The typical design lets holders always swap the stablecoin for $1 of a companion token and vice versa. If the stable trades at $0.98, arbitrageurs buy it, redeem for $1 of the companion, and the supply shrinks. On paper the peg is self-correcting.
The flaw is reflexive: the arbitrage only works if the companion token is worth something, and the companion token is worth something largely because people believe the stable holds. Once confidence breaks, redemptions mint ever more of the companion token into a falling market, a spiral usually described as a death spiral. See terra-ust-collapse for the largest example.
Some designs sit between categories, holding partial reserves alongside algorithmic mechanics. That reduces but does not remove the reflexivity. Treat an unbacked or partially backed peg as a market opinion that can vanish in hours, not as a cash equivalent, whatever yield it advertises.
Related: terra-ust-collapse, depeg, stablecoin, yield-bearing-stablecoin