Stablecoins are built to hold a steady reference price, most often $1. That design makes them useful in a crypto market where other tokens can move sharply within hours. Still, stability is a target, not a guarantee. A depeg occurs when a stablecoin trades meaningfully above or below the value it is supposed to track, and the break can be brief or severe depending on the coin’s structure and the stress hitting it.
What pushes a stablecoin off its peg
The source material lays out several paths to a depeg. Heavy market volatility, fear-driven selling, speculation, and weak liquidity can all move a stablecoin away from par. Regulation matters too: policy changes, reserve rules, or negative headlines can damage confidence quickly. Then there are operational and technical problems, including smart contract bugs, security breaches, platform failures, weak management, and poor transparency around reserves.
Collateral quality is another fault line. A pegged token needs backing that users trust and that can actually be accessed when redemptions rise. If reserves are risky, illiquid, or unclear, the peg gets harder to defend. The article also points to direct triggers such as bank-run dynamics, oracle failures, opaque holdings like commercial paper, and trouble at a custodian bank that holds reserve assets. Once redemption confidence fades, the market price tends to show it fast.
How stablecoins try to keep the peg
Different models use different tools. The article highlights redemption mechanisms, mint-and-burn design, arbitrage, rebase systems, and seigniorage-style algorithmic adjustments. The basic idea is simple. If a stablecoin falls below $1, traders may buy it at a discount and redeem it at par if that route is open, shrinking circulating supply and pulling the price back up. If it trades above $1, new issuance can increase supply and push the premium down.
Whether that works in practice depends on more than theory. The redemption channel has to function, reserves have to be real and liquid, and the system has to keep operating under stress. The source includes a striking example of execution risk: in October 2025, Paxos accidentally minted $300 trillion worth of PYUSD because of a technical error. Even if corrected, events like that can damage market trust in a hurry.
The risks users face during a depeg
For users, depegging risk is not limited to the token price on screen. Slippage can widen rapidly, meaning a seller or swapper receives less than expected between order placement and execution. A rush to exit can also produce redemption queues, with delays in exchanging tokens for cash or collateral. Some issuers charge redemption fees, and those costs can reduce recovery values at exactly the wrong moment.
Centralized stablecoins may carry another layer of exposure: blacklisting and freeze functions. According to the source, certain wallet addresses can be blocked when required by authorities or flagged for suspicious activity. In that case, the issue is not just market value. Access to funds itself can become restricted.
UST and USDC show two different failure paths
In May 2022, TerraUSD (UST) lost its peg and collapsed. The article says the event wiped out around $60 billion in market value. UST was not backed by conventional reserve assets; it relied on an algorithm and its sister token LUNA. Once confidence broke, the design failed. LUNA’s supply expanded from 342 million to 6.5 trillion, crushing its value and feeding a full collapse.
USDC’s depeg in March 2023 came from a different source. The token dropped below $0.87 after the market learned that nearly 8% of its $40 billion reserves were tied to the failed Silicon Valley Bank. Circle still had $3.3 billion at SVB, according to the material. That episode showed that even fiat-backed stablecoins can face run-like pressure when banking access, liquidity, and confidence are questioned at the same time.
What to examine before using one
The article’s core message is practical: check reserve composition, transparency, reporting, redemption design, custodian-bank exposure, and how the system behaves in stressed conditions before using a stablecoin. A token may look steady in normal trading, but that apparent calm depends on a chain of mechanisms and counterparties. If one weak link breaks, the peg can move with it.