A stablecoin is a promise that one token equals one dollar, on demand. Whether that promise holds under stress comes down to two documents almost nobody reads carefully: the reserve attestation and the redemption terms. Module 3 covered how a token settles on the wire. This module covers what sits behind it, and what happens when the backing and the redemption path stop lining up.
The peg is not a property of the token. It is a property of the arbitrage loop that connects the token to its reserves. When that loop works, price snaps back to a dollar. When it jams, the token trades at whatever the secondary market will pay.
Reading reserve composition
Reserves are not one thing. The question is never "is it backed" but "backed by what, held where, and convertible how fast."
Sort any reserve into three buckets. First, immediately liquid: physical cash and overnight assets you can turn into settlement dollars same-day. Second, near-cash: short-dated Treasury bills and Treasury repo, liquid in normal markets but subject to settlement timing and, in a true rush, price. Third, everything else: secured loans, corporate credit, other tokens, commodities. Bucket three is where reserves quietly stop being cash-equivalent.
Two real reserve stacks
USDC and USDT are both majority-Treasury, but the tails differ. As of an August 2025 snapshot, Circle's USDC reserve sat roughly in direct Treasuries, Treasury repurchase agreements, and bank deposits, with the Circle Reserve Fund custodied at BNY Mellon and managed by BlackRock, publishing CUSIP-level holdings daily.
Tether's USDT is also majority-Treasury. Its Q1 2025 attestation, reviewed by BDO Italia, showed roughly 78 percent of reserves in US Treasuries, about $126.8 billion of around $162.6 billion in total assets. But the tail carried billions in secured loans, plus bitcoin and gold positions. Those are bucket three. They are real assets, but they do not redeem at par into dollars on a bad afternoon, and a token-backed reserve line correlates with the very crypto stress that triggers redemptions.
The practitioner's read: weighted-average maturity tells you interest-rate sensitivity, the cash-and-overnight slice tells you same-day capacity, and the bucket-three line tells you what gets sold at a loss if redemptions spike. A 78 percent Treasury headline can hide a tail that behaves nothing like cash.
Attestation is not audit
Most of these reports are attestations: an accounting firm confirms assets existed at a point in time. That is weaker than a full audit, and a month-end snapshot says nothing about the other 29 days. The GENIUS Act, signed in 2025, tightens this for permitted payment stablecoin issuers: 1:1 reserves limited to cash, insured deposits, short-dated Treasuries with 93 days or less remaining maturity, government money funds, and Treasury repo, with monthly public disclosure and a public-accountant examination plus CEO and CFO attestation. Module 6 covers that wrapper. The structural point holds: read the composition, not the headline number.
Redemption is where the promise is tested
Reserves are only half the promise. Redemption is the path from token back to dollars, and the terms are where issuers retain optionality you may not have priced.
Check four things in any redemption agreement. Who can redeem: most issuers offer face-value redemption only to whitelisted institutional accounts, not to the wallet holding the token. Minimum size: redemption floors of hundreds of thousands of dollars are common, which means retail never touches the primary market and exits only through secondary venues. Settlement window: T+0 versus T+1 or longer determines whether you can meet your own obligations. And the suspension clause: nearly every issuer reserves the right to pause redemptions, exactly when you most want them open.
If you cannot redeem at par yourself, you do not hold a dollar. You hold a claim that trades near a dollar as long as someone with primary-market access keeps the arbitrage loop running.
How stablecoins actually break
Three distinct failure modes. They are not variations on one theme; they break for different reasons and call for different defenses.
Failure one: the reserve is impaired or stuck
USDC in March 2023 is the clean case. Circle disclosed $3.3 billion of USDC's cash reserves was stuck at Silicon Valley Bank when it failed, roughly 8 percent of the backing. The reserve was not gone, it was inaccessible, and redemption uncertainty over a weekend did the rest. USDC fell to about $0.87 at its trough on March 11 before recovering once regulators backstopped SVB depositors.
The lesson is concentration. The peg broke not because reserves were too risky but because too much same-day cash sat in one bank that ran. Diversification of cash custody is a peg variable, not a back-office detail.
Failure two: redemption jams while reserves are fine
The same SVB episode showed the second mode layered on the first. Circle suspended primary-market redemptions over the weekend. With the arbitrage loop shut, secondary-market sellers had no one taking tokens at par, and the discount widened beyond what the reserve impairment alone justified. Even a fully-backed token depegs in the secondary market if the redemption door is closed when holders reach for it.
Failure three: there was never a reserve
TerraUSD in May 2022 is a different animal entirely, and the reason this module sits next to the reserve discussion. UST held its peg through an algorithm, not off-chain collateral: burn one UST, mint a dollar of LUNA, and vice versa. When UST slipped below a dollar in early May, holders burned UST to mint LUNA, the protocol hyperinflated LUNA supply into the trillions, and price collapsed toward zero. An ecosystem that had topped $40 billion unwound in days.
There is no reserve to read here because the design substituted a reflexive token-mint for collateral. The defense is a binary screen, not a ratio: if the peg depends on minting a second volatile token rather than holding redeemable assets, the failure mode is a death spiral, full stop.
The takeaway
Treat the peg as a system, not a label. Read the reserve composition down to the bucket-three tail, not the Treasury headline. Read the redemption terms for who can actually redeem, at what size, and under what suspension rights. Then ask which of the three failure modes the design is exposed to: impaired or concentrated reserves, a redemption path that jams under stress, or no real reserve at all. A token can be 100 percent backed and still trade at 87 cents on a Saturday. If your treasury, payout, or settlement flow runs through a stablecoin, that Saturday is the scenario you underwrite.