Stablecoin depegs: how they happen and key examples

A stablecoin depeg occurs when a token intended to trade at $1 moves significantly below that level and does not return quickly. Small intraday swings around $0.998 or $1.002 are common and often resolve within minutes when traders arbitrage price differences across venues. A depeg describes a larger, sustained gap that lasts hours or days.

Market data show many brief deviations but far fewer deep, lasting failures. A mid-2023 count by a ratings firm recorded 1,914 depeg events through that period, 609 involving major stablecoins. Most of those events were shallow and short-lived. Drops of 10% or more that persist beyond a day have been rare.

Several recurring causes have driven depegs. Fiat-backed coins can lose access to reserves if banks or counterparties fail or if funds are frozen. Heavy, simultaneous selling can create a liquidity squeeze even when reserves exist but are not immediately convertible to cash. Algorithmic designs that lack substantial real collateral depend on market confidence; when confidence collapses, their stabilizing mechanisms can accelerate a fall. External shocks such as regulatory actions, smart contract bugs, oracle errors and blockchain congestion have also triggered or amplified depegs.

A key factor in whether a depeg heals is whether tokens can be redeemed for real assets. When backing assets exist and redemptions function, arbitrage traders can buy discounted tokens and redeem them with the issuer for $1, creating buying pressure that restores parity. In March 2023, Circle disclosed that $3.3 billion of USDC reserves were held at Silicon Valley Bank when the bank entered receivership. USDC fell to $0.8789 over a weekend while banks were closed and redemptions were briefly suspended. Once regulators guaranteed SVB deposits and redemptions resumed, the peg returned. About $1.9 billion of USDC supply left the market as holders redeemed.

In May 2022, TerraUSD relied on a mechanism tied to a companion token rather than substantial reserves. When confidence failed, the mechanism did not stop the decline and roughly $40 billion in value was erased. No redemption of real assets was available to support the peg.

Industry observers point to duration rather than depth as a practical signal of structural trouble. Persistent discounts paired with visible outflows from secondary markets or paused redemptions indicate the arbitrage-and-redemption mechanism is not working. Since 2023, rules and market practices have increased disclosure and reserve attestation for many major stablecoins, though those changes do not provide full insurance for holders.