Stablecoin Breakdowns Reveal Fragile Redemption Machine

Stablecoins are designed to maintain a constant value of $1 per token. However, recent events have shown that this is not always the case. In March 2023, USDC fell to $0.87 after Circle's reserves froze at Silicon Valley Bank. Similarly, in November 2025, xUSD crashed to $0.43 after a fund manager disclosed a $93 million loss.

The stability of stablecoins is not guaranteed by their code, but rather by the confidence of arbitrageurs who buy and sell tokens at a discount or premium to $1. If the redemption machine fails, the peg can break, causing losses for investors.

The May 2022 terraUSD (UST) collapse was caused by a design problem, where UST held its peg not with reserves but with an algorithmic seesaw against its sister token LUNA. When large withdrawals knocked UST off $1, holders rushed to convert to LUNA and sell, hyperinflating LUNA's supply and vaporizing the very asset meant to back the peg.