What Is a Depeg? When Stablecoins Lose Their Peg

Olvis Gil · October 31, 2026 · 7 min read

A stablecoin has exactly one job: hold its peg. A depeg is when it fails — a token promising $1 trades at $0.97, or $0.87, or zero. Understanding why pegs break is the difference between using stablecoins safely and learning about risk the expensive way.

Small slips vs full collapse

There are two very different events people call depegs. Temporary deviations— USDC dipping to $0.97 during stress, or USDT wobbling a few cents — are normal market mechanics: redemption still works, arbitrageurs pull the price back. Structural failure is when the peg mechanism itself breaks — collateral is missing or the algorithm cannot stabilize — and the coin never comes back.

The cautionary tale: UST

TerraUSD was the largest algorithmic stablecoin — no real collateral, pegged by a mint/burn mechanism against its volatile sister token LUNA. In May 2022 redemptions spiked, the algorithm printed LUNA to defend the peg, LUNA's price collapsed under hyperinflation, and ~$40 billion evaporated in days. UST is why "algorithmic" is now a warning label rather than a feature.

Even fiat-backed coins depeg — briefly

USDC itself dipped to $0.87 in March 2023 when Silicon Valley Bank — holding part of Circle's reserves — failed. The peg recovered in days once the US backstopped deposits, but it proved a key point: a fiat-backed stablecoin inherits the risks of its banking system. Transparency about reserves is not marketing — it is the entire risk model.

How to evaluate peg risk

Ask three questions: What backs it? (cash and Treasuries > crypto collateral > algorithms); Who attests it? (monthly third-party attestations > self-reported); Can I redeem it? (direct redemption at par with the issuer is the real peg mechanism — everything else is market making). Stablecoins that pass all three depeg briefly and recover; ones that fail the first question can go to zero.

Keep learning

Stablecoins hub ·Depeg glossary term ·How stablecoins work ·Are stablecoins decentralized? ·Stablecoins masterclass

Frequently asked questions

What does depeg mean?

A depeg is when a stablecoin trades away from its intended value — a USDC meant to be $1 trading at $0.87. Small temporary slips happen under market stress; a full collapse means the peg mechanism failed entirely.

Has USDC ever depegged?

Yes — in March 2023 USDC dipped to ~$0.87 when Silicon Valley Bank, which held part of its reserves, collapsed. It recovered within days when the US backstopped deposits. This is exactly why reserve transparency matters.

What was the UST collapse?

TerraUSD (UST) was an algorithmic stablecoin with no real collateral — pegged by minting/burning against its sister token LUNA. When confidence cracked in May 2022, the death spiral destroyed ~$40B in days. It is the canonical example of why algorithmic pegs are fragile.

How do I know if a stablecoin might depeg?

Check the backing model: fully-reserved fiat-backed (USDC, USDT) is strongest; crypto-collateralized (DAI) depends on over-collateralization; algorithmic is the weakest. Then check attestations, audit reports, and redemption liquidity — the peg is only as good as what stands behind it.

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Olvis Gil

Founder of EduNode — an educational platform teaching blockchain development on Stellar, Ethereum, Soroban, and beyond.