Stablecoin Depeg
Definition
When a stablecoin's market price deviates significantly from its intended peg (usually $1), indicating stress on the stablecoin's backing mechanism or loss of market confidence.
A stablecoin depeg occurs when a stablecoin trades meaningfully above or below its target value of $1. Minor deviations (within 0.5%) are normal and quickly corrected by arbitrage. A significant depeg (more than 2-3%) signals deeper problems with the stablecoin's reserves, mechanism, or market confidence.
The most dramatic depeg was TerraUSD (UST) in May 2022, which collapsed from $1 to near zero, wiping out $40 billion in value. UST was an algorithmic stablecoin maintained by minting and burning a companion token (LUNA) rather than holding dollar reserves. When confidence broke, a death spiral of selling destroyed both tokens.
Even reserve-backed stablecoins can temporarily depeg. USDC briefly dropped to $0.87 in March 2023 when Silicon Valley Bank (which held $3.3 billion of USDC's reserves) failed. It recovered once regulators confirmed deposits would be made whole. This event highlighted that even "safe" stablecoins carry counterparty risk in their reserve banking relationships.
Different stablecoin types have different depeg risks. Fiat-backed (USDC, USDT) risk: reserve inadequacy or banking failures. Crypto-collateralized (DAI) risk: collateral value crashes faster than liquidations can process. Algorithmic risk: loss of confidence in the mechanism itself, which can cause reflexive collapse.
For investors, holding significant value in any single stablecoin creates concentration risk. Diversifying across stablecoin types (USDC, USDT, DAI) and keeping meaningful reserves in traditional bank accounts provides protection against stablecoin-specific risks.
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Frequently Asked Questions
Which stablecoins are safest?
USDC (Circle) and USDT (Tether) are the largest, with the most liquidity and market confidence. USDC publishes regular reserve attestations from major accounting firms. USDT is larger but less transparent about reserves. DAI is crypto-collateralized and more decentralized. No stablecoin is risk-free.
What should I do during a stablecoin depeg?
Don't panic sell at the bottom — USDC's 2023 depeg recovered fully. Assess the cause: is it a temporary banking issue or a fundamental mechanism failure? Diversify across stablecoins to limit exposure. For significant holdings, convert some to traditional bank deposits during uncertainty.