Why Do Stablecoins Lose Their Peg?

Key Takeaway

- Stablecoins rely on a "peg" mechanism to maintain a fixed value, typically $1.

- They can be collateralized (backed by assets like fiat, crypto, or commodities) or algorithmic (regulated by smart contracts).

- Major depegging events—such as UST (2022), USDC & DAI (2023), and $BTC USDR (2023)—highlight the risks and challenges of maintaining stability.

What Is a Stablecoin Peg?

Stablecoins are cryptocurrencies designed to minimize price volatility by pegging their value to a stable asset, usually the US dollar. This "peg" acts like an anchor, ensuring the stablecoin’s value remains consistent—unlike Bitcoin or Ethereum, which frequently fluctuate.

Popular stablecoins like $ETH USDT (Tether) and DAI aim to maintain a 1:1 ratio with the dollar, making them useful for trading, lending, and hedging against crypto market swings.

What Happens When a Stablecoin Depegs?

A depegging event occurs when a stablecoin’s market price deviates significantly from its intended value (e.g., trading at $0.90 instead of $1.00). Given that stablecoins handle **billions in daily trading volume**, a loss of peg can trigger market-wide panic, liquidity crises, and even contagion across the crypto ecosystem.

Below, we’ll examine how stablecoins maintain their pegs—and why they sometimes fail.

How Do Stablecoins Maintain Their Peg?

Stablecoins fall into two main categories:

1. Collateralized Stablecoins

These are backed by real-world assets, ensuring each token has corresponding reserves. Types include:

-Fiat-collateralized (e.g., USDT, FDUSD): Each token is backed 1:1 by cash or cash equivalents (like Treasury bills).

- Crypto-collateralized (e.g., DAI, crvUSD): Overcollateralized with crypto assets (e.g., $1.50 in $ETH ETH backing $1.00 of DAI) to absorb price swings.