Trust in Stablecoins: The Key to Maintaining Fixed Prices

Stablecoins are generally designed to remain close to $1. However, this balance relies on investors believing that they can redeem these assets for $1 when needed. When the price drops to $0.99, the stablecoin is considered to have lost its value peg. Dollar-backed stablecoins can rebalance the price if the redemption mechanism works smoothly when the price falls, allowing market participants to buy at a discounted price. However, when doubts arise about the quality of reserves and the redemption process, prices can fluctuate. For example, when Circle announced that $3.3 billion of USDC reserves were held at Silicon Valley Bank, USDC briefly fell below $1. The price recovered with the intervention of U.S. authorities. The case of TerraUSD showed that not all stablecoins are based on the same structure; when trust is lost, the system can collapse. The fixed price of stablecoins relies more on a commitment than a technical rule. When the market believes this commitment will be fulfilled, the price can approach $1, but when trust weakens, the balance can be disrupted.