Stablecoin depegs explained: how pegs hold, how they break, and what Terra and USDC showed

A stablecoin depeg is when a token designed to trade at a fixed value, usually one US dollar, trades meaningfully away from it. Pegs are held by arbitrage: as long as some firms can reliably redeem tokens for a dollar each, anyone buying them below a dollar can make the difference, and that buying pulls the price back. A peg breaks when redemption stops working, when the backing turns out to be worth less than a dollar per token, or when fear spreads faster than arbitrage can absorb it.

Our introduction to stablecoins covers the three main designs and the EU's MiCA rules. This guide is about the failure point: the mechanics of a peg, the distinct ways it can fail, what actually happened in the two most studied episodes, and how to judge a depeg if you hold or trade around stablecoins.

Risk warning: stablecoins are not bank deposits. They are generally not covered by deposit or investor compensation schemes, and a stablecoin can lose most or all of its value. Crypto assets are highly volatile and you can lose all of the money you put in.

How a peg is held

It helps to separate two markets.

• The primary market is between the issuer and a limited set of approved customers, typically large firms. They hand over dollars and receive newly created tokens (minting), or hand back tokens and receive dollars (redemption), at exactly one dollar each, minus any fees.
• The secondary market is everyone else: crypto exchanges, decentralised exchanges and over-the-counter desks, where tokens change hands at whatever price buyers and sellers agree.

The peg in the secondary market is held by firms that have access to both. If the token trades at 0.99 on exchanges, they buy it there and redeem it with the issuer for 1.00. If it trades at 1.01, they deposit dollars with the issuer, mint new tokens at 1.00 and sell them at 1.01. Each trade nudges the market price back towards the peg.

Worked example: arbitrage below the peg

Illustrative numbers, ignoring market impact.

A fiat-backed stablecoin trades at 0.98 on exchanges. An approved firm can redeem at par with a 0.1% fee and a minimum redemption of 100,000 tokens.

1. It buys 100,000 tokens on exchanges for 98,000 dollars.
2. It redeems them with the issuer for 100,000 dollars, minus the 0.1% fee of 100 dollars, receiving 99,900 dollars.
3. The difference is 1,900 dollars, before trading fees, the cost of capital while the redemption settles, and the risk that the redemption is delayed or fails.

That last cost is the important one. The firm is betting that the issuer will actually pay. If it believes redemptions are working and will continue, buying at 0.98 is attractive and the peg recovers. If it doubts the issuer can pay, it will not buy, and nobody else has the same incentive to support the price.

This is why every depeg comes down to the same question: can tokens be turned into a dollar, reliably, right now?

Why retail holders see a different picture

Most individuals cannot redeem directly. Minimums are often high, onboarding requires business verification, and some issuers do not offer redemption to individuals at all. A retail holder's realistic exit is to sell on an exchange at the market price. So when a stablecoin trades at 0.95, that is what it is worth to you, even if it will be worth 1.00 to a large firm that can redeem in a week.

In the EU, MiCA gives holders of e-money tokens a right to redeem at par value at any time from the issuer, without a redemption fee. That is a meaningful protection where it applies, but it depends on the issuer being authorised under MiCA, being solvent and processing the request, and it does not change what the token trades at on an exchange in the middle of a panic. Our guide to MiCA regulation covers the wider framework.

The ways a peg can fail

Most depegs fit one or more of these patterns.

1. The backing is worth less than believed

A fiat-backed coin is only as good as its reserves. If reserves are lent out, invested in assets that fall in value, held at a failing bank or simply not there, the tokens are no longer fully backed. Arbitrageurs notice, and the market price falls towards what they think the reserves will actually pay out.

2. Redemption is interrupted

Even fully backed reserves are no use if they cannot be reached. Banking hours, weekends, frozen accounts and operational failures can all stop redemptions temporarily. Crypto markets trade every day of the year; the banking system does not. The gap is widest on weekends, as bitcoin trading hours and weekends explains for crypto more generally.

3. Collateral falls faster than the system can liquidate

Crypto-backed stablecoins hold more collateral than the tokens they issue, often in volatile assets such as ether, and automatically sell (liquidate) positions that fall below a minimum ratio. A crash that is fast enough, or that clogs the network so liquidations cannot be processed, can leave the system short.

4. The design relies on confidence alone

Algorithmic stablecoins try to hold their peg by creating and destroying a companion token rather than by holding outside assets. They work while people value the companion token. When confidence goes, the mechanism can accelerate the collapse instead of halting it. TerraUSD is the case study.

5. Contagion

A stablecoin that holds another stablecoin as collateral, or whose users also hold a failing one, can be dragged down even if its own design is sound. And a failing stablecoin often forces its holders to sell other crypto assets to meet obligations, spreading the damage across the market.

Case study: TerraUSD, May 2022

TerraUSD (UST) was an algorithmic stablecoin on the Terra blockchain. Its peg relied on a two-way swap with Terra's own token, LUNA: the protocol would always let you exchange 1 UST for one dollar's worth of newly created LUNA, and vice versa. If UST fell to 0.98, a trader could buy UST, swap it for a dollar's worth of LUNA, sell the LUNA and keep the difference, destroying UST in the process and supporting its price.

A large part of UST's demand came from a lending protocol on Terra called Anchor, which offered deposit rates close to 20% a year on UST. That yield attracted billions of dollars of deposits that were there for the rate rather than for any other use of the coin. To bolster confidence, an organisation linked to Terra, the Luna Foundation Guard, built up a reserve of bitcoin and other assets that it said could be used to defend the peg.

What happened, in outline:

1. Around 7 to 9 May 2022, large withdrawals from Anchor and large UST sales on decentralised exchanges pushed UST below one dollar.
2. Holders used the swap mechanism to exchange UST for LUNA and sold the LUNA. Each swap created new LUNA, so the more UST was redeemed, the more LUNA was issued and the further its price fell.
3. The reserve was deployed to buy UST, but the selling overwhelmed it.
4. Within days, LUNA's supply had multiplied enormously and its price fell to a tiny fraction of a cent. UST fell to a few cents and never recovered.
5. On 12 and 13 May 2022, the Terra blockchain was halted. Tens of billions of dollars of market value across UST and LUNA were wiped out by most estimates.

The fallout was wide. Tether's USDT briefly traded around 0.95 dollars on 12 May 2022 before recovering. Crypto lenders and funds that had exposure to Terra failed in the following months, as crypto exchange collapses and lessons describes.

The legal aftermath took years. In April 2024 a US jury found Terraform Labs and its co-founder Do Kwon liable for fraud in a civil case brought by the US Securities and Exchange Commission, and in June 2024 a settlement of about 4.47 billion dollars was agreed. Kwon later pleaded guilty to US criminal charges in August 2025 and was sentenced to 15 years in prison in December 2025.

The structural lesson: a stablecoin backed by a token its own system can create in unlimited quantities has nothing outside itself to fall back on. When the coin needs support most, the support is being diluted.

Case study: USDC, March 2023

USDC is a fiat-backed stablecoin issued by Circle, backed by cash and short-term US government securities. On 10 March 2023, Silicon Valley Bank (SVB) in California failed and was taken over by US regulators. That evening, Circle disclosed that 3.3 billion dollars of USDC's reserves, out of roughly 40 billion, were held at SVB.

The issue was not that USDC was mostly unbacked: more than 90% of its reserves were elsewhere. It was that nobody knew whether or when the SVB deposits, which exceeded the US deposit insurance limit, would be paid, and that redemptions through the banking system could not be processed over a weekend.

1. Friday 10 March: SVB fails; Circle discloses its exposure.
2. Saturday 11 March: USDC falls on exchanges, reaching roughly 0.88 dollars on some venues. DAI, a crypto-backed stablecoin that held a large share of its collateral in USDC, falls with it. Other systems that used USDC are disrupted.
3. Sunday 12 March: US authorities announce that all SVB depositors will be protected.
4. Monday 13 March: banks reopen, redemptions resume and USDC returns to around one dollar.

The lesson: even a conservatively reserved stablecoin carries banking risk, and the market price reflects not only what the reserves are worth but how quickly they can be reached. It also showed contagion in action, as DAI's depeg came almost entirely from its USDC collateral.

Other episodes worth knowing

• DAI, March 2020. A sudden crash in ether caused a wave of liquidations in the Maker system that issues DAI, and network congestion meant some collateral was auctioned at or near zero. DAI traded above one dollar for a time because people needed DAI to close positions and supply was short. A depeg can go upwards as well as downwards.
• USDT, May 2022. As noted above, Tether dipped to around 0.95 during the Terra collapse amid heavy redemptions and recovered within the day.

Worked example: when collateral falls

Illustrative numbers for a crypto-backed stablecoin system with a minimum collateral ratio of 150%.

You deposit ether worth 20,000 dollars and mint 10,000 stablecoins, a collateral ratio of 200%.

• Ether falls 25%. Your collateral is worth 15,000 dollars, a ratio of exactly 150%. Your position is liquidated: the system sells your ether to repay the 10,000 stablecoins plus a penalty.
• Now imagine ether falls 40% in an hour and the network is congested. Collateral across the system might be sold late, at worse prices, or not at all. If the ether sold covers less than the stablecoins outstanding, the system is under-collateralised and the stablecoin is backed by less than a dollar each until it is recapitalised.

This is why crypto-backed designs hold far more collateral than they issue, and why the speed of a crash matters as much as its size.

