How stablecoin depegs happen, using real examples with numbers
A stablecoin is supposed to trade at $1. Here's the mechanism that breaks that promise, with real depeg numbers from UST, USDC, and DAI.
A stablecoin promises one thing: a dollar in, a dollar out, anytime. When that promise breaks, it's called a depeg, and the price can move fast enough that "stable" becomes the wrong word entirely. Understanding why requires looking at what actually backs the coin and what happens when everyone tries to redeem at once.
What does it mean for a stablecoin to depeg
A depeg is any sustained move away from the $1 target, usually measured in cents but sometimes in dollars. Small wobbles of half a cent happen constantly on exchanges and don't count for much. A real depeg is when the price drops to 95 cents, 80 cents, or lower, and stays there long enough that arbitrage traders either can't or won't push it back.
The mechanism depends on the collateral. Fiat-backed coins like USDC hold cash and short-term Treasuries in bank accounts. Crypto-collateralized coins like DAI hold ETH and other volatile assets in on-chain vaults, overcollateralized to absorb price swings. Algorithmic coins like the old UST held no real collateral at all, just a linked token (LUNA) and a market-making mechanism meant to keep the peg through arbitrage incentives. Each design fails differently.
What actually happened with UST in May 2022
Terra's UST is the clearest case because the collateral itself was the problem. UST kept its $1 peg through a mint-and-burn arrangement with LUNA: burn $1 of LUNA to mint 1 UST, or burn 1 UST to mint $1 of LUNA. This worked as long as people trusted LUNA's value.
On May 7, 2022, roughly $2 billion in UST was pulled from the Anchor Protocol lending pool, which had been paying an unsustainable 20% yield. That withdrawal pressured UST's peg on Curve's liquidity pools. As UST slipped below $1, arbitrageurs burned UST for LUNA, which meant minting huge new supply of LUNA. LUNA's price crashed from about $80 on May 5 to under $0.0001 within a week, taking the entire mechanism with it. UST bottomed near 10 cents. Roughly $40 billion in combined market value was gone in days. The Federal Reserve's May 2022 Financial Stability Report later cited this collapse as a case study in stablecoin run dynamics.
What happened with USDC after Silicon Valley Bank failed
USDC's depeg in March 2023 looked nothing like Terra's, because the collateral was real. Circle disclosed that $3.3 billion of USDC's cash reserves sat at Silicon Valley Bank, which regulators shut down on March 10, 2023. With redemptions uncertain over a weekend, traders sold USDC down to about 87 cents on some exchanges by March 11.
The difference from UST: there was no death spiral, because the underlying dollars still existed. Once the FDIC guaranteed all SVB deposits on March 12, and Circle confirmed it could still process redemptions, USDC recovered to $1 within about four days. The lesson here is that a depeg caused by counterparty risk in the banking system can reverse if the collateral itself never actually vanishes. A depeg caused by collapsing collateral, like UST's, doesn't reverse.
What happened with DAI during market crashes
DAI has depegged in smaller, more frequent ways tied to its ETH collateral. In March 2020's "Black Thursday," ETH's price fell over 30% in a day, and MakerDAO's liquidation auctions malfunctioned, letting some vaults get liquidated for near $0 due to network congestion and thin bidding. DAI spiked above $1.05 as demand to repay debt and close positions in a supply-constrained system outpaced arbitrage. It wasn't a collapse but it showed that even overcollateralized systems can wobble when the liquidation mechanism itself gets stressed.
What to check before you hold or trade a stablecoin
Look at three things before treating any stablecoin as cash-equivalent. First, what's the collateral, and is it disclosed with recent attestations. Circle publishes monthly reports; opaque issuers don't. Second, is the peg mechanism collateral-based or algorithmic, since algorithmic designs have a much narrower failure mode that can compound quickly. Third, check where the coin trades and how thin the liquidity is on the exit you'd actually use, since a coin can be "at $1" on one exchange and 90 cents on a smaller one during stress. None of this guarantees safety, but it tells you which kind of depeg risk you're actually holding.