A stablecoin can trade at exactly one dollar while its reserves, redemption arrangements, or liquidity face serious pressure. The price tells you what someone will pay for the token. It does not tell you whether every holder can turn it back into money.
A stablecoin trades at $1.
Its chart looks uneventful. Traders exchange it for other cryptocurrencies, lending markets accept it as collateral, and payment applications treat it as the digital equivalent of a dollar.
Everything appears to be working.
But imagine that the issuer suddenly receives redemption requests for hundreds of millions of dollars.
Some reserves are held at banks that cannot immediately process withdrawals. Other assets may need to be sold before cash becomes available. Only selected institutions can redeem directly with the issuer, while ordinary holders depend on exchanges and market makers.
The stablecoin might still trade near $1 throughout the early stages of the disruption.
That price would not prove the issuer could satisfy every redemption request on demand.
A stablecoin’s market price and its underlying ability to deliver dollars are related, but they are not identical.
This distinction is fundamental to understanding stablecoin risk.
The dollar peg is the visible outcome of an arrangement involving reserve assets, redemption rights, banking infrastructure, market liquidity, and the willingness of intermediaries to exchange tokens for money.
When these mechanisms function together, a stablecoin can maintain a remarkably stable market price.
When they weaken, the same token can become difficult to redeem even before a severe price deviation appears.
And when market confidence disappears, a stablecoin can temporarily lose its peg without necessarily establishing that its reserve assets have suffered equivalent permanent losses.
The real question is not simply whether a stablecoin is worth $1 on an exchange. It is what stands behind that price when holders want to leave.
The $1 Price Is a Market Quote, Not a Redemption Guarantee
There are two distinct ways to obtain dollars from a fiat-backed stablecoin.
The first is selling the token to another participant in the secondary market.
The second is redeeming it through an eligible arrangement with its issuer.
These mechanisms are frequently treated as interchangeable, but their economics and legal conditions differ.
When a stablecoin trades at $1 on an exchange, that price reflects the available buying and selling activity in a particular market.
It does not establish that every holder has a direct claim against the issuer, that sufficient dollars are immediately accessible, or that a large redemption can be processed without friction.
Consider an investor holding 100,000 stablecoin units.
If the token trades at $1, the position has a quoted market value of $100,000.
But selling the entire position depends on available liquidity.
If the exchange order book contains only $20,000 of buying interest near $1, executing the full sale immediately might require accepting lower prices for the remaining tokens.
Alternatively, the investor might use a different exchange, wait for market makers to replenish liquidity, or redeem through an eligible institution.
The displayed price is therefore not necessarily the executable price for an arbitrarily large position.
This distinction between quoted price and realizable value is common across financial markets.
For stablecoins, however, it becomes particularly important because users expect the asset to function like money rather than a speculative security.
Why Stablecoin Arbitrage Normally Protects the Peg
Fiat-backed stablecoins generally rely on a relationship between primary-market issuance and redemption and secondary-market trading.
When the secondary-market price falls below $1, an eligible participant may purchase the discounted token and redeem it with the issuer for $1.
When the price rises above $1, eligible participants may create new tokens by depositing dollars and sell them at the higher market price.
These activities can help move the market price toward parity.
The Federal Reserve’s analysis of stablecoin price stability explains how primary-market creation and redemption can create arbitrage incentives that support the peg.
But arbitrage is not automatic.
It requires capital, market access, functioning payment systems, and confidence that the issuer will honor redemption requests.
Suppose a stablecoin trades at $0.98.
An institution capable of buying it at that price and successfully redeeming it for $1 could earn a gross spread of $0.02 per token.
On one million tokens, that represents a potential gross spread of $20,000.
But the opportunity must be evaluated against trading fees, redemption costs, settlement delays, financing expenses, and the risk that redemption may not occur as expected.
If these combined costs and risks outweigh the potential profit, the institution may decline to perform the arbitrage.
The market price can consequently remain below parity despite the issuer’s stated redemption promise.
A functioning peg requires more than a promise to redeem. It requires participants who can turn that promise into actual settlement.
