What keeps a stablecoin at one dollar?

Mint and redeem arbitrage: traders mint at one dollar and sell when the price is above a dollar, and buy cheap coins to redeem for a dollar when it trades below, pushing price back to the peg.

Why did UST collapse in May 2022?

UST was algorithmic: redemptions minted new LUNA, crashing LUNA's price, which destroyed the backing and confidence in a reflexive death spiral.

What is overcollateralization?

Locking more collateral value than the stablecoin debt, such as 1.50 dollars of ETH per 1 dollar of DAI, to absorb price drops in the collateral.

How Stablecoins Actually Work

Part one

The Peg Machine

The peg is held by arbitrage. When the market price rises above $1, anyone can mint a new coin for exactly $1 and sell it high — new supply pushes the price down. When it falls below $1, anyone can buy cheap coins and redeem them for exactly $1 — buying pressure pushes the price up. Watch it work, then break it.

Disable arbitrage (watch the price drift)

Arbitrage on: every deviation is profitable to correct, so the price keeps snapping back to $1.

Part two

Three Designs

All stablecoins promise $1. What differs is what actually stands behind that promise.

Fiat-backed

Real dollars in a bank

Every coin is backed 1:1 by cash and short-term Treasuries held by a custodian. Example: USDC.

Strength: simple, redeemable, auditable via attestations
Risk: trust in the issuer and its banks (USDC briefly hit $0.87 during the SVB scare, March 2023)

100% cash + T-bills

Crypto-collateralized

Locked crypto, extra padding

Coins are minted against volatile crypto locked in smart contracts, with more collateral than debt. Example: DAI.

Strength: transparent on-chain, no bank needed
Risk: crash in collateral can force liquidations

$1.00 debt

+$0.50 buffer

150% overcollateralization: $1.50 of ETH locked per $1 of DAI.

Algorithmic

Backed by a sister token

No hard reserves — the coin is swapped for a freely-minted volatile token. Example: UST / LUNA (collapsed May 2022).

Strength: capital-efficient, fully on-chain
Risk: reflexive: redemptions mint more sister token, crashing its price, which breaks the backing

Part three

Depeg Stress-Test Simulator

Set the reserves, the redemption pressure, and how much the market trusts the issuer — then run 30 days and see whether the peg survives. Under-reserved coins facing fast redemptions with low confidence can enter a self-reinforcing death spiral.

Reserve ratio (assets backing each $1) 100%

Daily redemption demand 5% of supply

Market confidence 80%

Stable

Fully reserved, calm redemptions, confident market: the price hugs $1 with only tiny noise.

Part four

Check Your Understanding

Five quick questions. Instant feedback, no scorekeeping shame.

Part five

Plain-Language Glossary

Peg: The target price a stablecoin promises to hold — almost always exactly $1.
Mint / Redeem: Mint: hand the issuer $1, get 1 new coin. Redeem: hand back 1 coin, get $1. This two-way door is what anchors the price.
Arbitrage: Risk-free-ish profit from price gaps. Arbitrageurs are the unpaid janitors who keep the peg clean.
Reserves: The assets an issuer actually holds against outstanding coins — cash, Treasuries, crypto, or (dangerously) nothing solid.
Overcollateralization: Locking more value than you borrow (e.g. $1.50 of ETH per $1 of DAI) so the debt stays covered even if crypto drops.
Depeg: When the market price breaks meaningfully away from $1 and arbitrage stops fixing it.
Death spiral: A reflexive collapse: falling price triggers redemptions, which weaken the backing, which crushes confidence, which triggers more redemptions.
Attestation: A regular accountant-signed snapshot claiming the reserves exist. Weaker than a full audit, better than a promise.

Educational explainer only — nothing here is financial advice. The simulator is a simplified model, not a price prediction.