Why Do Stablecoins Depeg? The Mechanisms Behind Every Real Case
A closer look at the specific failure modes that have caused stablecoins to lose their peg, from reserve doubts to algorithmic death spirals.
By Firoz Khan|4 August 2026|Updated 20 September 2026|7 min read
A stablecoin depegs when its market price meaningfully diverges from its intended target, almost always $1 or £1. It's meant to be a rare, temporary anomaly quickly corrected by arbitrage. In practice, several real, well-documented depegging events have shown the mechanisms that are supposed to hold the peg can fail under specific, identifiable conditions.
Reserve doubt: the fiat-backed failure mode
A fiat-backed stablecoin's peg depends entirely on market confidence that redeemable reserves genuinely exist. When credible doubt emerges about an issuer's reserves or solvency, holders rush to redeem or sell, and if that rush outpaces the issuer's actual ability to honour redemptions, the price can trade meaningfully below the peg until confidence, and typically clearer reserve reporting, is restored.
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Collateral shock: the crypto-backed failure mode
A crypto-collateralised stablecoin is backed by other volatile cryptoassets held in excess of the coin's issued value. A sudden, sharp fall in that collateral's value can push the system below its required collateralisation ratio faster than automated liquidations can correct it, straining the peg during exactly the market conditions when it's most needed to hold.
The algorithmic death spiral: the mechanism behind the biggest collapse
TerraUSD relied on a two-token mechanism where the stablecoin could always be swapped for a fixed dollar value of a companion token to maintain its peg, with no real collateral backing the promise. Once confidence cracked and large-scale selling began in May 2022, that swap mechanism itself flooded the market with the companion token, collapsing its price and destroying the very mechanism meant to restore the peg, a self-reinforcing spiral that wiped out tens of billions of dollars in value within days.
What this means for evaluating any stablecoin today
Check specifically which mechanism backs the peg, and stress-test it mentally: what actually happens to this specific coin during a genuine crisis of confidence, not just during calm, normal market conditions. The mechanism, not the branding or the word 'stable' itself, is what determines how it behaves under real pressure.
A reminder
The FCA risk warning still applies to higher-risk crypto content. Always assess how much risk you are willing to take before buying.
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