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A stablecoin can lose its peg when confidence in its backing or redemption weakens, when people cannot redeem it quickly enough, when trading liquidity is too thin to correct its price, or when its stabilization mechanism breaks down. A peg is a target supported by assets, market access and confidence—not a guarantee that every coin will always trade at exactly one unit of its reference currency.
How does a stablecoin maintain its peg?
A stablecoin’s peg is supported by a mechanism intended to keep its market price near a reference value, often one US dollar. Depending on the design, that mechanism may rely on reserve assets, redemption rights, collateral, market arbitrage or smart-contract incentives. The label “stablecoin” alone does not ensure that the market price will stay fixed. The Bank for International Settlements’ Financial Stability Institute identifies reserve, liquidity and redemption risks as relevant to whether holders can rely on a stable value.
It helps to distinguish three outcomes. A temporary secondary-market deviation occurs when exchange prices move from the target, even if an issuer still intends to redeem at par. A persistent impairment occurs when holders doubt that backing or collateral can cover claims at par. A mechanism collapse occurs when the design can no longer credibly support exits or restore the target.
Why can a stablecoin trade below its target?
Reserves may be risky, inaccessible or difficult to redeem
A reserve-backed coin depends on the value, liquidity and accessibility of the assets held to support redemption. A reserve can be sound in value yet temporarily inaccessible—for example, during a bank disruption or outside banking hours. If some customers can redeem directly with the issuer while other holders must sell on exchanges, a pause or delay in primary redemptions can push the exchange price below the target.
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Confidence can also weaken if holders are uncertain about the reserve’s composition, custody arrangements, legal claims, or who is eligible to redeem. The European Central Bank and the BIS discuss how reserve risks and uncertainty about timely redemption can leave stablecoins vulnerable to runs.
Market liquidity or arbitrage may not be enough
Arbitrage can help bring a coin back toward its target. If it trades below the target, a trader may buy it cheaply and redeem it at par; if it trades above the target, eligible participants may mint new coins and sell them. In either case, the trade is useful only if the participant can access the relevant primary market, the issuer or protocol can process the transaction, and the costs and delays are manageable.
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That correction can fail or slow when exchange order books or decentralized-finance (DeFi) pools are shallow, selling is one-sided, transactions are congested, withdrawals are limited, or primary redemptions are unavailable. Fiat-backed issuers may restrict direct access to approved institutional customers, leaving retail holders reliant on secondary-market trading, according to the Federal Reserve’s analysis of primary and secondary stablecoin markets.
Confidence can turn selling into a feedback loop
Concern about backing or redemption can prompt holders to sell or seek redemption. That activity can strain available liquidity, widen the market-price gap and reinforce the original concern. Stress may also spread through shared trading pools, collateral positions or automated DeFi facilities. The BIS and ECB identify opacity, operational and governance weaknesses, and uncertainty about redemption as relevant vulnerabilities.
An algorithmic mechanism may lose the support it depends on
Algorithmic designs use smart contracts and supply or exchange incentives to pursue a target rather than relying on a conventional reserve of equivalent assets. Adjusting supply does not create value by itself: the design depends on participants believing that the mechanism will work and being willing to trade. If a related token is meant to absorb redemptions, selling pressure can weaken that token, making the backing mechanism less credible and prompting further exits. The Federal Reserve’s explanation of algorithmic stablecoins notes that confidence in eventual reversion is necessary for supply adjustments to work.
What do past depegs show?
These historical episodes illustrate different mechanisms; they do not establish the current reserves, redemption terms or risks of any named coin.
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| Episode | What happened | What it illustrates |
|---|---|---|
| USDC, March 2023 | Circle said it could not wire out $3.3 billion of roughly $40 billion in reserves held at Silicon Valley Bank before regulators took control. Over the weekend, banking hours constrained primary operations while holders could still sell in secondary markets, and USDC traded below $1. Selling pressure eased after authorities announced protection for SVB depositors. | A disruption to access and redemption can cause a temporary depeg without, by itself, proving that reserves have permanently lost value. The figures and event details are from the Federal Reserve’s 2024 account; its 2025 analysis discusses the wider effects. |
| TerraUSD (UST), May 2022 | UST was linked through its stabilization mechanism to TerraLuna (LUNA). The Reserve Bank of Australia says the initial disruption appears to have involved large trades and a substantial withdrawal from a Terra exchange pool. Loss of confidence accelerated selling of both tokens; issuing more LUNA to support redemptions further depressed LUNA’s price. UST had a market capitalization of around US$18 billion before its collapse. | The system’s support weakened as the token intended to absorb exits lost value, creating a self-reinforcing spiral. Limited redemption capacity and drained secondary-market liquidity impaired arbitrage, and the mechanism ultimately failed rather than restoring parity. See the Reserve Bank of Australia’s account and the Federal Reserve Bank of Richmond’s analysis. |
| IRON/TITAN, June 2021 | A Federal Reserve study of the mid-June 2021 run found that design flaws in the no-arbitrage mechanism contributed to the failure; a large sell order after prices had risen appeared to trigger a run. | Different algorithmic designs can have different failure modes. This episode should not be treated as proof that all algorithmic stablecoins work the same way. See the Federal Reserve study. |
Can stress spread to other stablecoins?
Yes. Tokens can share trading pools, collateral markets or automated liquidity mechanisms, so pressure on one asset can affect another even without direct exposure to the original event. In its analysis of the 2023 SVB episode, the Federal Reserve noted that Dai and other stablecoins also came under pressure through liquidity mechanisms. As the Board put it: “When stablecoins lose their peg against the dollar, the effect can reverberate through the sector.” (December 17, 2025.)
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What should you check when a stablecoin depegs?
A market price below the target is a signal to investigate, not proof on its own that a coin is insolvent. To understand what may be happening, look at the mechanism and the practical route to redemption:
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- Identify the design. What assets or tokens support the peg? Is the backing external to the system or dependent on a related token and incentives?
- Check redemption access and terms. Who can redeem directly, under what conditions, and can ordinary holders use that route? Are redemptions delayed, restricted or unavailable?
- Examine reserve access, not just a headline total. Where are assets held, how liquid are they, and could the issuer or custodian access them during the disruption?
- Look at secondary-market conditions. Is there enough depth to absorb selling, and are relevant exchanges, pools and withdrawal routes functioning?
- Consider the mechanism’s capacity under stress. Can it process the volume of redemptions or minting, and does the mechanism still have credible backing if the market moves sharply?
- Separate a price move from a lasting failure. A temporary market gap, impaired claims on backing and a broken stabilization mechanism are materially different outcomes. Current conditions require current, coin-specific evidence; historical episodes alone cannot establish them.
The BIS’s stablecoin risk overview and the Federal Reserve’s discussion of redemption and trading markets provide context for these checks.
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