The Redemption Path Matters More Than Most Stablecoin Dashboards Admit
To understand stablecoin safety, investors need to establish who can redeem a token, through which institution, and under what conditions.
Circle’s USDC provides an instructive example because it publicly documents its redemption arrangements.
According to Circle’s USDC Terms, direct redemption through Circle Mint is subject to account eligibility, applicable law, and other contractual conditions.
The terms distinguish holders with Circle Mint accounts from holders who possess USDC without having such accounts.
For holders outside the European Economic Area, the referenced terms state that those without Circle Mint accounts cannot redeem directly with Circle unless they become eligible and establish an account. Other jurisdictions may provide additional rights or redemption arrangements.
That distinction matters because owning a stablecoin and having operational access to its primary redemption facility are not always the same thing.
An ordinary holder may instead rely on an exchange, bank, broker, or other intermediary to convert the token into fiat currency.
These services introduce additional dependencies.
The exchange must remain operational.
Its banking partners must be able to process fiat withdrawals.
Market makers must be willing to provide liquidity.
And the relevant blockchain must continue functioning so the stablecoin can be transferred to the appropriate counterparty.
These dependencies do not necessarily make the stablecoin unsafe.
But they explain why a token can have strong backing arrangements while an individual holder still experiences difficulty converting it into dollars.
Redemption Friction Is a Real Economic Cost
Access is not the only consideration.
The size, timing, and cost of redemption also matter.
Circle’s 2026 redemption fee documentation illustrates how even a major fiat-backed stablecoin can apply differentiated conditions to institutional redemption activity.
The revised structure, effective March 15, 2026, includes redemption tiers and additional adjustments for certain sustained net-redemption flows.
These provisions do not mean that USDC has lost its dollar backing, nor do they imply that every holder faces the same charges.
They demonstrate that converting stablecoins into fiat through institutional arrangements involves operational and economic terms beyond the quoted token price.
The implications become more significant during market stress.
A market maker might be willing to buy a stablecoin at $0.999 under normal conditions.
But if redemption becomes slower, more expensive, or operationally uncertain, the same participant may demand a larger discount before taking the position.
That discount compensates for the time and risk involved in converting the token into dollars.
A stablecoin can have enough assets to support its liabilities while still imposing meaningful costs or delays on holders seeking immediate liquidity.
This is why the redemption path deserves its own analysis rather than being treated as a footnote to reserve disclosures.
Fully Backed Doesn’t Necessarily Mean Immediately Liquid
Stablecoin issuers often emphasize the value of their reserve assets.
For fiat-backed stablecoins, the basic promise is that outstanding tokens are supported by assets intended to maintain their value relative to the reference currency.
But the total reported value of reserves is only one part of the assessment.
The composition of those reserves matters.
So does the time required to convert them into cash.
A dollar held in a readily accessible bank account and a dollar invested in a less liquid security may have similar accounting values under certain circumstances.
Yet they are not necessarily equivalent when an issuer must meet a large redemption request immediately.
The same applies to cash held at different banking institutions.
Funds may be fully recognized as assets, while their availability depends on the operational condition of a particular bank or payment system.
Reserve Quality and Reserve Liquidity Are Different Questions
Consider a stablecoin issuer holding a mixture of cash, short-term government securities, and other investments.
A reserve assessment must determine whether the assets are sufficient to cover outstanding tokens.
But it should also examine how rapidly the assets can be converted into the currency required for redemption.
This distinction appears in the Bank for International Settlements’ 2026 analysis of stablecoin monetary arrangements.
The BIS emphasizes that stablecoins intended to function like money require credible redemption arrangements, low-risk reserves, and sufficient liquidity to meet obligations under stressed conditions.
Its analysis also highlights the importance of dependable liquidity arrangements and backstops, particularly when redemptions place pressure on reserve portfolios.
The underlying problem is familiar from traditional finance.
An institution may own assets worth more than its liabilities while being unable to convert enough of those assets into cash quickly enough to meet immediate withdrawals.
That is a liquidity problem.
If the realizable value of the assets falls below outstanding liabilities, the problem becomes one of solvency.
