Peg mechanisms, reserves, redemption, liquidity, and depeg risk.
By the end, you should be able to
- Distinguish price stability from risk-free value.
- Compare reserve, redemption, and algorithmic mechanisms.
- Recognize liquidity and depeg warning questions.
A small depeg can create a large signal
Illustrative prices show why mechanism and liquidity matter more than the label.
A peg is a mechanism, not a guarantee
A stablecoin targets a reference value such as one U.S. dollar. The design may rely on reserves, overcollateralized positions, market incentives, or combinations of mechanisms. Evaluate how holders can redeem and who controls the process.
Market price and redemption are different
A token may trade away from its target when secondary-market liquidity is thin or confidence changes. Redemption access, timing, fees, jurisdiction, and minimum sizes can affect arbitrage.
Ask where the risk sits
- What backs the token and how is that claim verified?
- Who can mint, freeze, redeem, or change contracts?
- Where is liquidity concentrated, and what happens under stress?
What this does not tell you
- A current $1 quote does not prove reserve quality or future redemption.
- Attestations and audits provide different levels of assurance.
- Liquidity can fragment across networks, venues, and wrapped versions.
Map one stablecoin mechanism
Describe the system without deciding whether to buy or use it.
- Choose one widely used stablecoin.
- Find its primary reserve or collateral documentation.
- Record redemption access, control powers, and two stress risks.
Check your understanding
1. What does a stablecoin peg represent?
2. Why can market price differ from redemption value?
3. What is an important control question?