In simple terms — A stablecoin is a token that tries to stay close to a reference value, such as one US dollar. That reference is called its peg: it describes the project's target, not a guarantee of price or redemption.
A stablecoin may circulate on one or more blockchains and be used as a unit of account, a means of exchange, or collateral in DeFi protocols. It is not automatically a bank deposit, central bank money, or a money market fund: rights, reserves, and rules depend on the specific asset and applicable law.
How the peg is maintained
In an off-chain reserve model, an issuer creates tokens against reserve assets and provides a redemption process. If eligible participants can buy or redeem near the reference value, arbitrage may draw the market price back towards the peg. That mechanism still depends on reserve quality and liquidity, custody, access to redemption, and confidence in the issuer.
Other models use collateral recorded on-chain, often worth more than the tokens issued, with automatic liquidation when coverage falls. Algorithmic or hybrid designs adjust supply and incentives under protocol rules. Reserves, collateral, and algorithms are not interchangeable: they produce different stabilisation paths and different points of failure.
What to verify before looking at price
The ticker is not enough. Identify the reference asset, issuer or smart contract, parties allowed to mint and redeem, redemption time and cost, composition of reserves, and custodian. A periodic attestation, a financial statement audit, and on-chain proof answer different questions and should not be treated as synonyms.
The version actually held also matters. The same name may appear on several networks or as a token transferred through a bridge. In the latter case, smart-contract, custody, and bridge-infrastructure risk sits on top of the stablecoin's own risk.
Observed stability and risk
A price close to the peg in normal conditions does not prove that redemption and liquidity will withstand stress. Risk may arise from insufficient or illiquid reserves, a redemption run, volatile collateral, smart-contract or oracle failures, governance, operational blocks, or venue concentration.
When price moves away from the reference, the event is a depeg. Reading it requires market depth and redemption status, not merely the last price. Tokenomics also clarifies who can mint, burn, or govern the token. The wider path appears in the decentralized finance map.
Sources
- NIST IR 8408 — Understanding Stablecoin Technology and Related Security Considerations — Defines stablecoins, compares major architectures, and catalogues technical properties and risks.
- Financial Stability Board — High-level Recommendations for Global Stablecoin Arrangements — Covers governance, stabilisation, redemption, reserve management, and risks in stablecoin arrangements.