The two conditions can interact.
Forced asset sales may transform an initial liquidity shortage into realized losses, potentially reducing the institution’s ability to satisfy remaining claims.
A reserve balance answers how much asset value exists under a specified accounting basis. It does not automatically answer how much cash can be delivered today.
The USDC–Silicon Valley Bank Episode
The banking crisis of March 2023 provides a concrete demonstration.
On March 10, 2023, Silicon Valley Bank was closed by California regulators after experiencing severe financial distress.
Circle subsequently disclosed that approximately $3.3 billion of USDC reserves were held at the failed bank.
In its March 12, 2023, statement on the banking disruption, Circle described this exposure as approximately 8% of USDC’s total reserves.
The disclosure contributed to uncertainty about the accessibility of funds supporting USDC during the banking crisis.
USDC temporarily lost its dollar peg in secondary-market trading before recovering after US authorities announced measures protecting depositors at the affected banks.
Circle stated that its $3.3 billion deposit would become fully available when US banks reopened.
The episode reveals something important about reserve risk.
The problem was not simply that the stablecoin had been issued against speculative crypto collateral.
A significant portion of the reserve exposure involved a deposit at a traditional banking institution.
The uncertainty concerned whether and when those funds would become accessible.
The ultimate protection of depositors changed that outcome.
It would therefore be misleading to treat the incident as proof that USDC permanently lacked sufficient reserves.
But it would be equally misleading to conclude that its reserve structure had been immune to banking-system disruptions.
A stablecoin supported by conventional financial assets can still inherit risks from the institutions holding those assets.
The $1 target does not eliminate banking risk.
It transfers the importance of that risk into the infrastructure supporting redemption.
What Reserve Attestations Can—and Cannot—Establish
Reserve transparency is essential for evaluating fiat-backed stablecoins.
Circle, for example, publishes reserve composition information and independent assurance reports through its official transparency portal.
Its disclosures describe assets including cash, short-dated US Treasuries, and overnight repurchase agreements, alongside arrangements involving regulated financial institutions and the Circle Reserve Fund.
These reports provide evidence about reserve holdings and their relationship to outstanding token liabilities.
But an attestation at a particular date should not automatically be interpreted as a guarantee of continuous liquidity under every future condition.
Its scope, timing, valuation methods, and assurance procedures matter.
A reserve snapshot can support the conclusion that reported assets met or exceeded reported liabilities at the measurement date.
It does not necessarily establish that all assets could be liquidated instantaneously without losses or that every operational dependency would remain available during a crisis.
Proof of backing is important. Proof of immediate, reliable redemption requires additional evidence.
The Ravel Redemption Stress Test: When $1.02 Billion in Assets May Not Deliver $1 Billion in Cash
To make the distinction measurable, consider a hypothetical stablecoin issuer.
The issuer has one billion tokens outstanding, each intended to be redeemable for $1.
It reports $1.02 billion in reserve assets.
On paper, the reserve coverage appears adequate.
The issuer has $20 million more in reported assets than outstanding token liabilities.
But suppose its reserves have the following composition.
| Reserve component | Reported value |
|---|---|
| Immediately available cash | $200 million |
| Other assets requiring conversion into cash | $820 million |
| Total reported reserves | $1.02 billion |
| Outstanding stablecoin liabilities | $1.00 billion |
| Reported reserve coverage | 102% |
Ravel’s hypothetical reserve model. Values do not describe Circle, Tether, or any actual stablecoin issuer.
The reported reserve coverage is:
$1.02 billion / $1 billion = 102%.
That figure appears reassuring.
Now assume holders request $350 million in cash redemptions on the same day.
The issuer has only $200 million immediately available.
The remaining $820 million consists of assets that require settlement, sale, or financing arrangements before they can become spendable dollars.
If those arrangements cannot deliver funds within the required period, the issuer faces an immediate liquidity shortfall.
Same-day cash coverage = $200 million / $350 million = 57.14%.
The uncovered amount is:
$350 million − $200 million = $150 million.
The issuer may still be solvent based on the reported value of its total assets.
