer rules, including requirements for high-quality reserves, regular audits, and the right of holders to redeem their tokens. Supporters say such oversight will allow stablecoins to become a mainstream payment tool, while skeptics warn that a large stablecoin could one day pose the same kind of risk as a bank run.