A stablecoin is a digital token designed to hold a relatively steady value against something else, often the U.S. dollar. But “stable” describes its target, not a guarantee: the token’s market price, the issuer’s redemption promise and a holder’s practical ability to redeem are separate things.
What is a stablecoin?
A stablecoin is a digital token intended to track the value of a reference asset, commonly a fiat currency such as the U.S. dollar. It can be transferred over blockchain networks, much like other crypto tokens. Unlike a token whose price is meant to float freely, a stablecoin is designed around a target value—for example, one token near $1.
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That target does not ensure the token always trades at exactly $1, nor does it automatically give every holder a right to exchange it with an issuer. The design, reserve assets, legal terms, redemption process and market conditions all matter. The IMF’s December 2025 overview of stablecoins explains their mechanics and risks.
How do dollar-pegged tokens work?
Reserves and redemption
In a reserve-backed model, an issuer holds assets intended to support the tokens in circulation. If eligible holders can exchange tokens for dollars at or near par, that redemption process can help support the target. Trading also matters: participants may buy a token priced below its target if they expect to redeem or resell it nearer to $1, while a token trading above the target may attract additional supply.
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These mechanisms depend on actual access and functioning markets. Direct redemption may be limited by issuer terms, minimum amounts, fees, timing, jurisdiction or the holder’s status. A person who cannot redeem directly may have to sell through a secondary market, where the price can differ from the target. The Financial Stability Board’s 2023 recommendations for global stablecoin arrangements call for robust legal claims and timely par redemption for single-fiat global stablecoins; these are recommendations to authorities, not proof that every token already offers those protections.
USDC as one issuer’s example
Circle says USDC is backed by cash and cash-equivalent assets and is redeemable 1:1. Its transparency page displayed $74.1 billion in USDC circulation and $74.3 billion in reserves as of October 5, 2026, and Circle says it provides monthly third-party assurance. These are Circle’s claims and disclosures, and live reserve figures can change. They do not establish that every stablecoin uses the same structure, that every retail holder can redeem directly, or that any token is risk-free.
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Why can a stablecoin lose its peg?
Confidence in backing or redemption weakens
If holders doubt the reserve assets, the issuer’s ability to honor redemptions or the legal basis for a claim, they may sell rather than wait. A holder without direct redemption access may have no route other than the secondary market. If many sellers meet limited buying liquidity, the market price can fall below the reference value.
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Having assets whose stated value matches or exceeds token circulation is not the whole test. Those assets must be convertible into cash quickly enough to meet redemption demand, including during market stress. In its May 11, 2026 speech, the IMF described liquidity—not solvency—as the binding constraint when reserves must be liquidated fast enough to meet redemptions at par.
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Redemptions can create a run dynamic
Heavy redemption requests may require an issuer to sell reserve assets. If those sales are difficult or reduce confidence in the remaining backing, more holders may seek redemption or sell, adding pressure. The IMF analyzes this possible feedback loop in Making Stablecoins Stable. It is a risk mechanism, not an inevitable outcome for every stablecoin.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What to check when comparing stablecoins
Do not rely on the label “stable.” Compare disclosures and terms that establish how a token is meant to hold its value and what a holder can actually do:
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- Reserve composition and liquidity: What assets are held, and how readily can they be converted to meet redemptions?
- Reporting and assurance: Who reports on reserves, what is covered, and how often is information published?
- Redemption terms: Which holders are eligible, and what minimums, fees and timing apply?
- Legal claim and protections: What claim does a holder have against the issuer or reserves, and under which jurisdiction’s rules?
- Oversight: Which authorities or regulatory framework apply to the issuer and arrangement?
Terms and protections can differ by issuer, holder and jurisdiction, so a feature disclosed for one token should not be assumed for another.
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In an August 7, 2026 speech, the IMF estimated stablecoin market capitalization at around $300 billion and said nearly 99 percent of stablecoins were denominated in U.S. dollars. The IMF described capitalization as having nearly tripled between 2021 and 2025, then staying relatively flat over the preceding year. These figures are dated estimates, not a live market total. See the IMF’s speech on stablecoins, risks and policy choices.
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