How Do Stablecoins Maintain a Stable Value?

Overview

Stablecoins are designed to track a reference value (most commonly 1 USD) so they can be used for payments, invoicing, and settlement without the day-to-day price volatility associated with many cryptocurrencies. The key idea is simple: a stablecoin aims to stay close to its peg because there is a mechanism that encourages the market price to return to that target.

This guide explains how stablecoins maintain a stable value, what differs between fiat-backed, crypto-backed, and algorithmic designs, and what Australian businesses should look for before accepting stablecoins.

What “stable value” actually means

In practice, “stable” means the stablecoin’s market price tends to remain near its target (e.g., 1.00 USD), not that it is mathematically guaranteed. Short-lived deviations can happen due to market conditions, liquidity, redemption constraints, or operational issues. Good stablecoin structures are built to keep deviations small and to recover quickly when they occur.

The peg: why the market price stays near 1

Most stablecoin designs rely on some form of arbitrage—a financial incentive for traders (or authorised participants) to buy when the price is below the peg and sell (or redeem) when the price is above the peg. If the redemption and issuance process is credible, this activity pulls the price back toward the target.

For example, if a USD stablecoin trades at $0.99, an arbitrageur may buy it on the market and redeem it for $1.00 (or the equivalent value) through the issuer or protocol. If it trades at $1.01, they may mint/issue at $1.00 and sell at $1.01. The ability to redeem and mint at predictable terms is a major reason some stablecoins hold their peg better than others.

Fiat-backed stablecoins: reserve backing + redemption

Fiat-backed stablecoins (often called “reserve-backed”) typically aim to maintain a 1:1 relationship with a reference currency by holding high-quality reserves and enabling redemptions. In simplified terms:

• Issuance (minting): an authorised participant deposits fiat (or equivalent) and receives newly minted stablecoins.
• Redemption (burning): stablecoins are returned to the issuer, redeemed for fiat (or equivalent), and the redeemed stablecoins are removed from circulation.

Why this supports price stability: if the issuer’s redemption process is reliable, the market has confidence that a stablecoin can be converted back to its reference value. That confidence supports liquidity and makes arbitrage viable.

What reserves usually look like

Reserve composition varies by issuer. High-quality reserves often include:

• Cash and cash equivalents
• Short-dated government securities
• Other highly liquid, low-risk instruments (depending on issuer policy)

Important: reserve quality matters. The easier it is to liquidate reserves at par (especially during stressed markets), the more resilient the peg tends to be.

Transparency: attestations, audits, and reporting

Fiat-backed stablecoin issuers often publish periodic disclosures about reserves. When assessing stability, look for:

• Regular attestations or third-party reports
• Clear reserve breakdowns (what assets, where held, who custodies them)
• Redemption policies (who can redeem, minimums, timeframes, fees)

Crypto-backed stablecoins: over-collateralisation + liquidation

Crypto-backed stablecoins (e.g., DAI-style designs) are typically issued against on-chain collateral (such as ETH or other digital assets). Because crypto collateral can be volatile, these systems often require over-collateralisation—meaning the collateral value must exceed the stablecoin value issued.

Key components that help maintain the peg:

• Collateral ratios: borrowers must keep collateral above a minimum threshold.
• Liquidations: if collateral falls too low, positions are liquidated to ensure the system remains solvent.
• Fees and incentives: stability fees, borrowing costs, and governance parameters can influence supply/demand and support peg stability.

Trade-off: crypto-backed models can be transparent and on-chain, but stability depends on collateral volatility, liquidation efficiency, and overall market conditions.

Algorithmic stablecoins: supply adjustment (higher risk profile)

Algorithmic stablecoins attempt to maintain a peg using software-driven supply adjustments and incentive mechanisms rather than direct reserve backing. Designs vary widely, but many have historically shown higher risk of persistent depegs under stress.

For commercial payment workflows, businesses often prefer stablecoins with clear, verifiable backing and predictable redemption mechanics. If you are considering an algorithmic stablecoin, treat it as a specialised instrument and assess the risks carefully.

What causes a stablecoin to “depeg”?

A depeg happens when a stablecoin trades meaningfully away from its target value. Common drivers include:

• Redemption friction: slow processing, high fees, minimum redemption sizes, or restricted access to redemptions.
• Reserve concerns: unclear disclosures, questions about reserve quality, or custodial risk.
• Liquidity shocks: thin market liquidity can widen spreads and worsen price moves.
• Market stress: rapid sell-offs can overwhelm arbitrage capacity temporarily.
• Operational events: banking interruptions, settlement issues, or blockchain congestion.

Business checklist: how to assess stable value for payments

If you’re accepting stablecoins for invoices or international payments, the goal is not just “a stable coin,” but predictable settlement. Consider:

• Which stablecoin: prefer widely adopted stablecoins with strong liquidity (spreads tend to be tighter).
• Which network: fees and confirmation times vary by blockchain; choose one that fits your workflow.
• Redemption path: how do you settle to AUD when required, and what are the cut-offs/timeframes?
• Reporting: ensure you can export transaction records for reconciliation and bookkeeping.
• Compliance: use a provider that supports KYC/AML processes appropriate to your business.

In Australia, many businesses use stablecoins as a settlement rail—receive stablecoins from overseas clients, confirm payment quickly, then settle to AUD through a compliant provider when needed.

Practical example: the stabilising loop

When the structure is working well, stability comes from a reinforcing loop:

1. Confidence in reserves/collateral and redemption/liquidation rules
2. Liquidity improves because more participants trade and hold the stablecoin
3. Arbitrage becomes easier, pulling price back to peg when it drifts
4. Stability increases, reinforcing confidence

Related reading

• Stablecoins in Australia: What They Are and How Businesses Use Them
• What is a Stablecoin?
• How Do Stablecoins Work?

FAQ

Are stablecoins guaranteed to stay at $1?

No. Stablecoins are designed to track a target value, but price deviations can occur. The strength of the backing and the reliability of redemption or on-chain mechanisms are key factors in how quickly the price returns to the peg.

Are fiat-backed stablecoins safer than crypto-backed stablecoins?

Not always; they have different risk profiles. Fiat-backed stablecoins depend on reserve quality, custodians, and redemption processes. Crypto-backed stablecoins depend on collateral volatility and liquidation performance. Businesses typically choose based on liquidity, transparency, and operational fit.

What’s the biggest practical risk for businesses accepting stablecoins?

Usually it’s operational: fees, network congestion, liquidity/spreads, or delays settle to AUD. Using a clear process and a compliant provider helps reduce this risk.

Related guides: how businesses use stablecoins for payments works, crypto invoicing - how to invoice clients in usdt or usdc, and the difference between off-ramps and exchanges.