Why Do Stablecoins Depeg? Causes, Recovery and Holder Risks

• Recovery depends on the underlying problem. A stablecoin returns to its peg only when whatever failed can be fixed or contained.
• Redemption anchors the price. Market prices stay near the peg when eligible participants can reliably exchange tokens for the reference currency.
• History shows very different outcomes. USDC recovered in March 2023 and USDe’s October 2025 dislocation stayed confined to Binance, whereas TerraUSD in 2022 and Resolv’s USR in 2026 lost their pegs for good.
• Key management became a peg risk in 2026. Attackers minted unbacked tokens at Resolv and StablR, and both issuers’ coins broke their pegs within hours.
• A depeg can have several causes. Thin liquidity, inaccessible reserves, damaged backing, a failed stabilisation mechanism, a compromised minting key or a faulty price feed can each produce a discount.
• Holders can lose money even when the token recovers. Discounted sales, forced liquidations and blocked withdrawals can all lock in losses.
• The exact token matters as much as the ticker. The contract, issuer, jurisdiction and redemption route decide what a holder actually owns.

Stablecoins depeg when their market price moves away from the value they are designed to track, which for a dollar stablecoin usually means trading below $1. On the surface, the cause is always an imbalance between buyers and sellers. Underneath, the real driver sits in reserves, redemption access, collateral, minting controls, price feeds or confidence.

For a holder, the useful question is whether the system can still turn the token into its promised value. A reserve-backed coin might recover as soon as bank access returns, while a coin flooded with unbacked tokens can lose the very mechanism it needs to recover. Following the path from backing, through redemption, to a usable exit explains both outcomes.

What is a stablecoin depeg?

A stablecoin depeg is a departure from the asset’s reference value, so a dollar token that trades at $0.97 or $1.03 has depegged. To see where that happens, it helps to separate two markets. The primary market is where the issuer creates and redeems tokens, usually only for institutional customers, while the secondary market is where holders trade with each other on exchanges. A Federal Reserve study of stablecoin markets describes how arbitrage between the two helps a stablecoin hold its dollar value.

Buy bitcoin and stocks. Signup to Coinbase today

The size, duration and location of a deviation determine how much it matters. A small trade in an illiquid pair can print a dramatic price while larger markets stay at par, which is the token’s intended face value, whereas a broad discount combined with withdrawal problems signals a deeper failure.

It also pays to read the quote currency carefully. A price of 0.98 against another stablecoin describes only the relationship between two tokens, so the dollar value depends on the second token’s price too, and a screenshot without the trading pair, timestamp and available depth offers an incomplete diagnosis.

How stablecoins maintain their peg

A stablecoin needs incentives that pull trading back toward its reference value, and for reserve-backed coins those incentives come from minting and redemption. Consider an illustrative stablecoin trading at $0.98. An eligible trader who buys 10,000 tokens for $9,800 and redeems them for $10,000 earns a gross spread of $200 before fees and delays, and both the purchase and the redemption push the price back toward $1. When the price rises above $1, the same traders can mint at par and sell into the extra demand.

Under stress, this arbitrage weakens because a trader facing uncertain redemption timing has to carry the risk until cash arrives. A December 2025 Federal Reserve analysis of the Silicon Valley Bank episode found that USDC hit its low only once primary-market activity largely stopped, and it argued that suspending redemptions can amplify instability on secondary markets.

Why do stablecoins depeg? The main causes

The weak points in that redemption loop explain the main causes of stablecoin depegs. Because each design relies on different assets and operations, the cause should be traced before the size of the discount is interpreted.

Reserve access and reserve losses

The first weak point is reserve access, which can fail even when the assets remain on the balance sheet. A bank closure or payment disruption raises a liquidity problem, meaning the issuer cannot pay on time, and it can quickly raise doubts about solvency, meaning whether assets cover liabilities at all.

An actual reserve loss is harder to repair because the issuer needs fresh capital or recoveries to close the gap. Stream Finance disclosed on 3 November 2025 that an external fund manager had lost about $93 million of fund assets, after which its xUSD token fell to about $0.26 and Stream suspended deposits and withdrawals, Decrypt reported. The Financial Stability Board’s stablecoin recommendations treat clear redemption rights and recovery plans as the main defences against this kind of event.

Thin liquidity

Even with healthy reserves, trading liquidity decides how much can be sold near the quoted price. In a liquidity pool, each sale of one stablecoin worsens the price for the next seller, an effect called price impact that Uniswap explains grows with trade size relative to available liquidity. Slippage, the gap between the expected and actual execution price, adds to the cost in a fast market, as Uniswap’s comparison of price impact and slippage sets out, so a small quoted discount can become a large realised loss for a big seller.

