Stablecoins are only as good as their plumbing. The cycle from mint to redemption — fiat in, tokens out, and back again — is what keeps a token pegged to the dollar, and it's getting more scrutiny from regulators. The President's Working Group has laid out the creation and redemption mechanics, and the Federal Reserve has described how the primary and secondary markets split the work.
The mint-and-burn cycle
In a typical fiat-backed model, an institutional customer wires fiat to the issuer. The issuer mints stablecoins on a supported blockchain and transfers them to the customer's address. Redemption works in reverse: the holder returns tokens, they're burned, and fiat is sent back off-chain. These on-chain mints and burns are visible events, but the fiat legs happen off-chain through banking channels managed by the issuer and its partners.
That split matters. The primary market — where the issuer deals directly with exchanges, market makers, payment processors, and custodians — sets the anchor for value. A known set of counterparties can create or retire tokens against fiat, which is what keeps the peg honest.
Primary vs. secondary: who gets the tokens
Most retail users never touch the primary market. They buy and sell stablecoins on exchanges, brokers, or wallet swaps — the secondary market. The Federal Reserve explains that many issuers transact primarily with institutions, while retail access concentrates in secondary venues. That shapes access and liquidity for end users, and it's why a stablecoin's price on a retail exchange can drift from $1 even when the primary market is functioning.
The secondary market is where most people experience the price and liquidity of a stablecoin. It's also where stress shows up first.
Reserves: the promise behind the peg
Reserves are central to the promise of redeemability. The President's Working Group report notes different reserve practices and the need for a prudential framework. Issuers like Circle publish issuance and redemption details plus periodic reserve attestations to back up their redeemability claims. Tether releases circulation and reserve metrics. But claims about backing vary by provider, and they're only as good as the disclosures behind them.
Weak or opaque backing is a known risk. The Bank for International Settlements has documented that designs relying on algorithms or thin reserves can face run dynamics and rapid depegging under stress. The TerraUSD collapse is the case study everyone points to.
Why the plumbing matters
Companies are integrating mint and burn flows as programmable on- and off-ramps: fiat in, mint, move value on-chain; token in, burn, fiat out. That's the promise of stablecoins as a bridge between traditional finance and crypto. But the mechanics determine whether that bridge holds.
The primary market anchors the value, the secondary market distributes it, and reserves back the whole thing. When any of those pieces break, the peg breaks with them. Regulators are paying attention to exactly these mechanics — the PWG's framework and the Fed's analysis are both aimed at making the plumbing more transparent and more resilient.
The next concrete step is likely a prudential framework for issuers, something the PWG has called for. Until that lands, the burden stays on issuers to prove their reserves are real and their redemption process works under pressure.
