Stablecoin depeg: what happens when the peg breaks

What is a stablecoin depeg and how large can one be?

A stablecoin depeg is a lasting move of the token price away from its target, usually 1 US dollar. Small moves of a fraction of a cent happen daily and signal normal trading. A depeg begins when the gap persists and holders start to doubt that the token can be exchanged for a full dollar when they want it.

Real episodes differ in size. According to Wikipedia, tether touched $0.88 on Bitfinex on 15 October 2018, a gap of 12 cents, and UST fell to 10 cents, or $0.10, in May 2022. USDC lost its peg in March 2023 and regained it 4 days later. Size alone tells little; duration and the cause tell more.

What triggers a stablecoin depeg in the crypto market?

Four triggers recur. Doubts about reserves lead holders to question whether assets match tokens. A failure at a bank or custodian traps cash that backs the token. A collapse of the code or collateral breaks the mechanism in crypto-backed and algorithmic designs. A sudden fall in demand leaves sellers without buyers at 1 dollar. Each trigger leaves different clues in the data.

Reserve doubts show up in reports and in the questions asked about them. Bank failures show up in news about the custodian. Code and collateral failures show up as rapid changes in on-chain ratios. Demand falls show up in volume and in the spread between venues. Knowing the trigger helps you estimate the duration, because a bank problem can be fixed by an official decision while a design flaw seldom heals.

Which 4 stages does a stablecoin depeg usually follow?

Stage one is the trigger: a piece of news or a visible weakness creates doubt. Stage two is the redemption rush: holders sell on exchanges or redeem with the issuer, and the price falls below 1 dollar. The faster the rush, the more weight falls on the issuer’s cash and on the opening hours of its banking partners.

Stage three is collateral stress: traders who posted the token as collateral face margin calls, and DeFi positions liquidate. Stage four is repair, which arrives when the issuer, a regulator, or the market restores confidence, or when the token fails to recover. Markets often pass through stages two and three within hours, and repair can take days, as the USDC case showed.

How does a stablecoin depeg spread into a crypto crash?

Stablecoins sit under most trading pairs, so a wobble changes the price of everything quoted against them. Exchanges may pause conversions, as Coinbase halted conversions between USDC and US dollars in March 2023, according to Wikipedia. Pauses cut the exit routes and push sellers to dump other crypto assets for whichever stable token still holds 1 dollar.

That flight creates a second effect. The token that gains demand can trade above 1 dollar while the weak one trades below, which opens spreads that arbitrage traders try to close. Lenders that accept the weak token as collateral demand more margin, and forced sales hit Bitcoin and other coins. In this way a stablecoin problem becomes a crypto crash.

Who bears the loss when a stablecoin peg breaks?

Losses fall unevenly. Holders who can redeem directly with the issuer at par exit near 1 dollar, if redemption stays open. Holders who sell on exchanges accept the market price of the moment. Liquidity providers in trading pools end up holding more of the weak token as it falls. Borrowers who use the token as collateral face liquidations.

Timing explains much of the difference. Those who act in stage two receive better prices than those who wait for stage four, yet acting early on rumours carries its own risk. A holder with a written plan, set before any stress, avoids deciding under pressure. This page is general information, not investment advice, and it describes patterns.

What repairs a stablecoin peg after a depeg?

Repair needs a credible answer to the original doubt. On 12 March 2023, the Treasury, Federal Reserve, and FDIC issued a joint statement that allowed the FDIC to guarantee uninsured deposits at Silicon Valley Bank, according to Wikipedia. USDC recovered most of its losses after Circle assured investors the peg would be honored. The cause was fixed, and the price followed.

When the cause is a design flaw, repair is harder. After UST lost its peg in May 2022, a proposal approved on 25 May 2022 reissued LUNA and abandoned UST, according to Wikipedia. The contrast is the lesson: a depeg caused by an outside event can heal when the event is resolved, while a depeg caused by the mechanism often ends the token.

How can you measure a stablecoin depeg in real time?

Three numbers capture a depeg. Depth is the gap to 1 dollar. Duration is how long the gap lasts. Venue spread is the difference between the highest and lowest price across exchanges. Record all three with a time stamp, set your own alert levels before any stress, and review them against the reserve report. A gap that persists beyond a few hours deserves attention.

Add context from the issuer: redemption status, banking partners, and the latest reserve report. A holder in Singapore, ASEAN, or Hong Kong can pair these readings with the EQOS Asia method page, which describes the structured approach behind this series. A 30-minute pre-diagnostic applies it to a treasury that holds stablecoins.

Frequently asked questions

About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile