How stablecoins actually work — the plumbing nobody explains
Stablecoins moved $27.6 trillion in 2025 — more than Visa. Here is the reserve, redemption and on-chain plumbing that makes a $1 token actually worth $1.
On 28 February 2025 the Bank for International Settlements reported that stablecoin settlement volumes had reached $27.6 trillion in calendar year 2024, narrowly overtaking Visa and Mastercard combined. By Q1 2026 the float of dollar-pegged tokens stood at roughly $232 billion across Tether, Circle, MakerDAO and First Digital. Yet most users have never seen the actual machinery. They see a token that says “$1” and assume a vault somewhere holds a dollar. In practice the picture is messier, regulated unevenly across jurisdictions, and structurally different from one issuer to the next.
What is at stake is not abstract. When TerraUSD collapsed in May 2022 it wiped out roughly $45 billion in 72 hours. When Silicon Valley Bank failed in March 2023 USDC briefly traded at $0.87 because $3.3 billion of Circle’s reserves were stuck at the bank. Both events were predictable if you understood the plumbing. The aim of this piece is to walk through that plumbing — reserves, attestations, mint and redeem flows, smart-contract risk, and the regulatory wrapper now mandated under MiCA Title III and IV — in enough detail that the next depeg will not be a surprise.
The two-sided machine: issuance on one rail, redemption on the other
A fiat-backed stablecoin is a two-sided machine. On one side an approved counterparty wires US dollars to the issuer’s bank account; the issuer mints an equivalent number of tokens on-chain and ships them to a wallet. On the other side the same counterparty (or a different one, depending on the issuer’s policy) burns tokens and receives a wire back. The peg holds because arbitrageurs will buy the token below $1 on Binance or Coinbase, redeem it at par with the issuer, and pocket the spread. That arbitrage loop, not the marketing, is what keeps a stablecoin stable.
In practice the loop is gated. Circle’s USDC terms require a verified Circle Mint account, minimum redemption of $100, and same-day settlement only for wires received before 13:00 ET. Tether’s terms require a verified institutional account, a $100,000 minimum, a 0.1% redemption fee, and reserve the right to redeem in T-bills rather than cash if cash is constrained. That gating is the reason a retail user cannot personally close the arbitrage — they have to trust market-makers like Cumberland, Wintermute, GSR and B2C2 to do it for them. In practice that means the peg is only as reliable as the willingness of those firms to keep capital deployed in the round-trip.
Reserves: what is actually backing the token
“Backed by dollars” is shorthand that hides four very different reserve compositions. A regulated EMT issuer under MiCA must hold at least 30% of reserves in segregated bank deposits across multiple credit institutions; the rest can be in highly liquid sovereign debt up to a defined maturity ladder. A US-domiciled issuer like Circle holds the majority of reserves in the Circle Reserve Fund, a government money-market fund managed by BlackRock and custodied at BNY Mellon. Tether’s reserves are more heterogeneous: T-bills, reverse repo, secured loans, gold, and bitcoin. MakerDAO’s DAI is collateralised on-chain by ETH, wBTC, USDC and tokenised T-bills, with a system overcollateralisation ratio that floats between 150% and 300% depending on the asset.
| Issuer | Reserve composition (Q1 2026) | Custodian | Attestation cadence |
|---|---|---|---|
| Circle (USDC) | ~80% Circle Reserve Fund (US T-bills, repo), ~20% cash at GSIBs | BNY Mellon, BlackRock | Monthly, Deloitte |
| Tether (USDT) | ~84% T-bills + repo, ~5% gold, ~3% BTC, balance secured loans | Cantor Fitzgerald (primary) | Quarterly, BDO Italia |
| MakerDAO (DAI) | On-chain crypto + ~$1.5bn tokenised T-bills (Monetalis, BlockTower) | Smart contracts + RWA SPVs | Continuous on-chain |
| First Digital (FDUSD) | Cash + short-dated US T-bills, Hong Kong SAR custody | First Digital Trust (HK) | Monthly, Prescient Assurance |
The attestation cadence matters more than most users realise. A monthly attestation is a snapshot of one day in 30; for the other 29 you are trusting the issuer’s internal controls. An audit (which neither Tether nor Circle currently obtains in the full PCAOB sense) is a more rigorous review of the controls themselves. MiCA Article 36 closes part of this gap by requiring daily mark-to-market of reserves and weekly publication of holdings for any “significant” EMT — defined as more than €5 billion market cap or 2.5 million daily transactions. In practice that means USDC and USDT, when offered to EU residents, must publish reserve breakdowns on a weekly basis from end-2024 onward.
The smart-contract layer: where the token actually lives
Every stablecoin is, on-chain, an ERC-20 (or equivalent on Tron, Solana, Avalanche, etc.) contract that maintains a balance map. The contract has an owner key — held by the issuer — that can mint, burn and, critically, freeze. USDC’s contract on Ethereum has a blacklist function that the issuer has used 252 times since 2020, freezing roughly $97 million in tokens at the request of law enforcement and sanctions authorities. USDT has a similar function and has frozen north of $1.3 billion to date. DAI, by contrast, has no freeze function at the token-contract level; the closest equivalent is the MakerDAO governance vote to disable a collateral type.
