Stablecoins: how dollar tokens hold a $1 peg and how they fail

A stablecoin is a crypto token designed to keep a steady price, almost always $1.00. It moves on a blockchain like bitcoin or ether, settles at any hour, and can be held in the same wallets, but it is meant to behave like cash rather than like a volatile asset. That makes stablecoins the working money of crypto markets: traders hold them between trades, prices on many crypto exchanges are quoted against them, and they are used to move dollars across borders outside banking hours.

A token can't keep its price steady by itself. Something has to push it back to $1 whenever it drifts, and the quality of that something is the whole question. Tokens backed by cash and short-term Treasury bills that holders can redeem have mostly held their pegs; tokens that relied on an algorithm and a second, floating token have collapsed.

This guide explains how the peg works, walks through the arbitrage that holds it with real numbers, looks at the TerraUSD collapse of May 2022, and summarizes what the US GENIUS Act of 2025 requires. It is educational, not a recommendation of any token.

The three designs

Reserve-backed (fiat-backed). An issuer takes in dollars, creates the same number of tokens, and invests the dollars in reserves such as cash, bank deposits and Treasury bills. It promises to buy tokens back at $1.

Crypto-collateralized. A smart contract locks up more than $1 of other crypto for every token issued, so that the backing can absorb a fall in that collateral's price. If the collateral falls too far, the contract sells it. The peg depends on that selling working in a fast, falling market.

Algorithmic. Supply is expanded and shrunk by code, with little or no outside reserve. Usually a second token absorbs the swings: holders can swap one stablecoin for $1 worth of the second token, which is created for the purpose. That works while the second token has value and fails when it doesn't.

How the peg holds: mint and redeem

The issuer runs a two-way door at exactly $1. Most holders never use it: they buy and sell tokens with each other on exchanges, where the price can drift. The door matters because large, eligible traders can use it whenever the exchange price strays far enough to cover their costs.

Three things can break the door. Reserves can turn out to be smaller, riskier or less liquid than promised. Redemption can be slowed or suspended. And the bank or broker holding the reserves can itself run into trouble. When holders doubt any of these, they rush to sell before others do, which is the same dynamic as a bank run, and the exchange price can fall well below $1 until redemptions catch up.

Who earns the interest

Reserves invested in Treasury bills earn interest. Under US law since 2025, a permitted issuer may not pay holders interest or yield simply for holding the token, so that income stays with the issuer.

When the peg failed: TerraUSD, May 2022

TerraUSD (UST) was an algorithmic dollar stablecoin. According to the SEC's later complaint, it was supposed to hold its dollar peg by being interchangeable with LUNA, a second token from the same developer, and it was marketed as "yield-bearing" through a protocol that offered up to 20% a year. In May 2022, UST lost its peg, and UST and its sister tokens fell close to zero. In February 2023, the SEC charged Terraform Labs and its founder, Do Kwon, with fraud and with selling unregistered securities.

The mechanism shows why algorithmic pegs are fragile. As holders swapped UST for $1 worth of LUNA and sold the LUNA, its price fell, so each redemption needed more LUNA to be created, which pushed its price down further. A reserve-backed token in the same situation shrinks its reserves and its supply together; an algorithmic token shrinks its backing faster than its supply.

The wider market fell in the same months. In our monthly data, bitcoin's close dropped 15.7% in May 2022 and another 37.8% in June. The data can't separate how much of that was TerraUSD and how much was everything else happening in 2022 (see The 2022 bear market: inflation, Fed hikes and falling bonds).

