The Peg in Practice
This guide follows the peg through calm and stress — how arbitrage tightens the price in normal hours, what happens when a redemption window narrows, and why a "depeg event" is rarely a single cause.
Normal hours
In a liquid market with open redemption windows, the peg is maintained by arbitrage. The mechanism is circular and self-correcting: traders buy below par, redeem near par, and sell above par, minting new tokens. The cycle tightens the spread and holds the price near one dollar.
When a window narrows
Redemption is not continuously available to all holders at equal terms. Minimum thresholds, KYC gates and settlement delays create friction. When that friction increases — through regulatory pressure or operational bottlenecks — arbitrage slows, and the peg can develop a persistent discount until the window reopens.
What past stress episodes teach
Each episode — March 2020, the Terra aftermath, narrower corridor events — is a lesson in which force failed first: arbitrage access, reserve confidence, or market-wide liquidity. The common thread is that the peg is a system, not a button, and systems fail at their weakest point.
FAQ
Does a brief deviation from one dollar mean USDT is failing?
Brief deviations are normal; the arbitrage cycle corrects them. A deviation becomes a problem when it persists after arbitrage should have closed it — which usually means the redemption channel, not the token, is the bottleneck.