What Is Depeg?
Also known as: De-peg, Loss of Peg
In short
A depeg occurs when the market price of a cryptocurrency pegged to a specific asset deviates significantly from its target value; it is mostly used for stablecoins meant to equal 1 dollar falling below that level.
A stablecoin's peg is maintained thanks to the issuer's reserves and arbitrage mechanisms. When the price falls below 1 dollar, arbitrageurs buy the stablecoin cheaply and redeem it with the issuer at 1 dollar, pulling the price back up. Doubts about the adequacy of reserves, sudden mass redemption demands, insufficient liquidity or the collapse of an algorithmic mechanism can disrupt this balance.
There are notable examples in crypto history. TerraUSD (UST), an algorithmic stablecoin, lost its peg and collapsed in May 2022, causing major losses together with LUNA, the token it was linked to. USDC briefly fell significantly below 1 dollar in March 2023, after the collapse of Silicon Valley Bank, where its issuer Circle held part of its reserves, and then returned to its peg.
Depegs are not specific to stablecoins; wrapped tokens and liquid staking tokens can also be priced differently from the asset they represent. How resiliently a stablecoin can maintain its peg is assessed by examining the structure of its reserves, its transparency and its redemption terms.
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