The word “stablecoin” is being used to describe all sorts of fixed income instruments and structured products these days. However, not all stablecoins are created equal.

Yes, stablecoins are cryptocurrencies designed to maintain a fixed value in reference to another asset. But they can take many shapes and forms depending on their underlying asset, monetary policy, and technical implementation.

Some stablecoins track different assets that are not fiat currencies such as commodities or gold. Most, however, can be considered “cryptodollars” because they are designed to stay on par with the US dollar. 

Likewise, their monetary policy varies case by case. Some stablecoins keep reserves of their underlying assets that are either fully-backed or 1:1. Others are fractional, where they only keep reserves for a portion of the total existing supply. In some cases stablecoins don’t even require reserves of the underlying asset at all.

A third way to classify stablecoins is around the way they are implemented. It’s worth analyzing different stablecoin types from this perspective because there’s a lot of data on how they’ve performed in depeg events, their current risks, and what can be done about them.

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Types of Stablecoins and Their Mechanisms

Stablecoins generally fall into three categories based on how they maintain their peg. Their implementation plays a crucial role in determining how they respond to risks and whether they can recover. The three main categories are:

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Fiat-Backed Stablecoins/Cryptodollars 

These are backed 1:1 by fiat currency reserves (usually USD) held by a custodian. For each stablecoin issued, an equivalent amount of fiat currency is held in reserve. 

• Examples: Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), M0 (M).
• Mechanism: Users can redeem the token for actual USD from the issuer, which incentivizes the price to stay at ~$1. If the market price falls below $1, arbitrageurs buy cheap tokens and redeem them for $1 of fiat; if it rises above, they can issue new tokens against fiat reserves and sell them.
• Strengths: Typically less volatile because of full fiat collateral. USDC and USDT, for instance, hold tens of billions in cash or cash-equivalent reserves. They are widely used and trusted in crypto markets, often settling trillions of dollars in transactions annually.
• Weaknesses: They rely on centralized entities and banks. Regulatory actions or bank failures can freeze reserves, causing panic. They require trust in audits and transparency of their reserves.

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Crypto-Collateralized Stablecoins 

Backed by cryptocurrency reserves (e.g., Ether or Bitcoin), often over-collateralized to account for crypto’s volatility. 

• Examples: MakerDAO’s DAI (backed by ETH and other crypto assets), USDD (Tron’s stablecoin, partially crypto-backed), sUSD (backed by SNX), LUSD (backed by ETH).
• Mechanism: Users lock volatile crypto as collateral in a smart contract to mint stablecoins. Because crypto prices swing, these are over-collateralized (e.g., $1.5 worth of ETH backing $1 DAI). If collateral value falls too much, automated liquidations or redemptions occur to keep the system solvent and the stablecoin’s price near $1.
• Strengths: Decentralized (no single issuer can freeze assets) and transparent (reserves visible on-chain). Over-collateralization provides a buffer against market crashes. For example, DAI requires roughly 150% collateral, meaning a $100 DAI position might be backed by $150 in crypto.
• Weaknesses: Highly dependent on crypto market stability. In a sharp downturn, collateral can become insufficient fast. If liquidations fail (e.g., due to market congestion or oracle delays), the stablecoin can become under-collateralized and lose its peg. Additionally, redemption is indirect – one must sell the stablecoin on the market or repay a loan, rather than a simple $1 for 1 token redemption.

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Algorithmic Stablecoins 

These rely on algorithms (and sometimes paired tokens) to maintain the peg without full collateral. They may hold partial reserves or none at all, using smart contracts to expand or contract supply based on demand. 

• Examples: TerraUSD (UST) (now defunct), Basis Cash (failed), Empty Set Dollar (ESD), Frax (FRAX) (which began as partially algorithmic), Neutrino USD (USDN) on Waves, Ampleforth (AMPL) (though AMPL is an “elastic” supply token, not a fixed $1 peg).
• Mechanism: The protocol programmatically adjusts the circulating supply of the stablecoin (and possibly a secondary token). For instance, UST was tied to a sister token LUNA – users could always swap $1 of UST for $1 of LUNA and vice versa. The idea was to incentivize arbitrage: if UST < $1, users swap it for $1 of LUNA (reducing UST supply); if UST > $1, users swap $1 of LUNA for newly minted UST (increasing supply). In theory, these moves push the price back to $1.
• Strengths: No direct need for large fiat or crypto reserves. Can be more decentralized and capital-efficient if it works. When demand is strong, they maintain the peg and even earn seigniorage (profit from new issuance).
• Weaknesses: Fragility – if confidence falters, they can enter a “death spiral.” Without solid collateral, a sharp sell-off can lead to a self-reinforcing crash. The TerraUSD (UST) collapse in May 2022 is the prime example: as UST lost its $1 peg, holders rushed to redeem UST for LUNA; this minted enormous amounts of LUNA, crashing LUNA’s price and further undermining UST’s value, leading to a complete collapse. Algorithmic designs lack the safety net of redeemable assets and depend entirely on market psychology and flawless execution of code-based rules.

