Almost everyone knows a stablecoin is worth $1, but few can answer: why does it stay $1? Many say “arbitrage,” which is only half right. The real foundation under the peg is something more basic — the redemption right. To see it, you first have to take apart a stablecoin's two core actions: mint and redeem.
When someone (usually an authorized market maker or institution) hands the issuer $1, the issuer mints them one new stablecoin. The entire supply expands this way — in step with the real dollars deposited. When you see USDC's circulating supply rise, it's because someone deposited an equal amount of dollars to mint coins.
In reverse, when someone returns one stablecoin to the issuer to redeem, the issuer burns the coin and gives back $1, so supply contracts. Mint and redeem, in and out, are the breathing of supply — and the promise that one coin always converts back to $1 is the foundation of the whole peg.
Arbitrage can pull the price back to $1 only because there's a guaranteed $1 exit. Suppose USDC trades at $0.99. What does an arbitrageur do? Buy at $0.99 and redeem with the issuer for $1, pocketing $0.01 per coin; that buying pushes the price back to $1. Note: the arbitrageur dares to do this because they trust that $1 redemption exit really exists. Remove the exit and arbitrage loses its floor. That's the heart of UST's collapse — its “redemption” wasn't into $1 but into LUNA, which crashed alongside it; with no real $1 floor, once the peg broke it spiraled all the way down.
Here's a reality most retail users miss: you usually can't redeem directly with the issuer. The 1:1 redemption window has a high bar, often open only to authorized market makers and institutions. When you sell a stablecoin on an exchange or DEX, that's a secondary-market trade, not a true redemption. Normally it doesn't matter, because market makers arbitrage the secondary price back to $1. But in extreme moments, if even market makers won't step in, or the redemption channel is frozen, the secondary price drifts off $1. USDC's brief depeg in the 2023 Silicon Valley Bank event was, at its core, a live case of “the redemption channel temporarily blocked.”
Next time you judge whether a stablecoin is safe, don't just look at whether it's $1 right now — ask three redemption questions: first, what do you redeem into? Real dollars, or another token that can fall (the latter is extremely dangerous). Second, who can redeem? If only whales can, retail leans harder on secondary-market liquidity. Third, can redemption jam in a crisis? Where reserves sit, and whether liquidity is enough. Understand these three and you'll spot, earlier than most, which stablecoins' $1 truly has a floor and which are only standing on it for now.