Stablecoin Depegs Explained: What Really Happens When a Digital Dollar Breaks the Buck

Stablecoins promise a constant $1, yet USDC has traded at $0.87, Tether’s USDT at $0.88, and Terra’s UST collapsed to virtually zero in a crash that erased roughly $40 billion. As recently as November 2025, a DeFi stablecoin called xUSD lost more than half its value in a single day.

Nothing in a stablecoin’s code holds its price at $1, meaning that the peg is simply an economic promise where the issuer says every token can be redeemed for one real dollar, and arbitrage does the rest. If USDT trades at $0.99, professional traders buy it at a discount and redeem it with Tether for $1.00, pocketing the difference and pushing the market price back up.

Conversely, if it trades above $1, they mint new tokens for exactly $1 and sell them. The market price stays pinned only because that redemption machine is believed to work.

In practice, the redemption machine has a narrow doorway. Tether, for instance, requires verified customers and a $100,000 minimum to redeem directly, while Circle (USDC’s issuer) works through institutional accounts. Everyone else (be it the retail holder, the DeFi protocol, the offshore exchange) depends on a chain of arbitrageurs having both the access and the nerve to keep buying discounted tokens during a panic.

That structure is why depegs happen on exchange screens even when the issuer never misses a redemption, i.e. the peg’s first line of defense is other people’s confidence, not the reserves themselves.

When one of those managers disclosed a $93 million loss, Stream froze withdrawals and xUSD cratered from $1 to as low as $0.24 within hours (with $160 million in user deposits being frozen).

When large withdrawals knocked UST off $1, holders rushed to convert to LUNA and sell, hyperinflating LUNA’s supply and vaporizing the very asset meant to back the peg. UST fell below $0.10 within a week and trades near $0.02 today. Roughly $40 billion across the two tokens evaporated, and the collapse dragged down hedge funds, lenders, and, eventually, the FTX exchange’s fragile empire with it.

Shrinking supply doesn’t translate directly into a depeg, but it thins the buffer of arbitrage capital that absorbs shocks, which is precisely what gets tested when the next scare arrives.

That buffer is also unevenly distributed since USDT and USDC alone still account for roughly 83% of the entire $307.6 billion stablecoin market, meaning the redemption machinery that keeps the whole category pinned to $1 runs through two companies’ balance sheets and banking relationships.

That concentration means that even though the two coins dominate trading, which is generally a stabilizing factor, it also results in shocks to either issuer (such as a banking failure like Circle’s in 2023, a regulatory action, or a reserve dispute), causing immense unforeseeable damage.

Firstly, it is important to check the cause itself because reserve-backed coins (knocked off the peg by fear or a banking hiccup) tend to always snap back once redemptions are proved out. However, designs that have relied on their own token (à la TerraUSD), or on an opaque yield strategy, can’t.

Second, investors can watch redemption patterns, not just price, since a coin trading at $0.97 (while the issuer processes withdrawals normally) is simply doing so at a discount, not carving out a death spiral.

Third, it is imperative to watch where the contagion is flowing, given USDC’s wobble repriced DAI within hours, Terra’s failure reached companies that never touched UST, and xUSD’s collapse rippled through DeFi lenders holding it as collateral.