But without timely access to additional cash, it cannot meet all assumed same-day requests.
This distinction matters because the market price could respond to the immediate inability to redeem, even if the broader reserve portfolio ultimately retains sufficient value.
What Happens If Reserve Assets Must Be Sold at a Discount?
Now introduce another hypothetical stress.
Suppose the issuer is forced to liquidate its entire $820 million non-cash portfolio at an average discount of 5% to its reported value.
That discount might reflect market stress, asset-specific price risk, or the costs of rapid liquidation.
It is not an assumption about short-term treasury securities specifically.
The realizable value of that portfolio becomes:
$820 million × 95% = $779 million.
Adding the $200 million in immediately available cash gives:
$200 million + $779 million = $979 million.
Against one billion dollars of liabilities, the issuer would face a $21 million shortfall under this extreme liquidation scenario.
| Ravel stress-test metric | Result |
|---|---|
| Original reserve coverage | 102% |
| Same-day cash coverage of $350M requests | 57.14% |
| Immediate funding gap | $150 million |
| Total reserves after an assumed 5% portfolio haircut | $979 million |
| Stressed coverage of original liabilities | 97.9% |
| Stressed asset shortfall | $21 million |
Ravel calculation. The liquidity gap and stressed liquidation shortfall are separate scenarios, not losses that should be added together. The 5% haircut is an illustrative stress assumption, not an empirical estimate for a specific reserve asset.
The exercise exposes three different dimensions of stablecoin safety.
Reserve coverage measures reported asset value relative to outstanding liabilities.
Immediate liquidity coverage measures whether accessible cash can satisfy redemptions within a specified time window.
Stressed realizable coverage measures whether reserve assets remain sufficient after assumed losses or liquidation discounts.
A stablecoin can score differently on each dimension.
A fully backed issuer might temporarily struggle with settlement and banking access.
An issuer holding risky reserve assets might remain liquid during normal conditions but suffer losses if the assets must be sold under pressure.
And an issuer could have sufficient reserves and functioning redemption channels while individual retail holders still face unfavorable secondary-market prices because of local liquidity constraints.
The example also illustrates why redemption stress tests require carefully defined assumptions.
The severity of a hypothetical portfolio haircut depends on asset maturity, credit quality, interest-rate exposure, market depth, and access to financing.
It would be inappropriate to apply the same stress haircut indiscriminately to cash, short-term government bills, corporate debt, and speculative crypto assets.
Likewise, reported reserves may already incorporate market-value changes, depending on the accounting method used.
The purpose of the stress test is not to predict a stablecoin’s failure. It is to reveal risks that a $1 market price cannot measure.
Different Stablecoin Designs Hide Different Risks Behind the Same Dollar Peg
Not every stablecoin depends on a traditional issuer holding cash and government securities.
Some use crypto collateral managed by smart contracts.
Others depend on derivative hedging arrangements or monetary mechanisms designed to influence supply and demand.
They may all target the same $1 price.
But the economic structure supporting that target can be fundamentally different.
Fiat-Backed Stablecoins: The Risk Is in the Reserve and Redemption Chain
When it comes to a fiat-backed stablecoin, the most important questions are about the quality and availability of reserve assets, the issuer’s responsibilities, operational counterparties, and the legal rights of holders.
A token backed by highly liquid cash and short-term government securities has a different risk profile from one supported by longer-duration investments or substantial exposure to volatile assets.
However, asset composition is only part of the evaluation.
Banking arrangements, custody structures, redemption access, and concentration among counterparties can all affect resilience.
The Federal Reserve’s April 2026 financial stability analysis observed that stablecoins with safer and more liquid reserves exhibited relatively stronger adoption and lower exposure to run risk.
It also identified vulnerabilities arising from increasingly complex relationships between issuers, intermediaries, and service providers.
These interconnections matter because stablecoin holders depend on more than the assets listed on a reserve report.
They depend on a functioning chain of institutions capable of turning those assets into payments.
Crypto-Collateralized Stablecoins: The Risk Is in Collateral and Liquidation Mechanics
Crypto-backed stablecoins introduce different concerns.
