How Does the Ability to “Mint and Burn” Tokens Facilitate Stablecoin Arbitrage?

The ability to mint and burn tokens is the core mechanism that arbitrageurs use to enforce the peg. If the stablecoin trades above $1, an arbitrageur can mint a new stablecoin for $1 (e.g. by depositing $1 of collateral) and immediately sell it on the open market for $1.01, pocketing the profit.

Conversely, if it trades below $1, they buy it at $0.99 and redeem/burn it for $1 of collateral, again profiting. This minting (increasing supply) and burning (decreasing supply) mechanism constantly adjusts the supply to match demand at the peg.