These are not the only types of stablecoin implementations, however. Some stablecoins experiment with alternative approaches to maintaining their peg. USDe is a synthetic dollar that uses derivatives positions and short-term US government bonds to maintain its peg and USD0++ combines a bond-like mechanism with staking incentives.

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Lessons Learned from Historical Depegs

Many stablecoins have experienced depeg events in the past. Some were brief and quickly resolved; others led to a total collapse. Below is a rundown of notable historical instances of depeg events for different stablecoin implementation types, their causes, and outcomes. (For ongoing analyses on timely examples, be sure to follow Rob on X).

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TerraUSD (UST) – Algorithmic

Permanent depeg 

UST’s depeg in May 2022 was one of the most dramatic failures in crypto history. 

• Cause: A combination of a broad crypto sell-off and loss of confidence triggered a “bank run” on UST. Large holders began selling UST, breaking the $1 peg. The algorithm minted billions of LUNA (the support token) in an attempt to compensate, which crashed LUNA’s price 99%+ in days. The feedback loop meant UST could no longer be restored to $1. 
• Outcome: Permanent collapse – UST fell from $1 to mere pennies, wiping out ~$18 billion in market cap. The Terra blockchain halted, and the stablecoin never recovered its peg (UST now trades far below $1 as “USTC”). This event underscored that fully algorithmic models can fail catastrophically without robust collateral or circuit breakers.

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Iron/Titan (IRON) – Partial Collateral, Algorithmic

Permanent depeg 

IRON was a partially collateralized stablecoin (75% USDC, 25% TITAN token) on Polygon in June 2021. 

• Cause: TITAN (the algorithmic portion meant to absorb volatility) plummeted from over $60 to near $0 in a day due to a panic sell-off and unlimited minting, similar to UST’s dynamic. Iron’s price broke the peg and arbitrage mechanisms failed once TITAN fell too fast. 
• Outcome: IRON fell to ~$0.75 and never fully recovered its peg (effectively collapsing). Prominent investor Mark Cuban, who had funds in IRON, famously called for stablecoin regulation after this loss, highlighting the dangers of partly algorithmic designs.

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Neutrino USD (USDN) – Crypto-Collateralized, Algorithmic

Permanent depeg

USDN, built on the Waves blockchain, was intended to be a stablecoin collateralized by WAVES tokens. 

• Cause: Questions about Waves’ price manipulation and insufficient collateral value led to repeated depegs. At times, USDN traded well below $1 (e.g., ~$0.80 or lower).
• Outcome: Despite multiple attempts to restore the peg (including new mechanisms and governance changes), USDN struggled throughout 2022-2023 to hold $1. Eventually, its issuer announced plans to wind it down or integrate it into a new stablecoin, effectively marking a failure to permanently maintain its peg. This illustrates how even crypto-backed stablecoins can fail if the backing asset is too volatile or if there’s a loss of confidence in the issuer’s ability to manage the peg.
  
  

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Nubits (USNBT) – Algorithmic

Permanent depeg 

Nubits was an early algorithmic stablecoin (launched in 2014) that held a $1 peg for several years. 

• Cause: Ultimately, the supporting mechanisms (parking interest rates and printing a secondary token for funding) couldn’t handle a severe demand drop. The reserves depleted and Nubits lost its peg in 2016–2018, drifting far below $1. 
• Outcome: It never regained parity and serves as an early warning that algorithmic approaches can maintain stability for a time, but are vulnerable to black swan events or flawed economics.

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Tether (USDT) – Fiat-Backed

Temporary depeg 

USDT is the largest stablecoin, but it has seen momentary wobbles. 

