Learn · stablecoins
Stablecoins: the dollar claim and the reserve
A token can target one dollar without being a guaranteed dollar. Its market price depends partly on whether people can turn that token back into money, and what stands behind the claim.
Beginner lesson · fictional reserve-backed issuer · no wallet or real funds. A peg is a target price; redemption is exchanging tokens with the issuer under its terms.
01 · where tokens come from
Minting adds an asset and an obligation
In this model, a holder pays the issuer $1,000 and receives 1,000 newly minted tokens. The issuer gains $1,000 in reserve assets and owes $1,000 in redemption claims. Minting has not created $1,000 of free wealth: the holder exchanged cash for tokens.
1. Deposit
Cash leaves the holder and enters the issuer’s reserves.
2. Mint
New tokens enter circulation; outstanding claims increase.
3. Redeem and burn
Cash is paid out and the matching tokens are destroyed, reducing claims.
Buying an existing token from another trader is different: cash changes hands between traders. That trade does not automatically add money to the issuer’s reserves or mint a new token.
For a real reserve-backed example, Circle publishes USDC reserve composition and issuance/redemption information. The invented balance sheet below is not USDC data.
02 · follow a redemption
Backing and available cash answer different questions
Solvency asks whether assets cover obligations. Liquidity asks whether enough cash is available when payment is due. A reserve asset can retain value but take time to sell, mature or transfer.
Start with normal reserves and queue 600 tokens. Only $200 can be paid at once. Settle the other reserves and pay again. Then try liquidity stress: backing is unchanged, but the first payment falls to $50. Finally try reserve loss: even after settlement, $200 of claims have no backing.
Fictional simulation · manual steps
Run the issuer’s balance sheet
Choose a scenario, mint, request redemption, then pay from available cash. Changing scenario resets all balances.
Normal: $200 cash and $800 awaiting settlement. A large redemption still needs time.
Market quote / token
$1.00
Assumed secondary-market quote; no sale is executed.
Redemption claim / token
$1.00
Contractual face value; not a promise of immediate payment.
Cash available now
$0
Actual limit on this step’s cash payout.
- Holder cash
- $1,000
- Spendable tokens
- 0
- Queued tokens
- 0
- Backing shortfall
- $0
Holder starts with $1,000. Issuer has no assets or claims.
Transaction ledger (1 entries)
- Holder starts with $1,000. Issuer has no assets or claims.
Assumptions: one eligible holder, whole dollars, no fees or interest, no new funding after minting. Queued tokens are locked and burned only when paid. Settlement converts surviving assets at their displayed value. Real issuers use different queues, eligibility rules and insolvency procedures.
03 · why the price can move
A $1 claim can trade below $1
If a trader can buy for $0.97 and reliably redeem for $1, the difference can encourage buying and redemption. That can help pull a price towards its peg. Fees, delays, eligibility, uncertainty and unavailable cash can make that trade unattractive or inaccessible.
The lab’s quotes are assumptions, not prices calculated from its reserve ratio. A liquidity delay may cause a discount without a permanent asset loss. A reserve impairment is different: $800 cannot satisfy $1,000 of claims at face value without new funding or a change to what holders receive.
In the loss scenario, keep redeeming after settlement. Early claims receive $1 each, then later claims remain unpaid. A real resolution might suspend payments or distribute losses differently. The lab shows the shortage; it does not model insolvency law.
Direct redemption has conditions. See Circle’s USDC terms for an issuer’s eligibility and redemption rules. Holding a token in any wallet does not itself mean unrestricted access to an issuer account.
04 · another mechanism
Crypto collateral introduces a different balance sheet
Some stablecoins are created by borrowing against crypto assets locked in smart contracts. An overcollateralised design requires collateral worth more than the debt. If collateral falls far enough, liquidation sells it to recover the debt. Price feeds, liquidation execution and collateral liquidity matter.
That is different from the cash deposit and issuer redemption flow above. Excess collateral is a buffer, not a guarantee: a sudden price fall or failed liquidation can still leave a shortfall. Other designs use different mechanisms, so the name “stablecoin” does not tell you which risks apply.
Source: ethereum.org’s stablecoin mechanism overview. Explore collateral and liquidation in the Aave lending lesson; borrowing an existing stablecoin there is not the same as minting a new one.