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. Using a rich dataset of trades between the stablecoin Treasury and private investors, we examine how peg-sustaining arbitrage stabilizes the price of the dominant stablecoin, Tether. In conventional fixed-rate regimes, the central bank stabilizes the peg through management of foreign reserves. In contrast, stablecoin pegs are managed through the actions of private investors, who deposit (withdraw) dollars with the Tether Treasury when the stablecoin trades at a premium (discount), a change in the relative supply that drives peg prices back toward one. We identify the arbitrage mechanism through a unique natural experiment: the migration of Tether from the Omni to the Ethereum blockchain. This event led to an increase in investor access to arbitrage trades with the Tether Treasury. Consistent with our mechanism, this reduced the absolute size of peg deviations by more than half. We also pin down which fundamentals drive the two-sided distribution of peg-price deviations: Premiums are due to stablecoins' role as a safe haven, exhibiting, for example, premiums greater than 100 basis points during the COVID-19 crisis of March 2020; discounts derive from liquidity effects and collateral concerns