How a peg holds: five designs

The loop that holds every peg

A peg does not hold because an issuer says so. It holds because someone makes money by pushing the price back. Chapter 1 showed this for USDC. This chapter uses the same idea as a lens for every design.

An arbitrage loop is a pair of trades that pays whenever the market price leaves the peg, and that pushes the price back simply by being done. For a fiat-backed token it runs like this. Below 1 USD, a trader buys the cheap token on the market and redeems it with the issuer for a full dollar. Above 1 USD, the trader pays the issuer a dollar for a new token and sells it on the market for more. The buying lifts the price, and the selling lowers it.

Every design has some version of this loop, and each one can fail in its own way. Three questions test any of them:

1. Who can use the loop: anyone, or only a short list of verified firms.
2. What it costs: fees and minimum sizes set how far the price can drift before the trade is worth doing.
3. When it is open: a loop that depends on bank wires closes at weekends, and one that depends on a crypto exchange can stall when that exchange does.

The rest of the chapter asks these questions of five designs.

Fiat-backed: a reserve and a redemption desk

A fiat-backed stablecoin holds cash and short-term government debt worth at least as much as the tokens in circulation, and lets verified customers swap tokens for dollars at the issuer. This is the design that won. On 4 September 2026 DefiLlama counted about 183 bn USD of USDT and about 74 bn USD of USDC, together about 83% of all dollar stablecoins.

The mechanism is the arbitrage loop above, run by firms with accounts at the issuer. Tether and Circle both restrict direct redemption to verified business customers, with minimum sizes. Newer issuers such as Paxos with USDG and PayPal with PYUSD use the same model.

"Fully backed" does not describe a single recipe. Circle keeps most of the USDC reserve in a money-market fund of Treasury bills and repo. Tether's reserve report for 30 June 2026, checked by the accounting firm BDO, showed most of the book in Treasury bills but also about 25 bn USD in gold and bitcoin. Those are liquid assets, but their price moves against the dollar, and the GENIUS Act does not allow them in the reserve of a US payment stablecoin. That is one reason Tether is launching a separate token, USAT, for the US market.

What breaks this design is the bank, not the market. The reserve can be complete and still out of reach. In March 2023 Circle had 3.3 bn USD of USDC reserves at Silicon Valley Bank when it was closed on a Friday, redemptions stopped for the weekend, and USDC fell to about 0.87 USD. The third question, when the loop is open, failed.

Crypto-backed: vaults worth more than the debt

A crypto-backed stablecoin is borrowed into existence against crypto locked in a smart contract, with more collateral than debt. A collateralized debt position, or CDP, is the vault that holds that collateral. A user might lock 150 USD of ether and borrow 100 DAI. Typical designs let users borrow 60 to 80% of the collateral's value. If the collateral's price falls too far, the contract sells it to repay the debt. Liquidation is the name for that forced sale.

The loop here runs through the borrowers. When DAI trades below a dollar, vault owners can buy it cheaply to repay debt that is counted at a full dollar, and that buying lifts the price. There is no issuer desk and no bank account involved. Aave's GHO works the same way, and grew from about 35 mn USD at launch to about 570 mn USD in 2026.

What breaks this design is the liquidation machinery. The system needs fresh prices and buyers for the collateral it sells. An oracle is the service that reports market prices to the blockchain. On Black Thursday, 12 March 2020, both failed at once: ether's price fell fast, the network jammed, MakerDAO's price feed updated late, and some auctions sold ether for zero. The history chapter tells that day in full.

The largest crypto-backed dollar has since become a hybrid. Sky, the former MakerDAO, backs USDS and the older DAI with crypto vaults, tokenized Treasury bills and loans, plus a swap contract linked to USDC. A Peg Stability Module is that contract: it swaps USDS or DAI for USDC one for one. That module makes the peg tighter, because anyone can swap at a dollar. It also imports USDC's risk. When USDC fell to 0.87 USD in March 2023, DAI followed to about 0.88 USD.

Synthetic: a hedge instead of a reserve

A synthetic dollar holds crypto and cancels out its price risk with an opposite bet on the derivatives market. Ethena's USDe, launched in February 2024, is the main example. For each dollar of USDe, Ethena holds crypto such as ether and opens a short position of the same size in perpetual futures. Perpetual futures are derivatives that track a crypto price without an expiry date. If ether rises, the crypto gains and the short loses the same amount. If it falls, the reverse happens. The combined position should stay worth about one dollar either way. Delta-neutral is the name for that balance.

