How the Stablecoin Peg Works
A peg is a promise maintained by three forces: arbitrage, reserves, and expectations. This page explains each force, how they interact, and what kinds of stress reveal which force is weakest.
Arbitrage: the self-correcting force
When USDT trades below one dollar, arbitrageurs buy below and redeem near par, capturing the spread. When it trades above, they mint and sell. This circular pressure is the primary mechanism that keeps the market price near the claim — as long as redemption windows remain open and liquid.
Reserves: the backing promise
Tether publishes attestation reports listing the composition of reserves. The report does not audit every liability minute-by-minute — it attests to a snapshot. The difference between attestation and audit, and between aggregate reserves and liquid reserves, are the two distinctions worth tracking.
Expectations: the social layer
If the market believes the peg will hold, it does. If belief cracks — because of a regulatory threat, a reserve disclosure gap or a broader panic — the arbitrage machine slows and the price can gap below par. Peg stress is rarely a mechanical failure; it is almost always a belief failure that triggers the mechanics to follow.
FAQ
Has USDT ever broken its peg for a sustained period?
USDT has seen short deviations — usually minutes or hours — that arbitrage closed. Sustained gaps are rarer and tend to coincide with broader market disruption, when redemption windows or liquidity channels narrow. The history contains episodes, and each episode is a lesson in which force gave way first.