Crypto collateral and algorithmic feedback

Crypto-collateralised stablecoins rely on overcollateralisation, meaning backing worth more than the tokens issued. Decentralised finance (DeFi) protocols, which run financial services through blockchain code, sell that collateral when thresholds are breached, but a rapid crash or thin market can leave the proceeds short and push collateral prices lower still. The composition of the collateral matters as much as the headline ratio, because a portfolio holding another stablecoin inherits that coin’s issuer and redemption risks.

The future of finance is here. Trade crypto and more

Algorithmic designs add a second token to the loop. TerraUSD (UST) let holders exchange one UST for $1 worth of LUNA, so redeeming discounted UST created new LUNA at the moment demand for LUNA was collapsing. The Congressional Research Service’s analysis of the TerraUSD crash describes how this death spiral played out in May 2022. A mechanism tied to an internal token needs strong demand for that token precisely when confidence is weakest, so a record of past stability says little about how it will perform in a larger run.

Synthetic hedges

Some dollar products combine crypto holdings with short futures positions that offset price moves, as Ethena does with USDe. These structures depend on the hedge continuing to work, and Ethena’s own disclosures list funding risk and exchange failure risk among the main threats. That dependence on trading venues is why the way crypto derivatives clearing houses manage counterparty default matters to holders of hedged dollar products.

Weak minting controls

A newer failure pattern emerged in 2026, when attackers bypassed reserves entirely by minting tokens with no backing. On 22 March 2026, an attacker deposited 100,000 USDC into Resolv’s minting contract, received 50 million USR and then minted 30 million more through a privileged role controlled by a single key. USR fell to $0.025 on Curve within 17 minutes and it was still trading near zero in August, according to Webacy’s review of 2026 depegs.

StablR, a Malta-licensed electronic money institution, suffered a similar breach on 23 and 24 May 2026. A compromised key on a minting multisig that needed only one of three signatures let the attacker mint 8.35 million USDR and 4.5 million EURR and sell them on decentralised exchanges. Both cases show that intact reserves offer limited protection once unbacked supply reaches the market, so holders should check who can mint and how many signatures that requires.

Price feeds and venue design

Pricing infrastructure can also produce a depeg that exists in only one place. During the 10 October 2025 crash, USDe fell below $0.66 on Binance, which valued USDe collateral using its own order book. Ethena founder Guy Young said that the problem was isolated to that venue and that minting and redemption kept working throughout. The local price still triggered liquidations. Binance compensated futures, margin and loan users whose USDe, BNSOL or WBETH collateral was hit between 21:36 and 22:16 UTC, and it said it paid out $283 million in total. The episode shows that the price feed an exchange or lending market uses can matter as much as the token’s backing.

Bridges and connected protocols

Operational links can block the exit even when reserves are intact. Circle’s terms for bridged USDC state that Circle does not issue or redeem the third-party bridged versions they cover, so a holder needs to know exactly which contract they own. Circle’s Cross-Chain Transfer Protocol instead burns native USDC on one network and mints it on another, which avoids a wrapped token, although the choice of chain carries its own trade-offs, as this look at how stablecoin blockchains compete to host the float explains.

Stress can also spread through conversion facilities. The Federal Reserve’s SVB analysis found that Dai’s one-for-one USDC swap facility, the Peg Stability Module, became an escape valve for USDC holders in March 2023 and dragged Dai down to USDC’s level even though Dai remained overcollateralised. The stress then passed through similar facilities for USDP and GUSD, which fell to about 91 and 96 cents respectively.

What past depegs show about recovery

Applying those causes to real events shows why some pegs return and others never do. USDC recovered from a reserve-access shock that was resolved within days. Silicon Valley Bank failed on 10 March 2023 holding $3.3 billion of USDC reserves, and USDC fell as low as 86 cents. Once regulators announced on 12 March that all depositors would be protected and Circle resumed redemptions on 13 March, the price fully recovered, according to the Federal Reserve. Circle then said it had cleared substantially all of its minting and redemption backlog, having redeemed $3.8 billion since that Monday, which shows that price recovery and operational recovery follow related but separate timelines.

TerraUSD followed the opposite path. The SEC’s settlement announcement states that UST and Terraform’s other tokens fell close to zero, wiping out $40 billion in market value, and a jury found Terraform Labs and Do Kwon liable for fraud on 5 April 2024. BUSD showed a third pattern: Paxos stopped issuing it from 21 February 2023 at the direction of New York’s financial regulator, while keeping existing tokens redeemable through at least February 2024. The regulator’s notice on Paxos-issued BUSD also distinguished it from Binance-Peg BUSD, a reminder that a regulatory restriction and a reserve failure need separate evidence.

Buy bitcoin and stocks. Signup to Coinbase today

The events of 2025 and 2026 widen that picture. USDe’s dislocation stayed confined to Binance because its mint and redemption path kept working elsewhere, while xUSD, USR and the StablR tokens followed the TerraUSD path because their losses came from a broken strategy or unbacked supply that market buying could not repair. The table below sets all seven events side by side.

