Stablecoin Depegging: A Closer Look at the Risks and Mechanisms

The stability of stablecoins has been put to the test in recent months. On July 22, the algorithmic Balance Coin (BLC) crashed by nearly 100% after a reported BTCB oracle manipulation tied to the 42DAO exploit, resulting in around $912k, $915k being drained from it.

A week earlier, on July 15, the Arbitrum-based perps venue Ostium paused trading after an oracle-related exploit siphoned roughly $18 million in USDC from its OLP vault. This incident highlighted the risks associated with oracles and liquidity.

Despite these incidents, the big fiat-backed names such as USDT and USDC held tight to their pegs. As of July 29, they were trading essentially on peg, while some smaller coins drifted wider.

The reason for this stability lies in the design of these coins. Fiat-backed issuers defend pegs with cash-like reserves and redemption windows, while overcollateralized designs rely on crypto collateral and governance switches. Algorithmic coins, on the other hand, rely on incentives and arbitrage that can vanish under stress.