Worked example: what a depeg does to prices quoted in it

Many crypto markets are quoted in a stablecoin rather than in dollars. Illustrative numbers.

Bitcoin is worth 60,000 US dollars. A stablecoin that bitcoin is quoted against slips to 0.97 dollars. The same bitcoin now costs 60,000 divided by 0.97, about 61,856 units of the stablecoin. A chart of BTC against that stablecoin shows bitcoin rising about 3.1%, even though its dollar value has not changed.

The reverse also matters: if you hold 10,000 stablecoins as a cash buffer and the coin slips to 0.97, your buffer is worth 9,700 dollars, a loss of 300 dollars on the asset you thought of as cash. For anything priced in a stablecoin, check what is happening to the stablecoin itself before reading a move as a move in the asset.

How to judge a depeg as it happens

There is no formula, but a few questions help separate a wobble from a failure. These are analytical questions, not trading signals.

• Why is it off peg? A specific, quantifiable problem (a known amount at a failed bank) is different from an unexplained slide.
• Are redemptions working? Has the issuer said so, and are there reports of large holders actually redeeming?
• What backs it, and where is it held? Look at the most recent reserve report or attestation and how recent it is. An attestation is a point-in-time check, not a full audit.
• Is it a weekend or holiday? Temporary depegs over weekends can reverse when banks reopen, as USDC did. They can also get worse.
• Is the design circular? If the backing is a token the same system can create, history is not on your side.
• How concentrated are you? A depeg is a minor annoyance if a stablecoin is 5% of your holdings and a disaster if it is everything.

Common mistakes

• Treating a stablecoin as a bank account. It has issuer risk, banking risk, technical risk and, outside MiCA's scope, little regulatory protection.
• Assuming you can redeem at par. Many holders cannot, and in a panic the exchange price is what you get.
• Chasing high yields on stablecoins. Terra's near-20% deposit rate was a warning, not a feature. Under MiCA, issuers and crypto-asset service providers are not allowed to pay interest on e-money tokens or asset-referenced tokens; yields offered elsewhere come from lending or other risk-taking.
• Ignoring what the collateral is. A stablecoin backed by another stablecoin inherits its risks.
• Panic-selling, or refusing to sell, on reflex. Both are decisions; make them on the reasons above, not on the chart alone.
• Concentrating everything in one stablecoin. Spreading cash-like holdings reduces the damage from any single failure.
• Misreading prices quoted in a stablecoin. A falling stablecoin makes everything quoted in it look like it is rising.

What this means for crypto CFD traders

A crypto CFD is quoted in a fiat currency by your broker, usually dollars or euros, so a stablecoin depeg does not directly change your contract's value unless you trade a CFD on the stablecoin itself or on a pair quoted in one. It can still matter: depegs have historically come with sharp moves and thin liquidity across crypto markets, which widen spreads and increase slippage. Leverage on crypto CFDs for retail clients in the EU is capped at 2:1, and most retail CFD accounts lose money. Our guide to crypto leverage and liquidation explains how margin close-outs work, and the crypto position size calculator helps keep any single position small enough to survive a violent day.

Frequently asked questions

What does it mean when a stablecoin depegs?

It means the token is trading meaningfully away from its target value, usually one dollar. Small deviations of a fraction of a cent are normal. A depeg in the sense that matters is a move large enough, and long enough, that holders cannot reliably exchange the token for its target value.

Why did TerraUSD collapse but USDC recover?

TerraUSD's backing was LUNA, a token its own system created, so redemptions diluted the very thing meant to support it and the peg broke for good. USDC was backed by cash and US government securities; its problem was a temporary inability to reach part of its cash at a failed bank. Once US authorities said depositors would be protected and banks reopened, redemptions resumed and the peg returned.

Can a stablecoin go above one dollar?

Yes. If demand for a stablecoin spikes and new tokens cannot be created fast enough, it can trade above its peg, as DAI did in March 2020. Arbitrage normally brings it back as new supply is minted.

Are fiat-backed stablecoins safe from depegs?

They are less exposed than algorithmic designs but not immune. Bank failures, frozen accounts, reserve shortfalls, operational problems and doubts about reserve quality can all cause depegs. MiCA's rules on reserves and redemption reduce some of these risks for authorised issuers in the EU, but they do not remove them.

Can I get one dollar back for my stablecoin during a depeg?

Only if you can redeem directly with the issuer, and only if it is processing redemptions. Most retail holders sell on an exchange instead and receive the market price. In the EU, holders of MiCA-compliant e-money tokens have a legal right to redeem at par from the issuer, but that depends on the issuer being able to pay.

Do stablecoin depegs affect bitcoin and other crypto prices?

They can. Large depegs have historically come with forced selling and stress across the crypto market, and any price quoted in the failing stablecoin will look distorted. The 2022 Terra collapse was followed by failures of several crypto lenders and funds.