Tokens intended to hold a stable value use several different mechanisms, and describing them with one term obscures very different risk.
Fiat-backed
Reserves held in conventional assets, with tokens redeemable against them.
Which depends on the reserves existing, being liquid, and being redeemable in practice.
The risk is custodial and legal rather than algorithmic — bank failure, seizure, or reserve composition being different from what is claimed.
Attestations and audits differ substantially in rigour, and the distinction between the two matters.
Reserve composition
Short-dated government securities behave very differently from commercial paper or from loans.
Which determines whether redemption can be met during stress.
Published breakdowns exist for the larger issuers and vary in detail and in frequency.
Crypto-collateralised
Backed by volatile assets held in excess of the issued amount.
Which requires overcollateralisation and liquidation mechanisms.
The failure mode is a rapid price fall outrunning liquidation, leaving positions undercollateralised.
Network congestion during exactly those events compounds the problem, which has been observed.
Algorithmic designs
Maintain the peg through supply adjustment or through a paired token rather than through reserves.
Which has failed repeatedly and catastrophically, with the largest collapse destroying tens of billions in value within days.
The structural weakness is that the mechanism depends on demand for a related token that falls precisely when the peg is under pressure.
Regulatory treatment
Frameworks have been introduced in several jurisdictions specifying reserve requirements, redemption rights and issuer authorisation.
Which materially changes the risk profile of compliant issuers.
Requirements typically cover backing composition, segregation of reserves and redemption at par.
Depeg dynamics
Small deviations are normal and arbitrage generally corrects them.
Sustained deviation indicates either a redemption problem or a loss of confidence in the backing.
Which is why the depth of redemption channels matters more than the market price on any given day.
Yield
Yield offered on a stable-value asset comes from somewhere, and identifying where is the essential question.
Which may be lending, may be reserve returns, or may be subsidised from token issuance.
The last of these is not sustainable and has preceded several failures.
This is explanation of mechanism and is not a recommendation regarding any asset.
Redemption in practice
Whether ordinary holders can redeem, or only large approved counterparties, determines who bears risk during stress.
Which is frequently restricted to authorised participants with minimum sizes.
Retail holders in that structure depend on secondary market liquidity rather than on direct redemption.
Blacklisting
Several issuers can freeze balances at specific addresses.
Which is used in response to legal orders and to theft.
It is a centralised control and is a feature rather than a flaw depending on what the asset is for.
Yield-bearing variants
Tokens distributing reserve returns to holders have emerged and face different regulatory treatment.
Which may bring them within securities or fund regulation in some jurisdictions.
The distinction between a payment instrument and an investment product is the line regulators are drawing.
Concentration risk
A small number of issuers account for the large majority of supply.
Which makes their operational and legal circumstances systemically relevant to the wider market.
Diversifying across issuers is a distinct consideration from diversifying across asset types.
Historical depegs
Several fiat-backed tokens have deviated during banking stress affecting their reserve institutions.
Which demonstrated that the risk is genuinely in the conventional financial infrastructure rather than in the token mechanism.
Recovery followed once reserve access was clarified, which is the expected behaviour for a genuinely backed instrument.
Use in payments
A growing share of usage is transactional rather than for trading, particularly for cross-border transfers.
Which is what drew payment regulators into the subject.
Settlement speed and cost relative to conventional remittance channels is the underlying driver.
What to check
Who issues it, what backs it, who audits that, whether you can redeem, and under what law.
These answers differ substantially between assets that trade at the same nominal value.
Interest rate environment
Reserve returns for fiat-backed issuers depend on prevailing rates.
Which has made them substantially profitable in higher-rate periods and thinner in lower ones.
The business model's sensitivity to rates is a relevant consideration for their long-term stability.
The general point
Stability is a claim about a mechanism rather than a property of the token.
Which is why the mechanism is the thing worth understanding.
Systemic considerations
Large-scale redemption would require reserve assets to be sold, which links these instruments to conventional markets.
Which is why central banks and financial stability bodies have taken an interest.
The concern is about the effect on the underlying markets rather than about the tokens themselves.
Closing
The name describes an intention rather than a guarantee.
Checking reserves
Larger issuers publish reserve breakdowns and attestation reports on a schedule.
Which vary in detail, frequency and the standard applied.
Reading one takes minutes and tells you what the asset actually is.