Stablecoin Depeg Risk: Why Stablecoins Lose Their Peg and How to Prepare

What a depeg is

A depeg is when a stablecoin trades meaningfully away from its target price, usually below one dollar. Small deviations happen all the time; a real depeg is a larger move driven by doubts about redemption.

Common causes

• Reserve doubts: questions about whether an issuer really holds enough assets.
• Banking problems: reserves held at a bank that runs into trouble.
• Collateral crashes: crypto collateral falling faster than it can be liquidated.
• Design failures: algorithmic models that rely on confidence.
• Frozen redemptions: holders unable to redeem tokens for dollars.

Examples

TerraUSD, an algorithmic stablecoin, lost its peg and collapsed in May 2022. In March 2023, USDC briefly traded below one dollar after its issuer disclosed that part of its reserves was held at Silicon Valley Bank, which had failed; it recovered after the deposits were made accessible.

How depegs affect lending

• Lenders holding the depegged coin lose value.
• Borrowers who owe a depegged coin may benefit, while those using it as collateral may face liquidation.
• Protocols can suffer bad debt if prices move faster than liquidations.

How to reduce depeg risk

1. Spread holdings across issuers with different designs.
2. Prefer coins with frequent, independent reserve reports.
3. Avoid holding large balances in algorithmic designs.
4. Know how and where you could redeem or swap quickly.

Back to the stablecoins hub or read the risk and security guide.