• Notable Events: In October 2018, amidst rumors that Tether’s banking relationships were in trouble and questions about its dollar reserves, USDT dropped to ~$0.92 on some exchanges. Similarly, in March 2020 (global market panic from COVID-19), USDT dipped slightly below $1 under high market stress. 
• Cause: These depegs were driven by liquidity and confidence shocks – traders were briefly unsure if Tether could honor redemptions. 
• Outcome: USDT quickly regained its peg in those instances after Tether publicly affirmed convertibility and as arbitrageurs stepped in. Tether’s price typically rebounds fast due to its dominant market role, but these incidents highlight that even fiat-backed stablecoins can slip if users doubt the reserves or if redemption channels falter.

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USD Coin (USDC) – Fiat-Backed

Temporary depeg 

USDC has been regarded as a very safe stablecoin, fully backed by cash and U.S. Treasuries. 

• Notable Events: In March 2023, USDC temporarily depegged dramatically, falling as low as $0.87–$0.90 on various platforms (and even to ~$0.74 in a moment of illiquidity on Binance). 
• Cause: The trigger was the collapse of Silicon Valley Bank (SVB), where ~$3.3 billion of USDC’s cash reserves were held. When SVB was taken over by regulators, USDC holders feared those reserves could be lost or locked for an extended time, leading to a panic sell-off. Over a weekend, USDC fell ~10-13% below peg. 
• Outcome: U.S. authorities stepped in to backstop SVB deposits by Monday, and Circle (USDC’s issuer) assured the public it would cover any shortfall. Confidence was restored and USDC rapidly climbed back to $1. The episode lasted only a few days, illustrating both how even well-regulated stablecoins can face sudden shocks and how strong recovery mechanisms (in this case, regulatory intervention and transparency by the issuer) can restore a peg.

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Sky (fka MakerDAO)’s USDS (fka DAI) – Crypto-Collateralized

Temporary depeg 

DAI/USDS has generally held its peg, but it’s not immune to stress. 

• Notable Events: “Black Thursday” in March 2020 saw the price of ETH (major DAI collateral) crash by ~50% within 24 hours. 
• Cause: This led to under-collateralized vaults and failed liquidation auctions (due to network congestion), creating a sudden collateral shortfall. DAI’s price spiked above $1, trading around $1.05-$1.10 because demand for stablecoins soared and there was uncertainty if DAI could be redeemed for full collateral.
• Outcome: MakerDAO emergency measures included debt auctions (issuance of MKR governance tokens to re-collateralize the system) and raising the debt ceiling. The peg stabilized back to ~$1 after a short period.

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Huobi’s HUSD – Fiat-Backed

Temporary depeg 

HUSD was a dollar-backed stablecoin associated with the Huobi exchange. 

• Notable Events: In August 2022, HUSD lost its peg dramatically, plunging to $0.30–$0.85 range. 
• Cause: Huobi had recently delisted HUSD, and it came out that liquidity issues arose when market maker accounts were closed due to regulatory compliance, stranding HUSD liquidity. 
• Outcome: The issuer stated the depeg was caused by closures of specific market maker accounts for compliance reasons, which disrupted convertibility. HUSD did recover to $1 after the team intervened and restored access to liquidity. However, confidence was shaken and, over subsequent months, HUSD’s usage dwindled. The HUSD case shows how even fiat-backed stablecoins can plunge if their support infrastructure (exchanges, market makers) is suddenly removed, especially if it’s a lesser-known coin.

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Tron’s USDD – Algorithmic, Overcollateralized

Temporary depeg  

USDD is an algorithmic stablecoin issued by the Tron DAO, aiming for decentralization while being (over)collateralized by assets like BTC, USDT, and TRX (Tron’s native token). 

• Notable Events: In June 2022, amid crypto market turmoil and possibly due to a large sell-off by a single user, USDD broke its peg, trading around $0.97–$0.98 for a period. Later in November 2022 (during the FTX exchange collapse contagion), USDD again wobbled to ~$0.97. 
• Cause: Likely large sell-offs and general market panic tested the algorithm’s ability to maintain the price. Tron’s founder Justin Sun mobilized assets and withdrew TRX from exchanges to reduce USDD selling pressure and increase collateral ratios. 
• Outcome: USDD was brought back near $1 by operations of the Tron Reserve injecting more collateral and publicizing over-collateralization. But the peg instability, even if minor, shows that partially algorithmic designs remain risky. USDD’s need for active intervention to maintain $1 suggests it’s vulnerable to future depegs if there’s a crisis of confidence or if collateral (like TRX) falls sharply.

