A stablecoin arbitrage mechanism is the set of trading and conversion opportunities that allows market participants to profit from price differences between the stablecoin's market price and its reference or redemption value.
For a redeemable dollar stablecoin, eligible participants can buy tokens below $1 and redeem them near $1, or obtain newly issued tokens near $1 and sell them when the market price is above the target. These trades can increase buying pressure below the peg and selling pressure above it. Access restrictions, transaction costs, settlement delays, liquidity, and confidence in redemption determine how effectively arbitrage closes the price gap.
Arbitrage is a market response to price differences. Redemption and issuance provide primary-market channels that can make the arbitrage trade possible.
Arbitrage design is one of the main mechanisms linking primary-market convertibility to secondary-market price stability.
If a stablecoin trades at $0.98 and an eligible participant can redeem it for $1, buying and redeeming the token creates a potential gross spread of two cents before costs.