Their collateral may be held transparently in smart contracts, and the system may require collateral values to exceed issued stablecoin liabilities.
Overcollateralization creates a buffer against market declines.
But collateral value can change rapidly.
A sharp decline in prices may require positions to be liquidated before the collateral becomes insufficient.
The stability of the arrangement can therefore depend on price oracles, liquidation incentives, smart-contract execution, market liquidity, and the willingness of participants to purchase collateral during stress.
Mechanisms designed to maintain parity can introduce additional dependencies.
For example, the MakerDAO ecosystem’s Peg Stability Module specification describes facilities allowing swaps between DAI and eligible stablecoin collateral, subject to available liquidity and configured parameters.
Such facilities can support price stability by providing a conversion mechanism.
But they can also expose the system to risks associated with the assets accepted into the module.
A crypto-collateralized stablecoin might therefore maintain its peg while carrying meaningful collateral or dependency risks that do not immediately appear in its exchange price.
Algorithmic Stablecoins: A Peg Is Not the Same as an External Asset Claim
An algorithmic stablecoin can attempt to maintain a target price through token issuance, redemption incentives, or relationships with another crypto asset.
The critical question is what economic value supports redemption when confidence declines.
TerraUSD provides a historical example of the dangers of relying on a reflexive stabilization mechanism.
In its November 2022 Financial Stability Report, the Federal Reserve described how TerraUSD’s collapse followed declining confidence, changes in yield incentives, and liquidity pressures.
Before its May 2022 collapse, TerraUSD had reached a market capitalization of approximately $18 billion.
Its stabilization model depended heavily on the relationship between UST and the associated LUNA token rather than a conventional reserve of cash-equivalent assets sufficient to redeem all outstanding stablecoins.
As confidence deteriorated, the mechanism could not reliably restore parity, and the resulting collapse erased substantial market value.
The lesson is not that every crypto-collateralized or algorithmically managed stablecoin must fail.
It is that a stabilization mechanism cannot be evaluated solely by observing whether the token has recently traded near $1.
The source of redemption value matters.
A stablecoin supported by legally enforceable claims against liquid reserves is economically different from one whose stabilization relies on demand for another volatile token.
A derivatives-hedged synthetic dollar introduces still another set of risks, potentially including funding-rate changes, exchange or custodian failure, basis risk, and hedging execution.
These models should be assessed according to their actual liabilities and mechanisms rather than being placed in one undifferentiated stablecoin category.
The Token Itself May Introduce Another Layer of Risk
There is also an important distinction between a native stablecoin issued directly by its authorized issuer and a wrapped or bridged representation.
Circle’s USDC documentation distinguishes native USDC from third-party bridged versions such as USDC.e.
A bridged representation can depend on the security and liquidity of the bridge or underlying arrangement.
Even if the original stablecoin remains fully backed, the holder of a third-party representation may face additional risks that do not originate with the issuer’s reserves.
This scenario is another reason the familiar $1 symbol can be misleading.
Two tokens sharing the same reference asset may not offer identical redemption rights or security assumptions.
Stablecoin safety belongs to the entire financial arrangement, not merely the token’s name or displayed exchange rate.
The Ravel Peg-to-Cash Test: Five Questions Behind Every $1 Stablecoin
A more useful stablecoin assessment begins with the ability to convert the instrument into its reference currency under realistic conditions.
That requires examining five interconnected dimensions.
| Ravel assessment | Central question | Evidence to examine |
|---|---|---|
| Reserve Quality | What is the actual backing for the token? | Asset composition, valuations, custodians, liabilities |
| Redemption Access | Who can claim the underlying currency? | Legal terms, eligibility, fees, redemption limits |
| Liquidity Resilience | Can large withdrawals be met promptly? | Cash availability, asset maturities, stress scenarios |
| Peg Mechanism | What keeps market prices near parity? | Arbitrage, collateral rules, market makers, liquidations |
| Dependency Risk | What outside systems must keep working? | Banks, issuers, bridges, oracles, custodians, exchanges |
Ravel Peg-to-Cash Framework. These are analytical dimensions rather than a validated quantitative rating or a guarantee of safety.
