Depeg

A depeg happens when the market price of a pegged asset drifts away from the value it is designed to track, and arbitrageurs either cannot or will not step in fast enough to close the gap. Small deviations of a fraction of a cent are routine and self-correct within minutes; a genuine depeg is a sustained move, sometimes to a discount of ten percent or more, that signals the market has stopped trusting the mechanism behind the peg.

Depegs fall into two broad categories. Reserve-backed stablecoins such as USDC or USDT depeg when holders doubt the issuer's ability to redeem tokens for the underlying dollars, often triggered by exposure to a troubled bank or unclear reserve reporting. In March 2023, USDC briefly traded near $0.87 after Circle disclosed that $3.3 billion of its reserves sat at the failed Silicon Valley Bank; the peg recovered within days once regulators guaranteed depositors in full. Algorithmic stablecoins carry a different, more structural risk: instead of holding real reserves, they rely on a second token to absorb selling pressure. TerraUSD (UST) worked this way, and when large withdrawals in May 2022 broke confidence in its arbitrage loop, minting sister token LUNA to defend the peg flooded the market and dragged both assets toward zero within days, a pattern often called a death spiral. Emergency Bitcoin reserves deployed as a backstop were exhausted long before the selling stopped.

Depegs also strike other pegged instruments, including wrapped tokens and liquid-staking derivatives that track an underlying asset rather than a fixed dollar value. Traders watch on-chain collateral ratios, reserve attestations, and order-book depth for early warning signs, since an unaddressed depeg can trigger cascading liquidations across lending protocols that priced the asset as if it were permanently worth exactly one dollar.