The design also earns money. On perpetual futures, one side pays the other a periodic fee. The funding rate is that fee, and it usually flows from buyers to sellers when the market is bullish. Ethena collects it on its short positions and passes it to holders of sUSDe, a separate token for users who stake their USDe.

The loop runs through whitelisted firms that mint and redeem USDe with Ethena against the backing assets. There is no formal right for an ordinary holder to exchange one USDe for one dollar at the issuer, so the peg relies on those firms and on the secondary market. That is also why USDe is not a payment stablecoin under the GENIUS Act.

What breaks this design is the hedge. If the funding rate turns negative for a long time, the short positions cost money instead of earning it. The short positions are held on crypto derivatives exchanges, which adds exchange risk. On 10 October 2025 USDe traded about 35% below a dollar on one exchange during a market crash, while on-chain markets stayed close to the peg. The token recovered within hours, but supply fell from a peak of about 14.7 bn USD in October 2025 to about 4.3 bn USD on 4 September 2026.

Algorithmic: a sister token and nothing else

An algorithmic stablecoin has no outside reserve. It relies on a rule that lets holders swap the stablecoin for a dollar's worth of a sister token that the system can create at will. Terra's UST and its sister token LUNA were the largest case.

The loop worked while people wanted LUNA. When UST dipped, traders swapped it for newly created LUNA and sold that LUNA, which removed UST from circulation. The weakness is that every defence of the peg creates more of the sister token. In May 2022 the swaps turned into a flood, LUNA's price collapsed, each swap paid less, and UST fell from above 18 bn USD in supply to almost nothing within a week.

What breaks this design is its own logic, not an outside shock. Its backing is worth something only while people trust the stablecoin. After Terra the design nearly disappeared: on 4 September 2026 DefiLlama counted less than 1 bn USD in algorithmic stablecoins.

Bank tokens: deposits on a blockchain

The fifth design comes from banks. A tokenized deposit is an ordinary bank deposit recorded as a token on a blockchain. It is the bank's liability, on the bank's balance sheet, under bank supervision. JPMorgan's JPM Coin, ticker JPMD, went live on Base, a public blockchain, on 12 November 2025 and expanded to the Canton Network in January 2026. It is permissioned: only JPMorgan's verified institutional clients can hold or move it.

There is no market price to defend. A JPMD balance is a JPMorgan deposit, so it is worth what the deposit is worth, and the bank pays it out like any other deposit. Because it is a deposit, it can pay interest and, where the law applies, sit under deposit insurance. What breaks it is the bank itself: a bank failure, or limits on who may hold and transfer the token.

Some banks issue stablecoins proper instead. Société Générale's digital-asset unit, SG-FORGE, issues EURCV and USDCV, licensed as e-money tokens under the EU's MiCA rules. On 10 September 2026 SG-FORGE's own dashboard showed about 166 mn EUR of EURCV in circulation. These trade on public blockchains and work like fiat-backed stablecoins, with a bank behind the reserve.

The difference matters for the whole market. Banks create money by lending out most of their deposits. A stablecoin must hold its full reserve in cash and Treasury bills, so a dollar that leaves a bank deposit for a stablecoin cannot be lent onward. That is why large banks prefer to tokenize deposits they already have.

Deep dive Why dashboards show three designs, not five

DefiLlama, the most used public tracker, sorts stablecoins into only three groups. On 4 September 2026 it counted about 285 bn USD as fiat-backed, about 26 bn USD as crypto-backed and less than 1 bn USD as algorithmic.

Synthetic tokens such as USDe and hybrids such as USDS fall inside "crypto-backed" in that scheme, though USDe has neither a vault nor a cash reserve. Tokenized deposits such as JPMD are permissioned and do not appear at all. A risk reading that stops at a dashboard label misses the failure point that matters.

What to watch next

• Final GENIUS Act rules on reserves: they decide whether gold, bitcoin or longer bonds can sit behind a US payment stablecoin, and therefore how Tether and others split their products between markets.
• Ethena's funding income: a long stretch of negative funding would be the first full test of the synthetic design against its own main failure point.
• Sky's reliance on USDC: the share of USDS backing held through the Peg Stability Module shows how much of a decentralized dollar is really a wrapper around a fiat-backed one.
• Bank tokens on public chains: if JPMD, EURCV and similar tokens spread to more users and more chains, companies gain a dollar on-chain that keeps deposit-style protection.
• Wider redemption access: any fiat-backed issuer that opens redemption to ordinary holders, or at weekends, makes its loop stronger for everyone.