We can also look at more recent depeg examples that involve more experimental implementation models:

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Usual Protocol’s USD0++ — Alternative: Bond-like Mechanism and Staking Incentives

Temporary depeg 

USD0++ is a liquid staking derivative for the USD0 stablecoin issued by Usual Protocol that operates similar to a traditional bond and uses a Price Floor Redemption mechanism to maintain its peg.

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• Notable Events: On January 11, 2025, USD0++ depegged and its price fell $0.89 before a partial recovery to $0.92.
• Cause:  Usual Protocol implemented a controversial change to its Price Floor Redemption that caused panic among holders. While they could originally redeem their USD0++ 1:1 with the USD0 stablecoin, the imposition of a $0.87 price floor led to large liquidations across different markets.
• Outcome: The issuer averted the crisis by redistributing earnings to the community and enabling an “Early Unstaking” option where holders could redeem their USD0++ by forgoing rewards they had previously earned. Today, USD0++ has returned to its peg.

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Ethena's USDe — Alternative: Backed by Derivatives and Bonds

Temporary depeg 

USDe is an alternative to fiat-backed stablecoins that achieves its peg through complex hedging strategies where the issuer holds derivatives positions and US government bonds. It is issued by Ethena.

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• Notable Events: On February 21, 2025, the Bybit exchange suffered the largest hack in web3 history, losing over $1.45 billion. The event caused the price of USDe to dip to $0.97.
• Cause: While the breach did not directly affect USDe, it caused concern over the security of its collateral. This created systemic pressure that affected user behavior and stablecoin demand producing a flight to safety and liquidity dislocations in DeFi pools where USDe trades.
• Outcome: As previously explained, Ethena was able to employ a reserve fund that became critical in handling the stress of the event. It processed $120M in USDe redemptions without a hitch, backed by a hefty stablecoin buffer ($1.9B).

Overall, what we can glean from historical depegs is that algorithmic stablecoins have been most prone to catastrophic failure (UST, IRON, etc.). Crypto-collateralized stablecoins have usually recovered if over-collateralized and managed well (DAI’s resilience). On the other hand, fiat-backed stablecoins tend to restore pegs quickly unless there’s a fundamental solvency concern (USDC, USDT cases).

The more recent use of alternative approaches to stablecoin backing also remains uncertain. While there is wide experimentation, these new methods have also introduced new kinds of risks that are particular to each approach. 

These observations bring us to the question of the different kinds of risks that are associated with stablecoins and their implementation. It also starts to hint at the need for better risk frameworks that can respond to the variety of implementation models.

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Risks Affecting Stablecoin Pegs

There are several risk factors we can look at to determine which stablecoins are likely to depeg. While there is a current need for better ways to measure their effects on stablecoins, they are a good starting point for market analysis. They can also help us know whether such a depeg is temporary or permanent. Some of these risks are:

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Regulatory Risk

Although the landscape has become more favorable in 2025, regulations are still a top concern for stablecoin issuers and holders alike:

• Regulatory Actions: Government regulators have started treating large stablecoins as potential systemic risks or at least as money market equivalents. In 2023, U.S. regulators (NYDFS) ordered Paxos to stop issuing BUSD, citing it as an unregistered security. This effectively put an end-date on BUSD’s life (it’s redeemable but can’t expand), leading Binance to shift to other stablecoins. If regulators crack down on a stablecoin (due to compliance issues, reserve concerns, or it being seen as a competitor to a Central Bank Digital Currency), the affected coin could lose market confidence and depeg. Regulatory action can also freeze reserve assets – for example, if a fiat-backed coin holds reserves in a country that imposes capital controls or sanctions, redemption may halt.
• Legal Clarity and Protections: Another aspect is how well legally protected customers’ claims on reserves are. If a stablecoin issuer were to go bankrupt, do holders have a first claim on reserves? If not clearly delineated, a fear about issuer insolvency could cause a run. S&P Global notes that if the reserves aren’t held in bankruptcy-remote structures, holders risk losses if the issuer fails. This is more of a concern for centralized stablecoins (fiat-backed). For example, Tether’s corporate structure and jurisdiction might pose legal risks if something went awry, whereas USDC’s reserves are in regulated U.S. institutions with presumably clearer oversight.
• Compliance (KYC/AML): As regulations increase, some stablecoins might be forced to implement stricter KYC or blacklist certain addresses (indeed, USDC blacklisted Tornado Cash-linked addresses in 2022). Such actions don’t directly depeg the coin, but they can fragment liquidity (if certain pools can’t accept the coin) and reduce trust in “permissioned” stablecoins, possibly driving users to riskier ones and causing volatility.