Two patterns run through that table. Every recovery came after the specific failure was fixed or shown to be contained, and every permanent loss involved backing or supply that could no longer support the peg.

What makes stablecoin recovery possible?

Those patterns point to four kinds of evidence worth checking during a depeg: backing, redemption, liquidity and price convergence. The first test is whether the backing still supports the promised value. A credible explanation names the affected assets, how recoverable they are and what will cover any shortfall, and after an exploit it should also say how many unbacked tokens remain in circulation.

The second test is whether redemption is actually operating, because an announcement that redemptions have reopened can come before accumulated requests are cleared, as Circle’s March 2023 updates showed. The third is executable liquidity, meaning what a holder can actually receive at their own trade size after costs. The fourth is whether prices have converged across independent venues and trading pairs, which is far stronger evidence than one isolated print at $1.

Reserve reports help within the limits of their scope. The SEC’s investor alert on crypto asset platforms warns that proof-of-reserves reports differ from audits and may say little about liabilities. Before drawing conclusions, it is worth checking a report’s date, the assets it covers and its assurance standard. Circle publishes reserve data on its transparency page, and Tether’s BDO report as of 30 June 2026 showed $187.75 billion in assets against $183.64 billion in liabilities, an excess of $4.11 billion that had roughly halved since March.

How regulation is changing redemption rights

Regulators are now writing redemption paths into law, which changes what holders can expect during a depeg. Article 49 of MiCA, the EU’s Markets in Crypto-Assets Regulation, requires issuers of e-money tokens, which reference a single official currency, to redeem at any time and at par without a fee.

The United States passed the GENIUS Act on 18 July 2025, requiring payment stablecoins to be fully backed by reserves. The Office of the Comptroller of the Currency finalised its implementing rule on 21 October 2026, with both the rule and the Act taking effect on 18 January 2027. The rule sets a two-business-day ceiling for redemptions and requires an issuer to notify the OCC within 24 hours if requests exceed 10% of its outstanding issuance in a day. Issuers must also disclose that payment stablecoins are neither deposits nor federally insured.

Legal rights still leave room for delay under stress. Circle’s MiCA redemption policy, updated on 15 September 2026, lets Circle France defer redemptions during a Stress Event, defined as a period when USDC reserves cannot be rebalanced between Circle France and Circle LLC, while preserving the right to redeem at par. During such an event, Circle France may also cap how much regulated service providers can redeem, although it was noted that on 5 October 2026 that the documents showed no active transfer failure at that time.

What holders can lose during a depeg

Even when recovery arrives, a holder may already have locked in a loss. An illustrative sale of 10,000 tokens at $0.92 returns $9,200, an $800 shortfall that a later return to par does nothing to undo.

The future of finance is here. Trade crypto and more

Leveraged holders face a sharper risk because they can lose collateral before choosing to exit. Aave’s liquidation guide makes a position eligible for liquidation once its health factor drops below 1. A loan with a health factor of 1.05, backed entirely by a stablecoin, falls to 0.945 if that collateral’s recognised value drops 10%, which crosses the threshold even though most of the token’s value remains.

Liquidity providers face a quieter version of the same risk. In a two-token pool, traders seeking the healthier asset leave the pool increasingly concentrated in the distressed one, so a deposit that started out evenly split becomes steadily more exposed to the weaker token.

Custody and insurance add further gaps. An exchange or lending platform can freeze withdrawals while the token trades elsewhere, as Stream’s suspension showed, and the FDIC states that its deposit insurance does not cover crypto assets, so reserves held at an insured bank leave the token itself uninsured.

How to assess a depeg and your exit route

Preparation matters most before a crisis, starting with the exact asset a holder owns. Confirm the token’s contract address, chain, issuer and whether it is native or bridged, then check several markets for the depth available near the quoted price and read issuer notices for the cause and any withdrawal limits.

Direct redemption access varies widely between issuers. Tether’s fee schedule sets a $100,000 minimum, a $150 verification fee and a redemption fee equal to the greater of $1,000 or 0.1%, which is 1% at the minimum size. Circle’s MiCA policy offers individual holders in the European Economic Area a route that requires identity checks and an EEA bank account and should pay out within five business days unless discrepancies arise. Institutional customers redeem through a Circle Mint account instead, and holders outside the EEA redeem USDC with Circle LLC under separate terms.

During a disruption, keep transaction records and dated notices, and compare the cost of selling, redeeming or waiting against any liquidation deadline. Several stablecoins can share the same bank, bridge, exchange or oracle, so spreading holdings reduces risk only when those failure points actually differ. Moving funds through an unfamiliar platform or bridge adds yet another dependency, and buying at a discount exposes the buyer to further losses if the underlying problem gets worse.