Money, Crypto & CBDCsintermediate

Stablecoins

A stablecoin tries to hold a steady value by pegging to a fiat currency, usually the US dollar, and holding reserves to back it. The peg is only as good as those reserves, so stablecoins carry redemption and run risk much like a bank.

Try it yourself

Stablecoin run simulator

Each token claims $1 of reserves. To pay redeemers the issuer must sell reserves in a hurry, and a fire sale recovers only part of their value. Move the two sliders and watch whether the peg survives the rush for the exit.

PEG BREAKS. Recoverable value is $0.989 per token, below the $1 claim. First movers still cash out at $1; the loss lands on whoever waits.

Reserve sold (par)21.1% of pool

Cash raised$0.200

Loss to the pool$0.011

Recoverable / token$0.989

First mover (redeems)$1.000

Late mover (waits)$0.987

Recoverable / token = 1 − min(f/(1−h), 1)·h, the haircut on the reserves that must be sold (capped at the whole pool) spread across the whole supply. That gap is the incentive to redeem first.

Fire-sale haircut (h)5%

Share redeeming at once (f)20%

Try this:

Discuss. A stablecoin can be fully backed at par and still de-peg under stress. Why does the chance to redeem first turn a liquidity problem into a self-fuelling run, and how do cash-like reserves (versus longer or riskier assets) change the haircut you would expect?

Why it matters

A fiat-backed stablecoin is a private promise to redeem one token for one dollar. Like a bank, it is exposed to a run if holders start to doubt the reserves can cover everyone at once.

Worked examples

Scenario

A stablecoin claims one dollar of safe assets backs each token, then markets begin to doubt the backing. What can happen?

Solution

Holders rush to redeem before the reserves run out, and if the assets cannot be sold at full value fast enough the peg breaks. This is a stablecoin run, the same logic as a bank run.

Common mistakes

✗Stablecoins are always perfectly stable. The peg can break, and several have broken, when the reserves backing them are questioned.
✗A stablecoin is the same as a central bank digital currency. A stablecoin is a private liability, while a CBDC is central bank money.

Revision bullets

•Pegged to fiat and backed by reserves
•Only as safe as the reserves behind it
•Exposed to runs, like a bank

Quick check

The main risk that can break a fiat-backed stablecoin peg is

Connected topics

Cryptocurrency Is Bitcoin Money?CBDC

Sources

Mishkin (2018), Ch. 3
Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.
Background on money and the payment system.
FSB (2023)
Financial Stability Board. High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements: Final Report. FSB, July 2023.
The financial-stability risks of global stablecoins and the reserve and redemption issues behind them.

How to cite this page

Dr. Phil's Quant Lab. (2026). Stablecoins. Derivatives Atlas. https://phucnguyenvan.com/concept/mb-stablecoins

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