Definition
A stablecoin depeg occurs when a stablecoin’s market price deviates significantly from its intended target value — typically $1.00 USD — either trading above or below the peg. Depegs can be temporary (minutes to hours, corrected by arbitrage) or catastrophic (permanent loss of peg, resulting in collapse). The causes and severity of depegs differ by stablecoin type: fiat-backed stablecoins (USDT, USDC) depeg primarily from counterparty risk or bank runs; algorithmic stablecoins (TerraUSD/UST) can death-spiral due to broken peg mechanisms; and crypto-backed stablecoins (DAI) may depeg during collateral price crashes. The most significant depeg event in history was TerraUSD’s collapse in May 2022, wiping out ~$40 billion in market capitalisation.
Origin & History
| Date | Event |
| 2020 | USDT repeatedly trades at $0.97–$1.03 range during market stress events |
| Mar 2020 | COVID crash: USDC and USDT briefly depeg during liquidity crunch |
| May 2021 | Iron Finance TITAN token collapses in first major algorithmic depeg event |
| May 2022 | TerraUSD (UST) catastrophic depeg from $1 to $0.0001; $40B wiped |
| Jun 2022 | stETH briefly depegs to $0.93 during Celsius/3AC liquidity crisis |
| Mar 2023 | USDC depegs to $0.87 when Silicon Valley Bank (SVB) collapses (held $3.3B USDC reserves) |
| Apr 2024 | ezETH (Renzo LRT) depegs to $0.77 during airdrop disappointment |
| 2024 | USDe (Ethena) maintains peg through delta-neutral strategy despite volatility; FRAX evolves to RWA-backed |
“The death spiral is real. Once UST lost the peg, there was no mechanism to recover.” — Post-mortem analysis, 2022
How It Works
Depeg Types:
FIAT-BACKED (USDC, USDT): Bank/custodian holds $1 per coin Depeg cause: bank failure, reserve fraud, mass redemptions Mechanism: peg restored when trust returns or arbitrage buys discount
CRYPTO-BACKED (DAI): ETH/crypto locked as collateral > $1 per DAI Depeg cause: collateral crash below liquidation threshold Mechanism: emergency shutdown or collateral diversification
ALGORITHMIC (UST): Terra/LUNA absorbs UST supply to mint $1 worth of LUNA Depeg cause: loss of confidence; death spiral begins Death spiral: UST sells → LUNA minted → LUNA inflates → confidence falls → repeat Outcome: both assets go to zero
HYBRID (FRAX): Partial collateral + algorithmic Depeg risk: reduced by collateral floor
| Stablecoin Type | Peg Mechanism | Main Depeg Risk | Example |
| Fiat-backed | 1:1 USD reserves | Bank failure, reserve fraud | USDC (SVB), Tether concerns |
| Crypto-backed | Overcollateralised crypto | Collateral crash | DAI (Black Thursday 2020) |
| Algorithmic | Mint/burn companion token | Death spiral | UST/LUNA (2022) |
| Hybrid | Partial collateral + algorithm | Insufficient collateral floor | FRAX (pre-v3) |
| Yield-backed | Delta-neutral funding | Funding rate inversion | USDe (Ethena) |
| RWA-backed | T-bills as reserves | Regulatory/custodian risk | BUIDL, BENJI |
In Simple Terms
- Depegs break the promise: A stablecoin’s core value proposition is price stability — a depeg, even temporary, destroys user confidence.
- Arbitrage is the defence: For backed stablecoins, traders buy $0.95 USDC knowing they can redeem for $1.00 — this arbitrage pressure restores the peg.
- Death spirals have no floor: Algorithmic stablecoins can spiral to zero because the mechanism designed to restore the peg worsens the crisis (LUNA minting → hyperinflation → collapse).
- Contagion effect: One stablecoin depeg can trigger panic in others — UST’s collapse briefly pushed DAI and FRAX down as DeFi users rushed to exit all stablecoins.
- Duration matters: A 30-minute USDC dip to $0.97 (corrected by arbitrage) is very different from UST’s permanent collapse to $0.00.
