A stablecoin depeg is when a token designed to hold a fixed value, usually one US dollar, trades materially away from it. Fractions of a cent are normal. When the market stops believing the token is worth what it claims, that is a depeg. In May 2022, TerraUSD fell from $1 to under $0.10, destroying roughly $40 billion in 72 hours.
Why stablecoin pegs hold in the first place
Arbitrage, backed by redemption.
At par, a fiat-backed stablecoin issuer promises to redeem tokens for dollars. At $0.99, traders buy it and redeem it for $1.00, and that buying pushes the price back. At $1.01, new issuance brings it down.
The peg is only as strong as the market's confidence that redemption will work. Once that confidence breaks, the arbitrage stops, and nothing else holds the price.
The three kinds of stablecoin, and how each breaks
| Type | Backing | How it depegs | Example |
|---|---|---|---|
| Fiat-backed | Dollars and Treasuries held by the issuer | Reserve doubt, banking failure, redemption halt | USDC, March 2023 |
| Crypto-collateralized | Crypto assets locked in smart contracts, overcollateralized | Collateral crash faster than liquidations | DAI, briefly, March 2020 |
| Algorithmic | A second token and a mint-burn mechanism | Confidence spiral once the mechanism inverts | TerraUSD, May 2022 |
Because of that third row, the GENIUS Act requires full fiat reserves and MiCA prohibits algorithmic designs outright.
The Terra collapse, May 2022
Through a mechanism rather than reserves, TerraUSD, ticker UST, held its peg. At any time, users could swap one UST for one dollar's worth of LUNA, the sister token, and the protocol would burn or mint to maintain the ratio.
As long as LUNA had value, the design worked. In May 2022, large UST withdrawals broke the peg slightly. To convert UST into LUNA, holders rushed. To meet demand, the protocol minted LUNA. LUNA's supply exploded and its price collapsed, which meant one UST bought more LUNA, which meant more minting.
Within 72 hours, UST fell below $0.10, LUNA fell from over $80 to fractions of a cent, and roughly $40 billion was gone. The mechanism did precisely what it was designed to do, and that was the problem.
The USDC depeg, March 2023
In March 2023, Circle disclosed that $3.3 billion of USDC's reserves sat at Silicon Valley Bank, which had just failed.
USDC traded down to about $0.87 over a weekend, while banks were closed and redemptions were impossible. Once US regulators guaranteed SVB deposits and banks reopened, the peg recovered within days.
The lesson was specific. Full reserves protect against the issuer not having the money. They do not protect against the bank holding the money failing, or a redemption window being closed when the market panics.
USDT, and how a peg survives stress
During the 2022 turmoil following Terra's collapse, Tether traded near $0.945, driven by redemption pressure and reserve skepticism rather than any confirmed shortfall. As redemptions were honored, it recovered.
Now Tether reports reserves dominated by US Treasury bills, around $113 billion in the first quarter of 2026. Under repeated stress, its peg has held. The remaining question is the gap between an attestation of balances and a full audit of controls.
Warning signs of a stablecoin depeg
- Redemption friction. Delays, new minimums, or paused redemptions are the earliest signal.
- Reserve opacity. Attestations that stop, change scope, or shift to less liquid assets.
- Banking concentration. Reserves held at one or two institutions.
- Algorithmic or partial backing. Any design where the peg depends on a second token holding value.
- Persistent trading below par on deep markets, not just on one thin venue.
- Rising secondary-market discount with no corresponding redemption arbitrage closing it.
What happens during a depeg
Speed and cascade.
For most crypto trading, stablecoins are the base currency, and for much of DeFi lending, the collateral. Wherever the token was posted as collateral, a depeg triggers liquidations, forces traders to exit positions denominated in it, and drains liquidity from every pair it quotes.
Over the following months, Terra's collapse cascaded into the failures of several lenders and funds. The damage extended far beyond UST holders.
The regulatory response: GENIUS Act and MiCA
Two frameworks now address the risk directly.
The GENIUS Act, effective 18 January 2027 in the US, requires payment stablecoins to hold one-to-one reserves in cash and short-term Treasuries, redeem at par, and publish reserve reports. Algorithmic designs cannot qualify.
MiCA, in force across the EU since June 2024 for stablecoins, prohibits algorithmic stablecoins and imposes reserve, redemption, and disclosure requirements. USDT does not meet them and was delisted by EU exchanges.
Where mb.io fits
For most trading, stablecoins are the base currency, and where you hold them is a counterparty decision.
mb.io is a regulated crypto spot exchange backed by MultiBank Group, a financial institution founded in 2005 that serves more than 2 million clients across 100+ countries.
- Regulated by VARA in the UAE and AUSTRAC in Australia
- 10/10 security score from Hacken, an independent blockchain security auditor
- Institutional-grade MPC custody powered by Fireblocks, with segregated client funds
- Fiat on and off ramps supporting Visa, Mastercard, SWIFT, and PIX
- Buy, sell, and swap in three steps, from sign-up to purchase
- 24/7 multilingual client support
Open your account and start trading on mb.io.
Frequently asked questions
What is a stablecoin depeg?
When a token designed to hold a fixed value, usually one dollar, trades materially away from it because the market has stopped believing redemption will work. Fractions of a cent are normal. Several cents is a depeg.
What was the biggest stablecoin depeg?
TerraUSD in May 2022. It fell from $1 to under $0.10 within 72 hours, its sister token LUNA collapsed from over $80 to near zero, and roughly $40 billion was destroyed.
Has USDC ever depegged?
Yes. It fell to about $0.87 in March 2023 after Circle disclosed $3.3 billion of reserves at the failed Silicon Valley Bank. The peg recovered within days once deposits were guaranteed.
Has USDT ever depegged?
Briefly, trading near $0.945 during the 2022 turmoil after Terra's collapse. It recovered as redemptions were honored and has held under stress since.
Why do algorithmic stablecoins fail?
Because the mechanism depends on a second token holding value. When confidence breaks, the protocol mints more of that token to defend the peg, collapsing its price and accelerating the spiral. Both the GENIUS Act and MiCA effectively prohibit the design.
Can a fully backed stablecoin depeg?
Yes, as USDC showed. Full reserves protect against the issuer lacking funds. They do not protect against the bank holding those funds failing, or against redemptions being unavailable when panic hits.
What happens to my stablecoins during a depeg?
Their market value falls, positions using them as collateral may liquidate, and exiting becomes expensive as liquidity drains. Recovery depends on whether the issuer can honor redemptions, which some have and some have not.
How do I check if a stablecoin is safe?
Look at what backs it and where the reserves sit, how often and how transparently reserves are reported, whether redemption is working, and which regulatory framework the issuer operates under.
