Stablecoin Mechanisms Under Fire After TerraUSD Collapse
Stablecoins are designed to maintain their peg by backing each token with reserves or collateral and an arbitrage process that returns the market price to the peg when it deviates. The vast majority of stablecoins, over 98% as of mid-2026, track one U.S. dollar, while others may follow other currencies or assets.
Centralized stablecoins, such as Tether's USDT and Circle's USDC, are issued by a central company that holds a stockpile of cash and cash-equivalent assets to back up the tokens. Market participants have confidence in these coins because they can redeem them for dollars on demand. The price of these coins stays pegged to $1 because of this 1:1 backing.
Arbitrage opportunities also help maintain the peg, as arbitrageurs buy and sell stablecoins at a small profit when their market price deviates from $1. This process returns the market price to the peg, ensuring that the coin holds its value.