A stablecoin trades near a reference value because something enforces that price. What enforces it is the ability to redeem, and the credibility of redemption rests entirely on the reserves behind it.
Redemption is the mechanism that closes the gap
If a token backed by reserves trades below its reference value, an arbitrageur can buy it cheaply and redeem it for the full amount, taking the difference.
That buying pressure pushes the price back towards the peg, and the opportunity disappears once the gap closes.
The correction depends on redemption being available and reliable. Where redemption is restricted to large institutional holders, the mechanism weakens for everyone else.
Reserve composition determines behaviour under stress
Reserves held in cash and short-dated government instruments can be liquidated quickly at predictable prices, which supports redemption during a rush.
Reserves containing commercial paper, corporate debt or other tokens are harder to sell in exactly the conditions where selling becomes necessary.
The composition therefore matters more than the total, since a fully backed token can still fail to meet redemptions if the backing cannot be converted in time.
Attestation is not the same as audit
Many issuers publish attestations confirming that reserves existed at a point in time, prepared by an accounting firm on a limited basis.
A full audit examines controls and the reliability of reporting over a period, which is a substantially stronger assurance than a snapshot.
The distinction has mattered historically, since a snapshot can be satisfied by assets present only on the reporting date.
Algorithmic designs replace reserves with incentives
Some designs maintain a peg by minting and burning a companion token in response to price deviations, holding no external reserves at all.
The stability depends on continued demand for the companion token, which supports the peg only while confidence in the system persists.
When that confidence reverses, the mechanism accelerates the decline rather than arresting it, which is the failure pattern such designs have repeatedly exhibited.
Overcollateralised models take a different approach
Tokens issued against volatile crypto collateral require the collateral to exceed the debt substantially, with automatic liquidation if the ratio falls too far.
The buffer absorbs price movement, and the liquidation process is what protects the peg rather than any promise from an issuer.
The trade-off is capital inefficiency and dependence on liquidations executing smoothly during exactly the volatile conditions that trigger them.