⚠️ Depegging Risks: When Stablecoins Fail
Learn from Terra/UST collapse and other depegging events
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Despite mechanisms to maintain stability, stablecoins can and do lose their peg during crises. Understanding historical de-pegging events reveals the risks inherent to each stablecoin type.
🎮 Interactive: Crisis Case Studies
Explore major de-pegging events to understand what causes stability to break:
USDC De-Peg (March 2023)
March 10-13, 2023
Timeline
Lesson Learned
Even fully-backed stablecoins can de-peg if banking partners fail. Redemption uncertainty = price panic.
Total Impact
$10B+ liquidations, DAI affected via USDC backing
De-Pegging Risk Factors
Banking Risks (Fiat-Backed)
- • Bank failure or freeze of reserves
- • Regulatory seizure of accounts
- • Redemption delays or failures
- • Fractional reserve practices
Collateral Risks (Crypto-Backed)
- • Extreme market volatility (Black Swan)
- • Liquidation cascades
- • Oracle failures or manipulation
- • Network congestion preventing liquidations
Algorithmic Risks
- • Death spiral (negative feedback loop)
- • Loss of confidence = irreversible
- • Requires perpetual growth
- • No real asset backing
Smart Contract Risks
- • Exploits and hacks
- • Logic errors in peg mechanisms
- • Governance attacks
- • Upgrade vulnerabilities
Warning Signs of De-Peg Risk
Persistent deviation from $1.00
Trading consistently above/below peg for hours/days = mechanism failing
Declining market cap
Users exiting → confidence loss → self-fulfilling prophecy
Widening bid-ask spreads
Liquidity drying up → harder to trade at $1.00 → peg breaks
FUD and regulatory news
Banking issues, lawsuits, regulatory threats → panic selling
The Confidence Game
All stablecoins rely on confidence. When users believe the peg will hold, arbitrageurs step in to profit from small deviations, keeping the price stable. When confidence breaks, arbitrage stops working:
- • Traders fear redemption won't work → won't buy below $1
- • Liquidators fear collateral won't cover debt → won't liquidate
- • Panic selling overwhelms buy pressure → death spiral
This is why UST went to $0.01 while USDC recovered from $0.87. Fiat backing + redemption guarantee = confidence restored.