How Do Stablecoins Prevent Price Fluctuations? Unpacking the Secrets of the Pegging Mechanism

The "stability" of stablecoins doesn't come out of nowhere; it relies on cleverly designed mechanisms. Take lisUSD as an example. Its secret to being pegged to the US dollar lies in two main pillars: over-collateralization and arbitrage incentives.

First, let's talk about the collateral foundation. Every lisUSD in circulation is backed by at least 1.5 to 2 times the value of crypto assets (the specific multiple depends on the type of collateral—BNB, slisBNB, and others have different levels). These assets are locked in the protocol's treasury as collateral. In other words, even if the collateral's price plunges, as long as it hasn't hit the liquidation threshold, the system has sufficient buffers to defend against price drops.

But collateral alone isn't enough; the key is how the market adjusts the price. This is where arbitrageurs come into play.

Imagine a scenario: lisUSD drops to $0.98 on a DEX. Arbitrageurs, with keen senses, immediately buy at the low price, then deposit lisUSD into the ListaDAO protocol, exchanging $1 worth of lisUSD for collateral worth more than $1 (after deducting fees, there's still profit). This arbitrage activity stimulates market demand, gradually pushing the price back to $1.

Conversely, if lisUSD rises to $1.02, users can deposit collateral, mint lisUSD at a $1 cost, and sell high for profit. This increases supply and pushes the price down.

However, this mechanism isn't foolproof. In extreme market conditions, vulnerabilities can emerge—such as during a bull run when everyone wants to borrow and collateralize but is reluctant to redeem, causing lisUSD to accumulate and break its peg. Or in a major bear market, everyone rushes to redeem, collateral gets liquidated, leading to a "downward spiral" of falling prices, liquidations, and further declines.

Therefore, by observing lisUSD's price movements and trading depth on DEXes, one can gauge whether the protocol is truly alive. If the price stays close to $1 and liquidity is ample, that's a healthy sign.