When a stablecoin drops to $0.95, $0.90, or worse - even though it’s supposed to be worth exactly $1 - something has gone very wrong. This isn’t a glitch. It’s a depegging, and it’s one of the most dangerous events in crypto. Unlike Bitcoin or Ethereum, which swing by design, stablecoins are built to be steady. They’re meant to be the anchor in a stormy market. But when that anchor breaks, the whole system can shudder.

What Exactly Is a Stablecoin Depeg?

A stablecoin depeg happens when a digital token that’s supposed to hold a 1:1 value with a real-world asset - usually the US dollar - loses that connection. You might see USDT trading at $0.97. Or USDC at $0.92. In extreme cases, like TerraUSD in 2022, it plunged to pennies. The peg isn’t just a suggestion. It’s the whole reason these coins exist. Without it, they lose their purpose: a safe harbor for traders, a stable unit of account in DeFi, or a bridge between crypto and traditional finance.

Most stablecoins are supposed to be backed by reserves. That means for every $1 of USDC or USDT issued, there should be $1 in cash, treasury bills, or other safe assets sitting in a bank. But here’s the catch: not all issuers keep those reserves in the same place. Some use risky investments. Some use other crypto assets. And when markets turn, those assets can crash - dragging the stablecoin down with them.

The TerraUSD Collapse: A Perfect Storm

The biggest depegging in crypto history didn’t come from a bank failure or a hack. It came from a flawed algorithm.

TerraUSD (UST) wasn’t backed by dollars. It was an algorithmic stablecoin - meaning it used another token, LUNA, to maintain its peg. When UST dropped below $1, the system would burn LUNA and mint more UST to bring the price back up. Or so the theory went.

In May 2022, large holders started selling UST. The market couldn’t absorb the sell-off. As UST dipped to $0.98, then $0.95, panic spread. People rushed to swap UST for other stablecoins. The algorithm couldn’t keep up. LUNA’s value collapsed. Within days, UST was worth less than 10 cents. LUNA went from a $40 billion project to nearly worthless.

This wasn’t just a price drop. It was a total system failure. UST never recovered. The algorithm didn’t fix itself - it destroyed itself. And the fallout rippled across crypto. Entire DeFi protocols that used UST as collateral lost billions. Investors lost trust. Markets tumbled. The event proved that algorithmic stablecoins, without real-world backing, are fundamentally unstable under pressure.

Tether’s Long Shadow: When Backing Isn’t Transparent

While UST died, Tether (USDT) survived - barely. It’s the most used stablecoin in the world, with over $100 billion in circulation. But its history is full of red flags.

In 2021, the U.S. Commodity Futures Trading Commission (CFTC) fined Tether $41 million for misleading claims about its reserves. The company said it held $1 in cash for every USDT. It didn’t. Much of its backing was in commercial paper, corporate bonds, and even risky loans. These aren’t safe assets. They’re not cash. And they can’t be sold quickly if everyone tries to cash out at once.

Tether still hasn’t fully transitioned to holding only cash and Treasury bills. Even today, a significant portion of its reserves are in illiquid or low-grade assets. That’s a ticking clock. If a major bank fails, or if interest rates spike, those assets could lose value - and USDT could depeg again.

Unlike UST, USDT hasn’t collapsed. But that’s not because it’s safe. It’s because users still trust it - for now. And trust is fragile.

Why Depegging Happens: The Real Causes

Depegging isn’t random. It follows patterns.

• Market panic: When Bitcoin crashes, people sell everything - including stablecoins. If too many want to cash out at once, the issuer can’t keep up.
• Bad collateral: If a stablecoin’s reserves are tied to corporate debt, real estate, or other crypto, a drop in those assets = a drop in the peg.
• Lack of audits: If no independent firm checks the reserves regularly, you’re trusting a black box.
• Regulatory threats: When regulators threaten to shut down a stablecoin issuer (like Binance’s BUSD in 2023), holders panic and sell.
• Network congestion: If the blockchain gets jammed, redemptions get delayed. That looks like a depeg - even if the issuer is fine.

Here’s the brutal truth: most stablecoins are only as stable as their weakest asset. And that asset is often not cash.

Who Gets Hurt When a Stablecoin Depegs?

It’s not just the people holding the coin.

When USDT drops to $0.95, traders on exchanges lose money. DeFi protocols that use it as collateral get liquidated. Lenders can’t get repaid. Borrowers get wiped out. Even centralized exchanges suffer - users withdraw funds, liquidity dries up, and trading slows.

And it doesn’t stop there. Traditional finance starts to feel the heat. Banks that hold stablecoins as deposits see sudden outflows. Money market funds get spooked. The whole system becomes more volatile.

Stablecoins were supposed to reduce risk. But when they depeg, they become the source of it.

How to Spot a Risky Stablecoin

Not all stablecoins are created equal. Here’s how to tell the safe ones from the dangerous ones:

• Check the backing: Is it 100% cash and Treasury bills? Or is it a mix of crypto, bonds, and loans?
• Look for audits: Does an independent firm like Grant Thornton or BDO publish monthly reserve reports?
• See the redemption rights: Can you actually exchange your stablecoin for dollars anytime? Or are there hidden delays?
• Watch the price: If a stablecoin trades at $0.99 for days, that’s a warning. It’s not broken - it’s under stress.
• Know the issuer: Is it a well-known company with legal oversight? Or a startup with no clear legal structure?

USDC, issued by Circle, is one of the most transparent. It publishes daily reserve reports and holds almost all assets in cash and U.S. Treasuries. DAI, while partially crypto-backed, is overcollateralized and governed by a decentralized community. Both are far safer than most others.

The Future: Regulation Is Coming - But Is It Enough?

After UST and BUSD’s shutdown, regulators are stepping in. The U.S. is pushing for strict reserve rules. The EU’s MiCA law requires stablecoin issuers to hold 100% reserves in high-quality liquid assets. Other countries are following.

But regulation moves slow. Crypto moves fast. And many issuers still operate in gray areas. Even if new rules pass, enforcement is uncertain. And what happens when a stablecoin issuer goes bankrupt? Who gets paid first - the stablecoin holders, or the bondholders?

Until legal frameworks clearly protect stablecoin holders as depositors - not just token holders - the risk remains.

What Should You Do?

If you’re using stablecoins for trading, lending, or storing value:

• Stick to USDC or DAI. Avoid lesser-known stablecoins.
• Don’t keep large amounts in any stablecoin for long periods. Treat them like cash - useful, but not permanent storage.
• Watch the price. If it’s consistently below $1, get out.
• Understand what backs it. If you can’t find clear reserve reports, assume it’s risky.
• Never assume stability. Even the biggest stablecoins can fail.

Stablecoins are tools. Not savings accounts. Not banks. Not insurance. And until they’re treated like regulated financial products, they’ll always carry risk.