Pegs and redemption: what par value really means

A stablecoin is a token designed to keep a steady value against a currency, and the target is called its peg. Most people read the peg as a fact: one coin, one unit of currency, always. It is better read as a promise made by an issuer. Par means exactly that one-to-one value, and redemption is the process that is supposed to enforce it. The holder returns coins to the issuer, who removes them from circulation and hands back the currency. The promise sounds simple, yet it depends on who is allowed to redeem, what stands behind the coins and how well the issuer operates when many people ask at once.

Two markets exist side by side. In the primary market, an approved customer deals directly with the issuer, creating new coins by depositing currency and destroying coins by redeeming them. In the secondary market, everyone else trades coins with each other on exchanges and in wallets. A central bank research note points out that most individual holders cannot redeem with the issuer at all. They rely on the secondary market, where the price comes from supply and demand. In calm periods, large customers can profit from small gaps by creating or redeeming coins, which pulls the market price back toward par. That pull is a habit of the market, not a rule written into the token.

Picture a made-up holder named Ravi who keeps some stablecoins in his wallet for a future bill. One morning news spreads that part of the issuer's reserves may be stuck. Large customers rush to redeem, and the issuer pauses or slows redemptions while it sorts out its position. Ravi cannot use the primary route anyway, so he looks at an exchange, where the coin now trades below par because sellers outnumber buyers. A week later the reserves are confirmed and the price drifts back. Ravi never lost his coins, but for several days the coin in his wallet was not worth one unit of currency to anyone who wanted to sell it.

Several weak points follow from this design. Reserves may be held in forms that lose value or become hard to reach in a crisis, and the holder depends on the issuer's reports to know what they are. Redemption rights vary: some issuers set minimum sizes, limit who can redeem or pause the process. The Bank for International Settlements argues that stablecoins typically fail a test it calls singleness, because tradable prices can differ from par, especially under stress. A peg held by an algorithm instead of reserves can fail altogether. Seeing a coin at its peg on a quiet day says little about how it behaves on a bad one. The same is true of a bank branch that looks calm until a crowd forms at the door: the strain shows only when many people act at the same moment.

Some questions help a reader look past the label. Who is allowed to redeem, and does an ordinary holder have that right or only large customers? What are the reserves made of, where are they kept, and how often are they reported? Is the report written by an outside party or by the issuer itself? Do the terms say how fast redemption happens and when it can be paused? Is the peg backed by reserves, by other crypto assets or by an algorithm? Which currency and which legal entity does the promise belong to? Each answer is usually found in public terms and reserve reports.

The Financial Stability Board published recommendations in 2023 for large single-currency stablecoin arrangements. They call for redemption at par, clear disclosure and stabilization, which shows how much of the safeguard lies in design and oversight rather than in the token itself. This page does not rate any coin or tell anyone where to hold money, and the rules differ from place to place. It is general education, not financial or legal advice. For the primary material, read the central bank note, the Bank for International Settlements annual report and the Financial Stability Board paper listed below. Reserve reports and terms change over time, so any figure or claim about a particular coin needs a dated source from the issuer or an authority.

• Par is a promise by an issuer, enforced through redemption, not a built-in property of the token
• Most individual holders cannot redeem directly and depend on a market price that can move off the peg
• Reserve makeup, redemption terms and reporting say more about a stablecoin than its label