That asymmetry is the single most important design choice in stablecoins and almost nobody flags it. A USDC or USDT balance is censorable; a DAI balance is not (at least not at the token layer). For DeFi protocols this is the difference between being able to operate under OFAC sanctions risk and not. For users in jurisdictions with weak rule of law it is the difference between an asset they control and one held at the issuer’s discretion. Our stablecoin peg monitor tracks both the market-price deviation and the count of freeze events per issuer per month.
Why pegs break: the four failure modes
Stablecoin depegs cluster into four mechanisms. First, reserve impairment: the SVB episode in March 2023, when $3.3 billion of Circle reserves were trapped at a failing bank, sent USDC to $0.87 in 36 hours. Second, redemption gating: when an issuer pauses or rate-limits redemption, the arbitrage loop breaks and the market price drifts. Third, algorithmic collateral collapse: Terra’s UST relied on minting/burning of LUNA to defend the peg; once confidence broke, LUNA’s price went to zero and the mechanism amplified rather than dampened the move. Fourth, collateral correlation: an overcollateralised crypto-backed stablecoin like DAI is exposed if its collateral assets crash faster than the liquidation engine can clear positions, as nearly happened on Black Thursday March 2020 when DAI traded as high as $1.11 because liquidations bid up the demand for the token itself.
| Event | Date | Token | Low | Mechanism |
|---|---|---|---|---|
| Terra collapse | 9-12 May 2022 | UST | $0.04 | Algorithmic collateral spiral |
| SVB failure | 10-13 March 2023 | USDC | $0.87 | Reserve impairment (bank failure) |
| Black Thursday | 12 March 2020 | DAI | $1.11 (upside depeg) | Liquidation cascade |
| USDR collapse | 11 October 2023 | USDR | $0.51 | Illiquid real-estate collateral |
The MiCA wrapper: how Europe regulates the plumbing
Since 30 June 2024, any stablecoin offered to EU residents must be issued by an authorised Electronic Money Institution or Credit Institution under MiCA. The regulation splits stablecoins into two categories: e-money tokens (EMTs), pegged to a single fiat currency, and asset-referenced tokens (ARTs), pegged to a basket. The reserve rules are stricter than US practice: at least 30% of EMT reserves must sit in segregated demand deposits across multiple banks; ARTs face a 60% deposit floor. Daily and weekly disclosure thresholds are binding once a token crosses €5 billion or 2.5 million daily transactions.
In practice that has had two visible effects. First, BaFin and the AMF authorised Circle’s EU entity (Circle Mint Europe SAS) in July 2024, making USDC the first major dollar stablecoin compliant with MiCA. Second, Tether declined to apply for EMT authorisation and as a result was delisted from Binance, Coinbase, Kraken and Crypto.com for EU users in late 2024. Tether’s market share among EU venues collapsed from roughly 71% to under 15% in eight months. The plumbing did not change; the regulatory wrapper did, and the wrapper now determines where each token can be used. Our regulatory calendar tracks MiCA Phase 2 implementation deadlines through 2026.
Yield-bearing stablecoins and the regulatory line
A growing share of the market — roughly $11 billion across Ethena‘s sUSDe, Mountain Protocol‘s USDM, and Ondo’s USDY — pays the underlying T-bill or basis-trade yield through to holders. The regulatory line here is sharp. Under MiCA Article 45 an EMT must not pay interest to holders; if it does it becomes a Collective Investment Undertaking and triggers the AIFMD or UCITS regime. In the US the SEC’s April 2025 staff statement drew a similar line: a stablecoin that distributes yield to holders is presumptively a security and must be registered. In practice that means Ethena’s USDe is offered to US persons only through a wrapped, non-interest-bearing form; the yield-bearing sUSDe is restricted to qualified purchasers.
- Non-yield EMTs (USDC, USDT, FDUSD, EURC): allowed for retail in the EU and US, no security registration.
- Yield-bearing dollar tokens (sUSDe, USDM, USDY): regulated as funds or securities, retail-restricted in most jurisdictions.
- Algorithmic stablecoins without full reserves: prohibited under MiCA Title III and IV from 30 June 2024.
- Crypto-collateralised stablecoins (DAI, crvUSD, GHO): currently in regulatory limbo; not yet covered by a clean MiCA category, treated case by case.
What to actually check before holding a stablecoin
Three checks separate a survivable holding from a vulnerable one. Check the reserve composition and custody arrangement — is it cash and T-bills at a GSIB, or unsecured exposure to a single mid-size bank? Check the redemption terms — can the arbitrage loop close in 24 hours under stress, or is there a queue mechanism? Check the smart-contract permissions — can the issuer freeze your address, and under what process? Each of these is published in some form by every major issuer; the difference between users who lost money in 2022-2023 and those who did not was largely whether they had read the documents.
For anyone deploying meaningful capital, the right reference points are the issuer’s monthly attestation, the on-chain reserve dashboard (Circle, Tether and Maker all publish one), and the redemption queue depth visible on-chain via mint/burn events. Our market dashboard aggregates the supply, peg deviation and 30-day redemption flow for the top eight stablecoins, and the yield calculator compares the after-fee net return on idle stablecoin balances across the major lending venues. None of that is a guarantee against a depeg; it is the minimum due diligence the plumbing demands.