Stablecoin Pegs: How They Work and Why Depegs Happen

A stablecoin peg is the target price that a stablecoin aims to maintain. For most stablecoins, this target is one U.S. dollar.

The two mechanisms used by stablecoins to maintain their peg are reserves or collateral and an arbitrage process. Reserves or collateral give each token its underlying value, while arbitrage helps return the market price to the peg when it deviates from it.

One example of a fiat-collateralized stablecoin is USDC, which is backed 1:1 with cash and cash-equivalent assets held in its reserves. When holders redeem their USDC for dollars, the issuer exchanges the tokens with the corresponding amount of dollars, maintaining the peg at $1.