Most stablecoin pegs hold without being tested.

On a typical trading day, there is no surge in redemptions, no issuer intervention, and no visible stress in the system. Prices hover close to their target and move on. That apparent stability leads many analyses to focus on reserves, audits, or emergency backstops.

In this article, I am looking at something narrower and more routine. I am focusing on how stablecoin pegs are maintained under normal market conditions, when liquidity is available and redemption remains a credible option rather than an active one.

Under these conditions, peg stability is not enforced directly. It is produced indirectly, through market behavior that usually goes unnoticed because it works.

What “Normal Conditions” Actually Imply

Normal conditions are not the absence of risk. They are the presence of functioning assumptions.

In practical terms, this means:

These assumptions tend to be implicit. When they hold, price stability looks automatic. When one of them weakens, the peg starts relying on fewer mechanisms.

The rest of this article assumes those baseline conditions are intact.

Most Peg Maintenance Happens Before Redemption

A common misconception is that stablecoin pegs are held together primarily through redemption.

In reality, under normal conditions, most peg maintenance actually happens before redemption is ever required.

Small price deviations are usually absorbed in secondary markets. Market makers adjust quotes, arbitrageurs rebalance inventory across venues, and short-term traders step in to capture marginal spreads. These actions compress price movements toward the target without touching issuer reserves.

Redemption exists as a backstop. Its primary role is not to be used continuously but to make secondary market behavior rational. The possibility of redeeming at par anchors expectations and keeps arbitrage incentives intact.

As a result, a stablecoin can maintain a tight trading range for long periods without meaningful redemption activity.

Arbitrage Is the Active Mechanism, Not The Reserves

Under normal conditions, arbitrage is the mechanism that actively maintains the peg.

If a stablecoin trades below its target price, arbitrageurs can buy it on the open market and redeem it with the issuer. If it trades above the target, authorized participants can mint new supply and sell it into the market. The profitability of these actions pulls prices back toward parity.

What matters here is not the existence of reserves, but the ability to access them efficiently.

Arbitrage only works when:

As long as these conditions hold, deviations remain small and short-lived. When they do not, arbitrage slows or disappears, even if reserves remain unchanged.

Liquidity Does More Work Than Most People Realize

Liquidity depth plays a larger role in peg stability than reserve size under normal conditions.

In liquid markets, many imbalances are resolved without triggering arbitrage that touches issuer infrastructure. Inventory shifts between centralized exchanges, decentralized pools, and over-the-counter desks absorb routine flows. Price stability emerges from continuous trading rather than episodic redemption.

This is why two stablecoins with similar reserve profiles can behave very differently in practice. The one with deeper secondary market liquidity tends to show tighter price behavior, even if actual redemption volume is low.

Liquidity acts as the first line of defense. Redemption becomes relevant only when liquidity is insufficient to absorb sustained pressure.

Redemption Anchors Belief, Not Day-to-Day Pricing

Redemption is often described as the mechanism that enforces the peg. Under normal conditions, its real function is to anchor belief.

Redemptions are not instant. They involve issuer processing, compliance checks, banking hours, and settlement delays. Professional participants understand this. They do not expect immediate conversion.

What they expect is reliability.

As long as redemption is perceived as predictable and accessible, traders price the stablecoin accordingly. The peg holds because market participants believe that deviation will be corrected if it persists, not because redemption is constantly happening.

Why Stablecoin Pegs Feel Simple Until They Don’t

Under normal conditions, stablecoin pegs feel almost boring. Prices stay close to their target, trading continues, and nothing forces anyone to think too hard about why the system works. That quiet stability makes it easy to assume the peg is automatic, held together by reserves or some background mechanism that never really needs attention.

What actually holds the peg happens earlier and mostly out of sight. Liquidity absorbs pressure before it becomes noticeable. Arbitrage corrects small deviations before they turn into events. Redemption sits in the background, not as a constant action, but as an expectation that shapes how participants behave. Issuer controls quietly define who can act and how quickly, without being exercised day to day.

As long as these pieces line up, stability feels natural. That is where the mistake happens. When conditions change, the system does not suddenly fail. It simply loses some of the assumptions it was relying on. Normal conditions are where stablecoin mechanics are easiest to ignore and where they matter most.