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Liquidity and Redemption Risk

Liquidity – both of the stablecoin in trading venues and of the underlying reserves – is crucial:

• Market Liquidity: A well-pegged stablecoin typically has deep order books and many arbitrageurs. If a stablecoin is primarily listed on one exchange or a few DeFi pools, it’s vulnerable. We saw HUSD drop to 0.30 when Huobi (its main venue) delisted it. Similarly, Neutrino USD’s liquidity was tied to the Waves ecosystem; when that came under attack, there were few external arbitrageurs to support the price. Larger stablecoins like USDT and USDC trade on almost every exchange and chain, which helps maintain the peg (you can swap them across venues if one market is off). If market makers withdraw (as sometimes happens in a crisis or if they face their own issues), even big stablecoins can temporarily wobble.
• Redemption Process: For fiat-backed coins, the ability for large players to directly redeem from the issuer at $1 (usually in large batches like $100k or $1M lots) is key. If that process halts or is perceived to halt, the peg will drift. USDC’s depeg was so sharp because over the weekend nobody could actually redeem USDC for USD until banks opened Monday, so traders had to guess the outcome. Tether at times has suspended direct redemptions (or imposed fees), which can widen the price from $1 on exchanges because only secondary market demand/supply sets the price. Crypto-collateralized coins rely on arbitrage into the collateral (for DAI, you can always redeem 1 DAI by paying it back into a CDP vault in exchange for $1 of collateral minus fees). If those mechanisms clog (due to network issues or maxed-out parameters), the peg can stray.
• Reserve Liquidity: It’s not just can you redeem, but what are reserves invested in? If reserves are in ultra-liquid assets (cash, T-bills), redemptions can be met quickly. If reserves are in corporate bonds, loans, or other coins, there could be a liquidity crunch. For example, questions were raised when Tether revealed some reserves in past years included commercial paper of unknown quality – if those couldn’t be sold quickly in a crisis, could Tether meet a sudden $10B redemption demand? Now Tether claims to hold a majority in T-bills which are very liquid. Similarly, some stablecoins like Maker’s DAI have started including real-world assets (like bonds, or even revenue streams); these might not be instantly liquid in a crisis, potentially slowing down the stabilization process.

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Collateral and Asset Quality Risk

This pertains to stablecoins backed by assets (fiat or crypto):

• Under-Collateralization: Obviously, if a stablecoin isn’t fully backed (or over-backed as required), it may not redeem 1:1, leading to a permanent depeg. Most reputable fiat coins claim full 1:1 reserves, but transparency varies. Tether, for example, for a long time did not provide detailed audits, leading to speculation it was not fully backed (though it has weathered redemptions of tens of billions in 2022, suggesting it was at least mostly backed). For crypto-backed coins, a sudden crash can reduce collateral value below the stablecoin supply – if not corrected, this is dangerous. MakerDAO mitigates this by over-collateralization and on-chain liquidations, but it’s not foolproof if markets behave erratically.
• Collateral Concentration: Another risk is what type of collateral. If a stablecoin is 100% backed by a single asset (or highly correlated assets), it’s risky. Example: if a hypothetical stablecoin is 100% backed by Bitcoin and BTC falls 50% in a day, that stablecoin is effectively only 200% collateralized to 50% collateralized – without immediate action, holders will rush to sell, breaking the peg. Maker’s DAI uses a mix (ETH, USDC, etc.), which can spread risk but also introduces centralized collateral risk (USDC’s issue affecting DAI).
• Reserve Impairment: For fiat stablecoins, reserves could be impaired by external events – a government seizure, a default on instruments they hold, etc. S&P Global highlighted that impairment or mismanagement of reserves can cause depegs. A real-world example: if a stablecoin held a lot of money in a now-failed bank, that portion is at risk (this is exactly what happened to USDC with SVB). If a stablecoin treasury decided to chase yield (say, lent out funds to earn interest) and those loans default, suddenly the coin isn’t fully backed.
• Quality of Audits and Transparency: Collateral risk is mitigated by clear, frequent audits and public disclosure. USDC publishes monthly reserve attestations by a top firm; Tether publishes a breakdown of assets quarterly. However, if those audits are not trusted or are infrequent, rumors can cause a run. The more opaque a stablecoin’s backing, the more likely holders bolt at the first sign of trouble, causing depeg.

