The liquidity infrastructure that actually keeps stablecoins stable

In March 2023, USDC (backed by Treasury bills and cash, with monthly attestations from a major accounting firm) traded at $0.87. The trigger wasn’t a reserve shortfall. It was uncertainty about whether the issuer could access funds held at a failing bank. Within 48 hours of federal intervention confirming deposit access, the peg restored.

That weekend revealed something the stablecoin industry still hasn’t fully absorbed: reserve quality didn’t save the peg. External intervention did. The conventional framework for evaluating stablecoin stability is incomplete at best.

Here’s what that framework misses.

Reserve quality is necessary but not sufficient

The industry obsesses over reserve composition. Analysts scrutinize the mix of T-bills versus commercial paper versus bank deposits. Issuers compete on attestation frequency and transparency. The implicit model: better reserves equal more stable coins.

The March 2023 episode broke this model. Pristine reserves (short-dated Treasuries, cash at regulated banks) didn’t prevent a 13% depeg. Meanwhile, issuers with less transparent reserve structures have maintained their pegs through multiple stress events.

The disconnect exists because a reserve portfolio of T-bills is worthless during a crisis if:

• Banking partners fail outside business hours
• Redemption windows are closed
• Liquidity providers pull bids faster than assets can be sold
• Market makers won’t hold inventory through uncertainty

What actually matters: Stability equals reserve quality multiplied by liquidity infrastructure multiplied by banking access. The industry fixates on the first term and underweights the others.

flowchart LR
    A[Reserve Quality] --> D[Stability]
    B[Liquidity Infrastructure] --> D
    C[Banking Access] --> D
    style A fill:#f9f9f9
    style B fill:#e1e1e1
    style C fill:#e1e1e1

The components receiving less attention (liquidity infrastructure and banking access) proved decisive when it mattered most.

Transparency hasn’t driven market share

Some issuers publish monthly attestations with detailed reserve breakdowns and named custodians. Others publish quarterly snapshots with less granularity. The transparent issuers should be winning market share.

They aren’t.

Over the past two years, market share has shifted toward less transparent structures, not away from them. Users (especially outside the US and Europe) optimize for:

1. Liquidity depth on the venues they use
2. Exchange availability across platforms
3. Corridor coverage for their payment flows
4. “Good enough” trust based on track record

Transparency matters up to a threshold. Once an issuer has survived multiple stress events without breaking the peg, users stop reading attestations. The track record becomes the trust signal.

This creates an uncomfortable dynamic: regulatory clarity and extensive disclosure may serve compliance requirements without driving user adoption. The markets are revealing preferences that don’t match industry assumptions.

Arbitrage fails when it matters most

Every stablecoin explainer includes the arbitrage diagram: price drops below $1, arbitrageurs buy cheap, redeem at par with the issuer, pocket the difference, price returns to peg. Clean, mechanical, automatic.

The March 2023 weekend showed this diagram describes steady-state behavior, not crisis behavior:

• Redemption windows were closed (weekend, banking holiday)
• Market makers pulled liquidity rather than catch a falling knife
• DEX liquidity evaporated as LPs withdrew to avoid impermanent loss
• Cross-venue arbitrage couldn’t execute fast enough across fragmented markets

The peg restored not because arbitrage mechanisms functioned but because federal intervention removed uncertainty about reserve access. The announcement, not the arb bots, turned the market.

flowchart TD
    A[Stablecoin depegs] --> B{Steady state or crisis?}
    B -->|Steady state| C[Arbitrage functions normally]
    B -->|Crisis| D[Redemptions may be closed]
    D --> E[Market makers pull liquidity]
    E --> F[Arb mechanisms break down]
    F --> G[Resolution requires external action]
    C --> H[Peg restored via arbitrage]
    G --> I[Peg restored via intervention/announcement]

Arbitrage is a cleanup crew, not first responders. It smooths minor deviations during normal conditions. During actual crises (when peg stability matters most) it fails precisely when needed. What restores confidence is issuer credibility, clear communication and sometimes external backstops.

The real barriers to new entrants

New stablecoin issuers regularly enter the market with credible backing, regulatory licenses and distribution partnerships. Most fail to gain meaningful circulation. The standard explanation invokes network effects: users go where liquidity is, liquidity is where users are, incumbents win.

Network effects are real but they’re the result, not the root cause. The actual barriers:

Trust is binary, not continuous. An issuer has either survived a crisis or it hasn’t. New entrants can publish perfect attestations, secure top-tier banking partners and obtain every available license. None of it substitutes for the demonstrated ability to maintain a peg when markets panic. Until a stress event occurs and a new stablecoin holds, institutional users won’t treat it as equivalent to battle-tested alternatives.

Banking relationships became scarce in 2023. The failures of crypto-friendly banks eliminated much of the banking capacity serving stablecoin issuers. Remaining banks willing to provide services are selective and capacity-constrained. A new issuer can’t simply purchase this access. The relationships take years to build.

The yield math creates a bootstrapping problem. An issuer earning 5% on $30 billion in circulation generates $1.5 billion annually to cover operations. An issuer with $100 million in circulation earns $5 million. That’s not enough to fund the compliance, banking, custody and technical infrastructure required to compete. You need scale to afford the operations that enable scale.

