A stablecoin is a token designed to hold a constant value against a reference currency. How it achieves that differs fundamentally between designs, and the difference only becomes visible under stress.
Reserve-backed tokens hold assets against issuance
The most common design issues a token for each unit of currency received and holds the proceeds in cash and short-dated government debt.
The peg is maintained by redemption. If the token trades below its reference, arbitrageurs buy it cheaply and redeem at full value, which removes supply.
The mechanism depends entirely on redemption being available promptly, which is why access restrictions and minimum redemption sizes matter more than the reserve composition alone.
Reserve quality determines behaviour under pressure
Reserves held in instruments that can be sold instantly at a known price support redemption at scale. Longer-dated or less liquid holdings do not.
An issuer facing heavy redemptions with illiquid reserves must sell into a falling market, which is the same maturity mismatch that produces bank runs.
This is why attestations covering the composition and maturity of reserves, rather than a headline total, carry the information that matters.
Crypto-collateralised designs over-collateralise deliberately
An alternative locks volatile crypto assets in a contract and issues tokens worth substantially less than the collateral deposited.
The buffer absorbs price declines. If the collateral value falls toward the issued amount, the position is liquidated automatically and the tokens are retired.
Capital efficiency is poor by design, and the system's weak point is that mass liquidations occur simultaneously, precisely when markets are least able to absorb them.
Algorithmic designs rely on incentives rather than assets
Some designs hold no meaningful reserve and instead expand or contract supply, often using a second token whose value is expected to absorb the adjustment.
The arrangement works while participants believe the second token has value, since the mechanism requires someone to buy it during a contraction.
That belief is reflexive, and several such systems have unwound rapidly once confidence broke, which is the structural criticism of the category.
The peg is a market outcome, not a property
No design fixes the price directly. Each creates an incentive for participants to trade toward the reference value, and the token holds its peg only while that incentive functions.
Brief deviations occur routinely in thin conditions and correct quickly. Sustained deviations indicate the arbitrage path is blocked or no longer profitable.
Reading a stablecoin therefore means reading its redemption mechanism, because that is what the peg actually rests on.