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Algorithmic and Design Risk

This mainly concerns the algorithmic stablecoins or novel designs:

• Death Spiral Mechanics: If maintaining the peg relies on a secondary token (like LUNA for UST, or TITAN for IRON), the stablecoin is only as good as the continuous faith in that secondary token’s value. When things turn bad, both the stablecoin and the support token can crash together, accelerating the demise (UST/LUNA perfectly illustrated this). Any design where new stablecoins are minted against a volatile asset that can drop in value while being inflated (in supply) is inherently unstable.
• Insufficient Emergency Measures: Does the stablecoin have circuit breakers or governance to step in during extreme conditions? For example, MakerDAO could theoretically trigger “Global Settlement” – a last-resort shutdown that lets DAI holders redeem directly from collateral pools. Terra had almost no mechanism to halt or wind down safely once the run started – it attempted to use BTC reserves to buy back UST, but that failed to stop the bleeding. Algorithmic designs often assume rational market actors; in panics, that assumption breaks. Modern algorithmic or semi-algorithmic stablecoins (like USDD or Frax) advertise over-collateralization and may manually intervene (Tron DAO added collateral when USDD faltered), but that starts to resemble discretionary central banking, undermining the “code will handle it” premise.
• Smart Contract and Technical Risks: Bugs or exploits can also cause depegging. If a stablecoin’s smart contract is hacked (feared in the case of some DeFi-issued stables) or an oracle providing price data fails, the peg mechanism can break. For instance, if an oracle reported the price of USD = $2 by bug, an algorithmic stable might over-adjust supply. There haven’t been major cases of peg loss purely due to a hack yet (most hacks just steal reserves), but it remains a possibility.
• Governance and Human Factors: Decentralized stablecoins rely on governance by token holders (as with Maker’s MKR votes). Slow or poor governance decisions in a crisis could exacerbate problems (if they can’t act fast enough to adjust fees or collateral parameters). Centralized stablecoins rely on human management – a bad decision (like misallocating reserves, or a communications misstep that spooks markets) can cause short-term depegs.

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Market Confidence and Adoption Risk

A stablecoin’s strength ultimately hinges on user confidence:

• Loss of Confidence: If users collectively believe a stablecoin is in trouble, their rush to sell or redeem can create the very depeg they fear – a self-fulfilling prophecy. Confidence can be shaken by rumors on crypto Twitter, a bad news report, or a sudden unexplained drop in the peg (even if minor). Lack of transparency can accelerate loss of confidence, as people fear the worst in a vacuum. Tether’s historical dips were largely confidence crises. UST’s collapse began with loss of confidence.
• Adoption and Network Effects: Stablecoins with broad adoption (many exchanges, wallets, DeFi platforms supporting them) have more stakeholders who will act to restore the peg (via arbitrage or simply continuing to accept it). A niche stablecoin that few use will find no cavalry in a crisis. Low adoption also often means low liquidity (tying back to liquidity risk).
• Competitive Dynamics: If a stablecoin is rendered redundant or less useful due to a competitor or an official Central Bank Digital Currency, it could slowly lose users, and a shrinking user base might at some point jump ship causing a depeg. We may see this with something like BUSD – as its supply shrinks, at some point traders might stop using it and if liquidity gets too low, it could depeg slightly until the last holders redeem or sell it off.

In summary, the risks affecting stablecoins are varied and often related to factors that go beyond their implementation model. This makes them hard to evaluate in straightforward terms. A stablecoin most likely to permanently lose its peg is one with weak or convoluted backing (especially algorithmic), poor transparency, low usage, and high external risks. At the same time, temporary depegs can hit even the big players during crises, but those with sound structures have consistently shown recovery.

All of this points to a market need for tools that evaluate and hedge risk. Developing specific tools to measure each risk factor might be unrealistic. However, we can develop risk pricing mechanisms so that the market can inform market participants in real time about each stablecoin’s particular depeg risk. This can also present participants with the opportunity to either absorb risk or create hedging strategies.

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Resilience and Recovery Mechanisms

In any case, depeg events are not a death sentence. Stablecoins have the ability to bounce back to their target price depending on certain factors that range from the response of large holders to the issuer’s ability to mitigate a sell-off to the kind. In an ideal scenario, they would also be determined by the risk management techniques applied by regular market participants. Some key mechanisms for stablecoin peg recovery include:

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Arbitrage and Open Market Operations 

Most stablecoins rely on arbitrageurs – independent traders or even the issuer – to stabilize price. Fiat-backed giants (USDT, USDC) typically see rapid arbitrage-led recovery because large players know they can redeem with the issuer. For instance, during USDC’s drop to ~$0.90, savvy firms likely bought millions of USDC at a discount, confident they’d get $1 each when banks reopened – making a huge risk-free profit and pushing the price up. This natural incentive corrects most minor depegs within hours or days. Tether, in 2018’s scare, also relied on buyers stepping in at $0.95 because they believed Tether would honor redemptions (which it did, handling $600M+ in a day at the peak of that run).

