What is Depeg?

How it works

A stablecoin's price is set by markets, not by the issuer. The issuer can mint and redeem at $1, but the secondary market price is whatever buyers and sellers agree on. When confidence falters or liquidity dries up, the market price can dip below $1 even if the issuer is still honoring redemptions.

Three causes of depegs, in increasing severity:

1. Liquidity-driven (mild, recoverable). Big seller hits an illiquid pool, price dips a few cents, arbitrage closes the gap within hours.
2. Confidence-driven (medium, often recoverable). News raises doubt about the backing. Holders rush to exit. Price dips 2-5%. If the issuer can demonstrate solvency or get a backstop, recovers within days.
3. Solvency-driven (severe, usually permanent). The backing genuinely isn't there. Once enough holders confirm this, the depeg goes to zero.

Example

Three real depegs of different types:

• USDC, March 2023. Circle disclosed $3.3B in reserves stuck at the failing Silicon Valley Bank. USDC dropped to $0.88 over a weekend. The FDIC made SVB whole on Sunday night; USDC was back to $1.00 by Monday. This was a confidence-driven depeg with intact actual backing.
• DAI, March 2023. Dropped alongside USDC because ~50% of DAI's collateral was USDC at the time. Recovered with USDC.
• UST, May 2022. Algorithmic stablecoin backed only by Luna market cap. Once a coordinated attack triggered the death spiral, UST went from $1.00 to $0.01 in a week and never came back. The mechanism was fundamentally broken — there was no backing to rescue.

Why it matters

Holding stablecoins isn't risk-free, even though they look like cash. The mental model:

• Treat depegs by category. A 2% USDC depeg from a banking scare is different from a 2% UST depeg from algorithmic stress, even though both look identical on a chart.
• Diversify if you hold significant balances. Splitting between USDC, USDT, and DAI hedges against any single issuer failing.
• Watch the order book during stress. A stablecoin that can be redeemed at $1 by the issuer should be heavily bid below $1 — that's arbitrage at work. If the bids disappear, holders are pricing in real solvency risk.
• Off-ramp if you can't tolerate the risk. For long-term cash holdings (months+), real USD in a high-yield savings account is usually the better choice — FDIC insurance is real protection that crypto stablecoins don't have.

For active traders, brief depegs are sometimes opportunities (buy USDC at $0.97, get $0.03/dollar of upside if the peg holds). For everyone else, depegs are reminders that "stable" is a marketing word, not a guarantee.