When stablecoins lose their $1 peg

A stablecoin depeg occurs when a token marketed as worth one dollar trades below or above $1 on the market. Examples include USDC, which slid to $0.87 in March 2023 after Circle disclosed that $3.3 billion of its cash was held at the failed Silicon Valley Bank, and terraUSD (UST), which collapsed toward zero in May 2022 and wiped out roughly $40 billion across UST and its sister token LUNA.

Stablecoins are not hard-coded to keep a $1 price. Most issuers say each token can be redeemed for one dollar, and traders perform arbitrage: buying tokens below $1 to redeem them for a dollar, or creating new tokens when the market price rises above $1. That system depends on access to issuer redemption and the willingness of market participants to trade during stress. Tether requires verified customers and a $100,000 minimum for direct redemptions. Circle processes redemptions through institutional accounts. Retail holders, decentralized finance protocols and offshore exchanges rely on intermediaries and market makers to carry out trades that restore the peg.

In March 2023, U.S. authorities guaranteed deposits at the failed bank, and redemption activity contributed to restoring USDC’s peg. The May 2022 UST failure began with an algorithmic mechanism that swapped a sister token for UST; rapid conversions and sales caused the sister token’s supply to balloon and both tokens to collapse, with UST trading well below $0.10 within days.

Other depegs have different causes. In October 2018, rumors about Tether and its affiliated exchange pushed USDT to roughly $0.88 on some venues; redemptions were met and the price recovered within days. In November 2025, Stream Finance’s xUSD fell sharply after an outside fund manager disclosed a $93 million loss. Stream froze withdrawals, about $160 million in user deposits were affected, and xUSD fell from $1 to as low as $0.24.

Market-wide trends in 2026 narrowed some buffers. The stablecoin category opened 2026 at about $310 billion, rose to roughly $322.1 billion by mid-May and then contracted by about $14.56 billion to the start of August. Over that period, Tether’s USDT supply declined from roughly $189 billion to about $183.2 billion and Circle’s USDC fell from a March peak near $80 billion to about $72.1 billion. The two coins together account for about 83% of a roughly $307.6 billion stablecoin market.

Observers assess a depeg by checking the cause, redemption activity and where losses spread. Reserve-backed coins that lose the peg due to fear or a temporary banking issue have recovered after redemptions were completed. Tokens that rely on algorithmic links to another token or on opaque yield strategies have failed to regain the peg in past episodes. Past incidents have affected other market instruments: USDC weakness has repriced other dollar-pegged tokens, UST’s collapse hit firms that did not hold UST directly, and xUSD’s drop affected DeFi lenders holding the token as collateral.

The stablecoin category represents hundreds of billions of dollars of digital value and has experienced stress from banking failures, design flaws and counterparty losses.