Reserve Quality
The first test examines what stands behind the stablecoin.
For fiat-backed issuers, analysts should establish the reserve composition, valuation methods, concentration among institutions, and whether reported assets adequately cover liabilities.
For crypto-backed and synthetic arrangements, the assessment must also examine collateral volatility, leverage, hedging exposures, and potential liquidation requirements.
A reserve surplus is meaningful only when its composition and valuation basis are understood.
Redemption Access
The second test identifies the holder’s route to the underlying currency.
Does the holder have a direct contractual redemption right?
Must redemption occur through an eligible institution?
Are there minimum sizes, fees, restrictions, or banking requirements?
A stablecoin can have credible issuer-level backing, while secondary-market holders depend heavily on intermediaries for immediate liquidity.
Redemption is not merely an accounting promise. Redemption is an operational process that involves legal and financial conditions.
Liquidity Resilience
The third test asks whether the issuer or protocol can meet withdrawals during periods of unusually high demand.
This requires analyzing available cash or liquid collateral relative to potential redemption requests.
The relevant timeframe matters.
Assets available within one business day may not solve a redemption demand requiring immediate settlement.
A stress test should therefore distinguish assets that exist, assets that can be sold, and funds that can actually be delivered within a specified period.
Peg Mechanism
The fourth test investigates how the token’s market price returns toward its target.
For fiat-backed stablecoins, this generally includes issuance and redemption arbitrage.
For collateralized stablecoins, it may include liquidation systems, swap facilities, and other mechanisms.
For synthetic arrangements, the stability process may depend on hedging positions or market incentives.
A mechanism that works under ordinary trading conditions may face different constraints during a liquidity crisis.
The important question is whether the mechanism can continue functioning when the cost of arbitrage increases and confidence weakens.
Dependency Risk
The final test maps the external systems required for the stablecoin to remain usable.
A fiat-backed token may depend on banks, custodians, and payment networks.
A crypto-backed stablecoin may depend on price feeds, liquidators, collateral markets, and smart contracts.
A bridged token may additionally depend on external validators, messaging protocols, or custody arrangements.
Even when the peg remains intact, disruption in one of these dependencies can affect the holder’s ability to transfer or redeem the asset.
These risks do not necessarily appear in the market price until they become material to traders.
The Peg-to-Cash Test therefore examines not only whether a stablecoin has maintained $1 but also whether its underlying financial promises can be fulfilled when conditions deteriorate.
The Dollar Peg Is an Outcome, Not a Safety Certificate
A stablecoin trading at $1 provides useful information.
It suggests that, at the observed moment and in the relevant market, buyers and sellers are willing to exchange the token at approximately its target price.
Sustained price stability can reflect confidence in an issuer, credible redemption mechanisms, deep liquidity, and reliable infrastructure.
But it cannot independently establish all those conditions.
A quoted price does not reveal the quality of assets supporting the token.
It does not show whether reserve funds are concentrated at vulnerable counterparties.
It does not determine which holders have direct redemption rights.
And it cannot guarantee that intermediaries will remain available during a sudden wave of withdrawals.
The events surrounding USDC in March 2023 demonstrated how banking-system disruptions could affect confidence in a major fiat-backed stablecoin without proving permanent reserve insolvency.
The collapse of TerraUSD demonstrated a different vulnerability: a stabilization mechanism dependent on volatile market confidence can fail without a sufficient external redemption anchor.
These were different events, each involving different financial structures.
They should not be treated as interchangeable failures.
But both illustrate why the dollar peg is insufficient as a standalone safety assessment.
The proper analysis begins beneath the market price.
It follows reserve assets, contractual claims, redemption channels, liquidity arrangements, collateral mechanics, and the institutions required to complete settlement.
That is where the financial strength, or fragility, of a stablecoin becomes visible.
A stablecoin’s $1 price tells you what the market believes it is worth right now. Its safety depends on whether the dollars behind that price can actually reach the people entitled to them.
