How Is the “Peg” of a Stablecoin Maintained, and What Causes It to Break?

The peg is maintained through arbitrage opportunities. If the stablecoin price drops below $1, traders buy it cheaply and redeem it for $1 worth of collateral (or burn it) until the price returns to $1.

If it goes above $1, new coins are minted and sold for profit, increasing supply. A peg breaks when market confidence is lost, often due to insufficient collateral, regulatory action, or a failure in the algorithmic mechanism, leading to a death spiral.