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Issuer Intervention 

Sometimes the issuer or affiliated parties will actively use reserves to buy their coin on the market, shortening the depeg. Tron’s DAO Reserve explicitly did this for USDD, using collateral funds to purchase USDD when it traded at $0.97 until it went back to $1. This is analogous to a central bank defending a currency peg by using foreign reserves to buy its currency. It can work if the reserve is deep enough relative to sell pressure.

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Redemption and Minting Facilities 

The design of how new stablecoins are issued or redeemed is vital:

• For fiat-backed: Clear, fast redemption (ideally T+0 or T+1 day) is best. USDC’s strength is that any verified user can redeem 1 USDC for $1 (with some minimum amount), and during normal times this happens in under 24 hours. Tether historically had some friction (only large users, slower times, fees), which sometimes caused lingering small discounts on USDT (e.g., $0.998 instead of $1). Improvements in redemption ease generally tighten the peg. On the flip side, the ability to mint new coins easily against fresh collateral can help if a stablecoin is above $1 – issuers can increase supply (or users do so in crypto-collateral systems) to push it down.
• For crypto-collateralized: Mechanisms like MakerDAO’s auctions and emergency shutdown option build confidence. If DAI went way off, keepers would arbitrage by buying cheap DAI and using it to pay back loans for collateral, or by creating new DAI if it’s expensive. Maker can also vote to raise fees or adjust collateralization ratios if needed to coax the peg back. Liquity’s LUSD has an interesting mechanism: if LUSD < $1, users can directly redeem 1 LUSD for $1 of ETH from the system, which immediately arbitrages the price up (and if >$1, anyone can mint new LUSD by borrowing against ETH at slight premium). These designs make it likely that any deviation is quickly corrected by design, assuming the underlying collateral market is functioning.
• For algorithmic: Recovery mechanisms are the weakest here. They often rely solely on market incentives which may vanish in a panic. Once UST started spiraling, there was no circuit breaker. Some newer algorithmic ideas propose things like reserve pools or partial collateral to restore confidence, but effectively those start making them hybrid models. In general, if an algorithmic stable loses peg significantly, its recovery is largely at the mercy of speculators choosing to believe in it again or a new backing being introduced. In practice, this hasn’t happened for any fully algorithmic coin of size – once they fail, they tend to stay down or fade away.

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Transparency and Communication 

A soft but important “mechanism” is how quickly and clearly an issuer communicates during a crisis helps recovery. Circle (USDC’s issuer) was proactive during the SVB crisis, publicly announcing the exact exposure and their plan to cover any shortfall, which likely prevented further free-fall. MakerDAO’s community was active on forums discussing emergency measures during DAI’s stresses. In contrast, during Terra’s collapse, communication was slow and insufficient as the problem snowballed. Good transparency can actually stop a depeg from deepening since people have less fear of the unknown.

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Capital Backstops 

In some cases, outside capital can bail out a stablecoin in trouble. For example, if a crypto-backed stable had a shortfall, a consortium of investors might inject funds to re-collateralize it in exchange for equity or future fees (similar to how traditional banks might get bailed out to protect deposits). This hasn’t been clearly tested yet in stablecoins, but some issuers have venture investors who might step in if only a moderate amount is needed to save a basically sound project. We might consider how Tron’s Justin Sun is effectively a backstop for USDD – he publicly committed funds to maintain the peg (which is a centralized dependency, but a form of backstop).

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Resilience Comparisons

Taking into account the different factors that make a stablecoin more or less resilient, we can examine their historical performance by each category:

