What you will learn
- Explain what supports a stablecoin peg and how it can fail.
- Estimate execution cost from order-book depth.
What a peg promises
A stablecoin aims to hold a fixed value, usually one dollar per token. Fiat-backed designs hold reserves such as cash and short-term securities, crypto-backed designs hold excess volatile collateral, and algorithmic designs rely mainly on incentives rather than assets.
A peg is only as strong as its reserves and its redemption rights. Check who may redeem directly, at what size and fee, how fast, and what the reserves contain, since a token can trade below target if redemption is limited or doubted.
How a peg breaks
Pegs come under pressure when reserve assets lose value, when a banking partner fails, when collateral falls faster than liquidations can cope, or when confidence disappears and holders rush to redeem.
Runs reward the fastest. Early redeemers may receive the full amount while late ones share what remains, which pushes everyone to move at once and can turn a small shortfall into a large one.
Venues, liquidity and depth
Digital assets trade around the clock on many venues, and liquidity differs by venue and pair. Stablecoins are the quote currency for many pairs, so trouble with one token can spread across many markets.
A quoted spread describes only the first price level. A larger order consumes deeper levels and gets a worse average price, so depth matters as much as the quoted spread, and depth can vanish in stress.
Worked example: A reserve shortfall
A fictional stablecoin has 1,000,000 tokens outstanding, backed by 700,000 in cash and 300,000 in a risky asset. If the asset falls 20%, it is worth 240,000 and reserves total 940,000, a backing ratio of 0.94. If holders of 700,000 tokens redeem first at 1.00 from cash, the other 300,000 tokens share 240,000 and receive 0.80 each.
Check your understanding
An order book offers 50 units at 20.00, 50 at 20.10 and 50 at 20.40. What is the average price of a 150-unit market order, and how far is it above the best ask?
Show answer and explanation
Cost is 50 × 20.00 + 50 × 20.10 + 50 × 20.40 = 1,000 + 1,005 + 1,020 = 3,025. The average price is 3,025 ÷ 150 ≈ 20.17, about 0.17 or 0.83% above the best ask of 20.00. That gap is slippage caused by limited depth.