Network effects are downstream of these dynamics. Fix the trust problem, banking access and unit economics. Then network effects could be overcome. But those preconditions are precisely what new entrants can’t easily replicate.

Yield-bearing stablecoins serve a different market

The logic seems obvious: rational users should prefer stablecoins that pass through reserve yield rather than ones where issuers retain it entirely. Why hold a zero-yield token when you could earn 4-5%?

But stablecoin use cases segment cleanly:

Most stablecoin volume is transactional. Traders parking funds between positions don’t optimize for yield on a four-hour holding period. Businesses settling invoices don’t care about APY on a same-day transfer. The use cases where yield matters represent a small fraction of overall volume.

Yield-bearing stablecoins serve a real but narrow market: savings products for users who want dollar exposure with passive returns. They’re not competing for the payment and trading volume that drives circulation.

Regulatory complications compound this: in the US, passing yield to holders likely makes a token a security, excluding it from exchange listings and payment use cases in regulated venues. The yield feature that attracts savings-oriented users may disqualify the token from the use cases that drive volume.

What attestations actually tell you

Stablecoin issuers publish attestations from accounting firms. Users treat these as audits. They are not.

What attestations typically cover:

• At a specific point in time
• Certain assets existed
• In accounts the firm was shown
• Meeting a defined threshold relative to tokens outstanding

What attestations typically don’t cover:

• Whether reserves are accessible during stress
• Stability of banking relationships
• Undisclosed liabilities or encumbrances
• Ability to liquidate assets at par under pressure
• Operational resilience of redemption infrastructure

Major accounting firms provide limited attestations, not full audits, for stablecoin reserves. The scope constraints exist for reasons. The firms are unwilling to provide broader assurance.

The more reliable trust signal: Survived stress events. An issuer that maintained its peg through a banking crisis, a market crash or a regulatory action has demonstrated something an attestation cannot certify. Track record under pressure reveals what point-in-time snapshots cannot.

The stability framework that matches reality

If the conventional framework overweights reserves, what’s the right weighting? Based on observed outcomes:

Liquidity infrastructure (highest weight)

Can the issuer meet redemptions when they spike? This depends on:

• Banking partner reliability and redundancy
• Settlement speed for converting reserves to dollars
• Market maker relationships and their willingness to provide liquidity during stress
• Redemption process efficiency and uptime

Crisis track record (high weight)

Has the issuer survived stress? Each survived crisis provides data that attestations cannot. Users and institutions observe behavior during volatility and update their trust assessments based on outcomes, not reports.

Reserve quality (moderate weight)

Are reserves held in assets that can be liquidated quickly without loss? T-bills beat commercial paper beat illiquid instruments. But this factor matters less than infrastructure and track record. Pristine reserves in inaccessible accounts provide no stability.

flowchart TD
    subgraph "Conventional View"
    A1[Reserve Quality: High]
    B1[Transparency: High]
    C1[Track Record: Low]
    end

    subgraph "What Outcomes Show"
    A2[Liquidity Infrastructure: High]
    B2[Crisis Track Record: High]
    C2[Reserve Quality: Moderate]
    end

Implications

For businesses integrating stablecoins:

Evaluate issuers on crisis history, not attestation frequency. An issuer that held its peg through March 2023 demonstrated more than monthly reports can prove. Ask about banking redundancy and redemption SLAs, not just reserve composition.

For payment providers:

Multi-stablecoin support isn’t just user preference. It’s risk management. Single-issuer dependency creates exposure to that issuer’s banking and operational risks. The costs of supporting multiple stablecoins may be lower than the tail risk of concentration.

For those building new stablecoins:

The barriers are higher than they appear. Regulatory licenses and quality reserves are necessary but far from sufficient. The binding constraints are banking access (scarce post-2023), trust accumulation (requires surviving crises you can’t manufacture) and unit economics (requires scale to fund operations that enable scale). Niche strategies (specific corridors, regional focus, specialized use cases) may be more viable than direct competition with established issuers.

For users:

Liquidity and track record matter more than published reserve details. The stablecoin available on your preferred venues, with deep order books, that has survived multiple stress events, is likely more reliable than a technically superior alternative with thin liquidity and no crisis history.

The mechanics behind the stability

Stablecoins are remarkable infrastructure. They enable near-instant, low-cost dollar transfers globally, 24/7, without correspondent banking delays. The major issuers have survived stresses that would have broken many traditional financial products.

But the mental model most participants use to evaluate them needs updating. Reserve quality gets too much attention. Liquidity infrastructure and crisis track records get too little. Transparency is assumed to drive adoption when revealed preferences show otherwise. Arbitrage is credited with maintaining pegs when the evidence shows it fails during actual crises.

The infrastructure keeping stablecoins stable isn’t the reserves sitting in custody accounts. It’s the banking relationships, the market maker commitments, the redemption operations and the demonstrated ability to hold the peg when everything goes wrong at once.

Understanding that distinction matters for everyone building on or using these rails.