What Keeps Stablecoins Stable?

We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange-rate economics. Stable coins aim to solve the volatility problem by pegging to a national currency, such as the US dollar, and are used as vehicle currencies for exchanging national currencies into non-stable cryptocurrencies. Using a rich dataset of signed trades and order books on multiple crypto exchanges, we examine how peg-sustaining arbitrage stabilizes the dollar price of the largest stable coin, Tether, as an alternative to the main mechanism with national-currency fixed rates, namely intervention by a central bank. We find that stable-coin issuance, the closest analogue to central-bank intervention, plays only a limited role in stabilization, pointing instead to the demand side as the fundamental stabilizing force. Order-flow data show that a 25 basis-point move requires arrival of a roughly two standard deviation change in net trading, equivalent to $3 million. Finally, we investigate which fundamentals drive the two-sided distribution of peg-price deviations; premiums are due to stable coins' role within the digital-asset economy as a safe-haven asset, whereas discounts derive from both liquidity effects and collateral concerns.