• Fiat-Backed (USDC, USDT, BUSD, etc.): Historically very resilient to temporary depegs if reserves are intact. They usually snap back within hours to days. None of the major fiat stables have permanently failed; at worst, they might scale down (as BUSD is doing due to regulatory orders) but still honor $1 redemptions throughout. A permanent failure would likely only occur if reserves were irrecoverably lost or seized (which is extremely unlikely without broader financial system collapse, given reserves are in cash/treasuries).
• Crypto-Collateralized (DAI, LUSD, etc.): Also quite resilient so far. DAI’s worst deviation saw it slightly above $1 (not a failure per se, but a premium). Over-collateralization and active governance have kept them relatively stable. The risk of permanent failure is low unless the underlying crypto markets go into a prolonged tailspin (e.g., if ETH lost 90%+ quickly and failed to recover, DAI could be in trouble). The recovery mechanism is as strong as the collateral market and the arbitrage incentives.
• Algorithmic (UST, et al.): Track record is poor. Once a hard depeg (say >10%) happens for an algorithmic stable, odds of full recovery are slim without external intervention or a fundamental change. For instance, Frax, which started partially algorithmic, moved to largely collateralize its supply after seeing what happened to Terra – effectively abandoning the pure algorithmic approach. So truly algorithmic designs that remain are few and mostly small because trust in that model is broken. We can safely say any fully algorithmic stablecoin that deep-depegs is a candidate for permanent failure.
• Alternative Stablecoins (USD0++, USDe): Demonstrated moderate resilience with effective but complex recovery mechanisms. USD0++ experienced significant depeg due to controversial protocol changes but regained stability via community redistributions and unstaking incentives. USDe faced systemic pressures after an external market shock (Bybit hack) but swiftly restored its peg using robust derivative hedges and ample reserves. These alternatives are resilient if managed transparently and proactively.

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Key Takeaways

Stablecoins have become a cornerstone of the crypto ecosystem, but their stability is not guaranteed. By examining their structures, history, risk factors, and resilience we find that:

• Fiat-backed stablecoins or crypto-dollars (USDT, USDC, M, etc.) are generally stable with strong peg recovery dynamics. They can have brief depegs due to market panic or operational bottlenecks (especially off-bank hours), but these events tend to resolve quickly. Permanent depeg is unlikely unless something fundamentally undermines their reserves or legality.
  
  
• Crypto-collateralized stablecoins (DAI/USDS, LUSD etc.) bring decentralization and have weathered intense volatility. As long as they remain over-collateralized and adaptive (through governance or automatic mechanisms), they usually pull back to $1 even after shocks. Their biggest vulnerability is an extreme and rapid collapse in collateral value or failure of the liquidation mechanisms.
  
  
• Algorithmic stablecoins are the most precarious. History (Nubits, IRON, UST, and others) shows they often work until they spectacularly don’t. Without substantive collateral or intervention, a lost peg can cascade into a total collapse. Many algorithmic projects have failed to re-establish a lasting $1 peg after losing it, making them likely to permanently fail unless they evolve into a collateralized model.
  
  
• Alternative stablecoins (USD0++, USDe etc.) offer novel mechanisms like bond-like staking and derivative-backed hedging. They can temporarily depeg under unique stresses—such as controversial protocol changes or external market shocks—but robust recovery plans (earnings redistribution, reserve funds, flexible redemptions) often successfully restore their peg. Their resilience depends heavily on transparent management and effective crisis response.
  
  
• Current risks revolve around regulatory crackdowns, liquidity crunches, collateral quality, and technology flaws. Notably, regulatory and banking-related shocks have caused recent depegs (USDC/SVB, BUSD regulatory halt), while crypto-market crashes have tested the collateralized stables (DAI in 2020). Knowing these risk factors helps anticipate which coins might waver in future turbulence.
  
  
• Resilience factors include transparency, liquidity, and robust design. Stablecoins with clear 1:1 redeemability and audited reserves inspire confidence and see swift arbitrage corrections. Decentralized stablecoins with strong algorithms and over-collateralization (and community governance ready to act) can also be very resilient. On the flip side, opacity or over-complex designs breed doubt, which can quickly lead to depegging in a crisis.
  
  
• Lesser-known stablecoins are often riskier simply due to lower adoption and scrutiny. If they depeg, fewer market participants are motivated or able to restore the peg. Thus, crypto users should be cautious with newer or thinly traded stablecoins, especially those promising high yields or using experimental mechanisms – often, higher yield implies higher risk of something going wrong with the peg.
  

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Conclusion

Depegs are nothing new and they’re not going away. However, just as there are different stablecoin types carrying different risks, the risks themselves are not the same either. There are many ways to evaluate risk in the stablecoin market and, in some cases, this can even lead to new opportunities if the risk is correctly priced.

This is an underserved need. Cork’s Depeg Swap is a tool that allows the market to price depeg risks in real time. It creates new opportunities for market participants to both hedge against and potentially benefit from depeg events. 

For a deeper understanding of how to get started with Cork, see the Cork documentation.