A stablecoin trades on open markets where supply and demand set the price, yet it stays close to one dollar. The anchor is redemption, not the label.
Creation and redemption do the work
An issuer of a reserve-backed stablecoin allows approved parties to hand over dollars and receive newly created tokens, and to hand back tokens and receive dollars.
If the token trades below a dollar, those parties can buy cheaply on the market and redeem at face value, pocketing the difference and removing supply.
If it trades above, they create new tokens at face value and sell into the market. The two flows push the price back towards par from either side.
The mechanism depends on frictionless redemption
Arbitrage only closes a gap if it can be executed quickly and reliably. Delays, minimum sizes and restricted access all widen the band the price can wander within.
Where redemption is limited to institutional counterparties, ordinary holders rely on those intermediaries acting. If they hesitate, the discount can persist far longer than the arithmetic suggests.
Doubt about whether the reserves would actually be paid out removes the mechanism entirely. At that point the token trades on sentiment like any other asset.
What sits behind the token matters
Reserves held in cash and short-term government paper can be sold quickly at predictable prices, which is what redemption on demand requires.
Reserves held in longer-dated or less liquid instruments earn more but can fall in value or take time to convert, creating a mismatch between promises and assets.
This is the same structure that makes bank runs possible, which is why disclosure of reserve composition receives so much attention from holders and regulators alike.
Overcollateralised designs work differently
Some stablecoins are backed not by dollars but by volatile crypto assets locked in contracts, with more value deposited than tokens issued.
The excess absorbs price declines in the collateral, and automated liquidations sell it off if the buffer thins. Stability comes from the cushion rather than from a bank account.
The design fails when collateral falls faster than liquidations can execute, typically during severe market stress when everything is being sold at once.
Algorithmic designs removed the anchor
A purely algorithmic stablecoin holds no meaningful reserve and instead adjusts supply, often by minting or burning a companion token, to steer the price.
The scheme relies on continued demand for that companion token. When confidence falls, the supply adjustment dilutes it further and accelerates the decline it was meant to correct.
Several such designs have collapsed rapidly and completely for this reason. The distinction between backed and reflexive designs is the single most important thing to establish about any stablecoin.