Stablecoin Depegs: Understanding the Economic Promise Behind the Peg
The stablecoin market has experienced several depegs in recent years, where the price of a digital dollar breaks away from its peg to $1. But what really happens when this occurs? The answer lies not in the code or reserves but in economics and human behavior.
When a stablecoin trades below its peg, such as USDT at $0.99, arbitrageurs step in to buy it at a discount and redeem it with the issuer for $1, pocketing the difference. Conversely, if it trades above $1, they mint new tokens for exactly $1 and sell them.
The redemption machine that keeps the peg is an economic promise, not a law, and its narrow doorway means only certain entities, like verified customers or institutional accounts, can directly redeem their stablecoins. Everyone else depends on a chain of arbitrageurs to keep buying discounted tokens during a panic.
Four notable depegs have occurred: the 2018 USDT scare due to confidence problems, the 2023 USDC depeg caused by banking issues with Circle's Silicon Valley Bank reserves, the 2025 xUSD collapse from counterparty risks with leveraged strategies, and the 2022 terraUSD (UST) failure due to design flaws.