Stablecoin depeg

How it works

No stablecoin is held at $1 by decree. It is held there by an arbitrage loop. If a fiat-backed coin trades at $0.99, anyone who can redeem it with the issuer buys it on the market and redeems it for $1.00. If it trades at $1.01, they mint new coins for $1.00 and sell them. Those trades push the market price back to par, and the tighter and more certain the loop, the closer the price stays.

A stablecoin depeg starts when that loop is interrupted. The trigger is usually doubt about access to the backing rather than proof that the backing is gone: a bank holding reserves fails, an issuer pauses redemptions, a bridge halts, or redemption is limited to a small set of institutions and they hesitate. Once buying at $0.97 to redeem at $1.00 no longer looks certain, fewer traders step in, and the price drifts to wherever the order books and pools clear.

Deviations are usually quoted in basis points (bps), where 1 bp is 0.01%. The box above shows each coin's price, its deviation from $1 in bps and its 24-hour low and high. A few bps either side is normal trading noise between venues. A depeg is a move of tens or hundreds of bps that persists.

How a coin can break depends on its design:

• Fiat-backed (USDC, PYUSD, FDUSD): reserves in cash and short-term government debt held by custodians. The risk is custody, banking and redemption access. There is a real asset floor, so depegs have tended to recover once access is confirmed.
• Crypto-overcollateralized (DAI): more crypto locked than coins issued. The risk is a fast fall in the collateral, or in the case of DAI, the stablecoins it holds as backing.
• Synthetic (USDe): crypto collateral hedged with short perpetual futures. The risk includes long periods of negative funding rates, exchange counterparty exposure and how quickly the hedge can be unwound.
• Algorithmic: no redeemable asset, only a mint-and-burn mechanism against a second token. There is no floor.

A worked example

Reading the box. A coin at $0.9985 is 0.15% below par, or −15 bps. A coin at $0.97 is −300 bps.

What a holder loses. A fund holds 250,000 USDC as margin. In March 2023 USDC traded as low as about $0.87 after Silicon Valley Bank failed with part of Circle's reserves, reported at $3.3 billion, held there. Marked at $0.87, the margin is worth 250,000 × $0.87 = $217,500, a drop of $32,500, without any position moving.

What the arbitrage is really pricing. Buying a coin at $0.97 to redeem at $1.00 earns $0.03 per coin, or 3.09%. That is only arbitrage if redemption is certain. Suppose the realistic bad outcome is that holders recover $0.80. Buying at $0.97 then loses $0.17. The trade breaks even when:

p × $0.03 = (1 − p) × $0.17, so p = 0.17 ÷ 0.20 = 85%

At $0.97 the market is pricing roughly a 15% chance of that 20% haircut. A price of $0.87 implies far more doubt. The depeg price is a probability estimate about redemption, not a measure of what the reserves are worth today.

What it tells you

The live deviation shows how confident the market is that each coin can be redeemed at par, quickly and at size. Readings to watch:

• Within a few bps: the arbitrage loop is working.
• Persistently tens of bps off on one venue only: a local liquidity problem, often a thin book or a pool imbalance, rather than doubt about the issuer.
• Below par across venues, with a wide 24-hour range: redemption is being questioned. The speed of recovery says more than the size of the drop. A snap-back within hours means the loop is intact; a stalled recovery means holders still doubt it.
• Above par: demand for that coin is outrunning minting, typically when traders flee another stablecoin into it.

When it matters most

A stablecoin is rarely held only as cash. It is margin for perpetual futures, collateral in lending protocols and one side of most DEX pools, so a depeg spreads.

• Margin marked in a depegging coin shrinks, and leveraged positions can be liquidated even if BTC and ETH have not moved, which can start a liquidation cascade.
• Liquidity providers in two-stablecoin pools end up holding the weak coin as arbitrageurs sell it into the pool, a form of impermanent loss that the stable pairing was supposed to avoid.
• Market makers widen spreads because they cannot hedge the coin cleanly, so exits cost more slippage just when everyone is trying to exit.

Contagion follows the backing. In March 2023 DAI, much of which was backed by USDC through its Peg Stability Module, fell along with USDC. Both recovered after US authorities announced on 12 March that SVB depositors would be covered. UST in May 2022 shows the algorithmic case: redeeming UST minted new LUNA, which pushed LUNA's price down and required ever more LUNA to defend the peg, until both collapsed within days.

Common misconceptions

"A depeg means the backing is gone." Most depegs start with doubt about access, not missing reserves. USDC traded at $0.87 while its reserves were largely intact.

"Fully backed coins cannot depeg." Being backed does not make redemption instant or available to everyone. Price reacts to access before it reacts to solvency.

"Buying the depeg is free money." It is a bet on redemption, priced as a probability. Sometimes it pays; for algorithmic designs it has gone to zero.

"All stablecoins carry the same risk." A fiat-backed coin, an overcollateralized coin and a synthetic dollar fail in different ways and for different reasons. The label is the same; the backing is not.