Depegging
DeFi risk • peg stability
Depegging occurs when a stablecoin or pegged asset drifts away from its intended fixed value—usually tied to the U.S. dollar. This loss of parity can be temporary or catastrophic, caused by insufficient collateral, flawed algorithms, liquidity withdrawals, or market panic. Depegging undermines the credibility, functionality, and utility of the asset, especially in DeFi systems that rely on price-stable instruments for collateral, lending, and liquidity.
Use Case: During a banking crisis, users rapidly exit USDC due to fears about reserve access, triggering a temporary depeg. Traders who anticipated the risk rotate into alternate stablecoins like RLUSD to preserve capital stability.
Key Concepts:
- Collateral Failure — Occurs when the assets backing a stablecoin lose value or become inaccessible.
- Algorithmic Breakdown — Supply/demand models can spiral out of control (e.g., UST collapse).
- Liquidity Drain — Mass redemptions or withdrawals can force prices below $1 due to market imbalance.
- Market Sentiment — FUD and trust erosion can accelerate depeg cascades even if collateral is intact.
Summary: Depegging is a critical risk in both centralized and decentralized stablecoin systems. It erodes trust, destabilizes protocols, and exposes users to hidden losses. As stablecoins evolve, transparency, real-world backing (like Treasuries), and stress-tested liquidity models are essential to minimizing depeg risk and maintaining utility across crypto ecosystems.