What Actually Backs a Stablecoin

A stablecoin is a token designed to hold a steady value against a reference, usually a national currency. The peg is not a property of the token itself; it is a claim about something behind the token. Understanding what that something is tells you what has to go wrong for the peg to break.

The three designs

Fiat-backed stablecoins are issued against reserves held in cash and short-term instruments by a company, which promises to redeem tokens for the underlying currency. Crypto-collateralised stablecoins are minted against volatile crypto locked in smart contracts, deliberately overcollateralised so a price fall does not immediately leave the debt unbacked. Algorithmic designs try to hold the peg through supply and market incentives rather than assets — the model with the least to fall back on if confidence goes.

What attestations prove

Reserve reports are usually attestations rather than full audits: an accounting firm confirms what the issuer reported at a chosen moment. That is meaningful, and it is narrower than it sounds. It says little about the days in between, and the composition matters — cash and short-dated government paper behave differently in a rush for the exit than commercial paper or loans to affiliates.

Redemption is the real test

The question that matters is who can redeem, at what size, on what timetable, and in which jurisdictions. If direct redemption is limited to a handful of institutional partners, everyone else depends on those partners arbitraging the peg back — which works until they choose not to. A stablecoin that trades below its peg is telling you the market doubts either the reserves or the path to reaching them.

Other risks that are not the reserves

Most fiat-backed issuers can freeze balances at specific addresses, at their own initiative or on a legal order. Tokens also exist as bridged copies on other networks, where the risk becomes the bridge rather than the issuer. Neither is hidden, and both belong in the same picture as the backing.