The Block explains the mechanisms stablecoins use to maintain their peg to the U.S. dollar and what causes failures.
DeFi & Yields ·
The Block Research has published an explainer detailing how stablecoins maintain their $1 peg across different structural models. The piece covers four primary approaches: fiat-backed stablecoins, crypto-collateralized variants, algorithmic models, and synthetic designs, examining the specific mechanisms each employs to preserve price stability.
The explainer outlines how reserves, collateral, and arbitrage function as foundational tools across these models. Fiat-backed, crypto-collateralized, algorithmic, and synthetic stablecoins each rely on distinct combinations of these mechanisms—reserves held to back issued tokens, over-collateralization to absorb volatility, and arbitrage incentives that allow traders to profit from deviations and restore equilibrium.
The analysis does not detail the failure modes that can affect individual models or the relative stability of each approach in practice. The piece serves as an educational comparison rather than a risk assessment or recommendation.