Real-World Examples
| Scenario | Implementation | Outcome |
| USDC SVB depeg | SVB holds $3.3B USDC reserves; SVB fails | USDC drops to $0.87; peg restored within 48 hours when FDIC guarantees deposits |
| UST death spiral | $2B coordinated sell + declining confidence | UST drops $1 → $0.10 → $0.0001 in 72 hours; $40B destroyed |
| DAI Black Thursday | ETH crashes 50% in 24 hours; CDP liquidations fail | DAI depegs to $1.05 (demand spike); system deficit of $4M; MKR minted to cover |
| stETH depeg | Celsius and 3AC sell stETH to cover withdrawals | stETH trades at $0.93; restores over weeks as Lido processes withdrawals |
| USDT (historical) | Multiple reserve concerns spark sell pressure | USDT dips to $0.95–$0.97; recovers as Tether demonstrates redemption capability |
Advantages of Understanding Depegs
| Benefit | Detail |
| Risk assessment | Understanding depeg risk helps choose safer stablecoins |
| Arbitrage opportunity | Temporary depegs create profitable trades for sophisticated users |
| Protocol design | Depeg events drive better collateral design and reserve transparency |
| Portfolio hedging | Knowing depeg triggers helps diversify stablecoin exposure |
Disadvantages & Risks
| Risk | Detail |
| Total loss (algorithmic) | UST-style depegs can result in 99.99% losses with no recovery |
| Contagion | One depeg can cascade to protocols using that stablecoin as collateral |
| Liquidation cascade | DeFi protocols may liquidate collateral during depeg, worsening the crisis |
| Counterparty trust | Fiat-backed stablecoins depend entirely on issuer transparency and reserve integrity |
| Regulatory response | Major depegs trigger regulatory scrutiny affecting the entire stablecoin market |
Risk Management Tips
- Diversify across stablecoin types (fiat-backed, crypto-backed) rather than concentrating in one
- Avoid algorithmic stablecoins without robust collateral floors
- Monitor reserve attestations and proof of reserves for fiat-backed stablecoins
- Use on-chain depeg alerts (DeFi Safety, DeFiLlama) to track real-time peg health
FAQ
Q: Can USDC or USDT fully depeg permanently?
A: Theoretically yes, if Circle or Tether were insolvent and unable to redeem tokens. Practically, Circle’s SVB depeg restored within 48 hours due to FDIC intervention. Permanent collapse would require complete insolvency.
Q: What caused UST to fail permanently?
A: UST’s death spiral: massive coordinated selling drained the Curve pool → UST fell below $1 → LUNA was minted to absorb UST supply → LUNA hyperinflated → confidence collapsed → spiral accelerated to zero.
Q: How do protocols protect against stablecoin depegs?
A: DeFi protocols use diversified collateral (multiple stablecoins), circuit breakers, emergency governance, and have begun requiring proof of reserves for accepted collateral.
Q: What is a stablecoin’s “peg deviation”?
A: Peg deviation measures how far a stablecoin’s market price differs from its target. Common tools include DeFiLlama’s stablecoin tracker, which shows real-time peg deviation percentages.
Q: Is a 1% depeg dangerous?
A: A brief 1% deviation (e.g., $0.99–$1.01) is normal market noise. Sustained depegs beyond 3–5% indicate structural problems and warrant attention.
Sources
- DeFiLlama Stablecoins: defillama.com/stablecoins
- Do Kwon Terra Post-mortem: research sources
- Circle USDC Reserve Reports: circle.com/usdc
- MakerDAO Black Thursday: makerdao.com
- Chainalysis Stablecoin Report: chainalysis.com
UPay Tip: Not all stablecoins are created equal. Before using any stablecoin in DeFi, research its peg mechanism, reserve transparency, and historical depeg events. The $40B UST collapse is a permanent reminder that “stable” in the name doesn’t guarantee stability — especially for algorithmic designs without robust collateral.
Disclaimer: This content is for educational purposes only and does not constitute financial or investment advice. Crypto assets are volatile and subject to risk. Always conduct your own research.
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