US rules: the GENIUS Act

The Guiding and Establishing National Innovation for U.S. Stablecoins Act became Public Law 119-27 on July 18, 2025. The points that matter most to a holder:

• Who may issue. Only a permitted payment stablecoin issuer may issue a payment stablecoin in the United States. Three years after enactment, digital asset service providers may not offer or sell payment stablecoins to US persons unless a permitted issuer issued them, with exceptions the law sets out for some foreign issuers.
• Reserves. At least 1 to 1, in a listed set of assets: US coins and currency, balances at a Federal Reserve Bank, demand deposits at insured banks, Treasury bills, notes or bonds with 93 days or less to maturity, certain overnight repurchase agreements, and government money market funds holding those assets. Reserves may not be pledged or reused except in narrow cases.
• Disclosure. Issuers must publish their redemption policy and fees, post the composition of reserves each month, have that monthly report examined by a registered public accounting firm, and have the CEO and CFO certify it.
• No interest. Issuers may not pay holders interest or yield for holding the token.
• No deposit insurance claims. It is unlawful to say payment stablecoins are backed by the US government or covered by federal deposit insurance.
• Not a security or a commodity. A payment stablecoin from a permitted issuer is excluded from the definition of a security under the main securities laws, including the law that governs SIPC, and from the definition of a commodity.

The act takes effect on the earlier of 18 months after enactment or 120 days after regulators issue final implementing rules. As of this page's review, the rules are still being put in place, so check the text of the law and the primary regulators for the current status rather than relying on any summary, this one included.

Pitfalls

• "Stable" is a target, not a guarantee. Every stablecoin is only as good as its reserves, its redemption terms and its legal structure.
• You may not be able to redeem. Redemption is often limited to approved customers and minimum sizes. Everyone else relies on the exchange price.
• No FDIC and no SIPC. A stablecoin is not a bank deposit. SIPC does not protect digital assets that aren't securities under its law, and the GENIUS Act excludes permitted payment stablecoins from that definition.
• Platform risk stacks on top. A sound token held on a failed exchange is still stuck in the failure. See Crypto wallets and custody: keys, seed phrases, hot and cold storage.
• Taxes still apply. The IRS lists stablecoins among digital assets, which it treats as property, so swaps between tokens are taxable events even when the price barely moves.

Stablecoins compared with other dollars

How Finabase does it

The crypto list includes several dollar stablecoins, such as USDC.X, DAI.X and FDUSD.X, priced against the US dollar like every other coin. On a stablecoin's quote page, for example USDC.X, the useful numbers are the boring ones: the day's low and high, and the list's 52-week low and high columns, show how far the market price has strayed from $1. The Treasury page lists the bill yields that reserve-backed issuers earn on their reserves. Finabase does not show issuers' reserve reports, token supply or other on-chain data; for those, use the issuer's own monthly disclosures.

Frequently asked questions

Are stablecoins safe?

They are designed to be stable, not guaranteed to be. Reserve-backed tokens that hold cash and short-term Treasuries and honor redemptions have usually stayed close to $1, while algorithmic tokens such as TerraUSD have collapsed.

Do stablecoins pay interest?

Not from a US permitted issuer: the GENIUS Act forbids paying holders interest or yield for holding the token. Platforms sometimes offer rewards on stablecoin balances; those come from the platform, carry its risks, and depend on how the rules are applied.

Is a stablecoin the same as a digital dollar from the Federal Reserve?

No. A stablecoin is a liability of a private issuer. The law makes it illegal to represent a payment stablecoin as backed by the full faith and credit of the United States.

What does it mean when a stablecoin "depegs"?

Its market price moves materially away from $1, usually below. Small, brief moves happen; large or lasting ones signal that the market doubts the reserves or the ability to redeem.

Summary

A stablecoin is a token built to trade at $1. Reserve-backed designs hold that price with a two-way door: eligible firms can mint tokens for $1 and redeem them for $1, so arbitrage pulls the exchange price back whenever it strays. Algorithmic designs replace reserves with a second token, and TerraUSD showed in May 2022 how quickly that can unravel. In the US, the GENIUS Act of July 18, 2025 requires at least one-to-one backing in cash and short Treasuries, monthly reserve disclosure, and no interest to holders, while its detailed rules are still being implemented. Stablecoins are not bank deposits: there is no FDIC insurance or SIPC protection, and the interest on the reserves goes to the issuer.