What Is a Stablecoin — Peg and Depeg Risk
In a coin world where values swing wildly, there are coins that promise 'always 1 dollar.' Those are stablecoins. But what happens when that promise breaks?
What are a stablecoin and a 'peg'
A stablecoin is, as the name suggests, a cryptoasset designed to keep its value 'stable.' Most aim to match their value 1:1 to a fiat currency such as the U.S. dollar.
Fixing a value to a specific level (e.g., 1 dollar) this way is called a 'peg.' Because it doesn't swing wildly like Bitcoin, it is widely used as the 'base currency' for coin trading or as a place to park money temporarily.
But aiming for 'stability' and being 'actually always stable' are different. A peg is not maintained just by itself; there must be a mechanism behind it holding it up.
Three ways to maintain a peg
The ways a stablecoin maintains 1 dollar divide broadly into three.
First, fiat-collateralized. The issuer stockpiles actual dollars, Treasuries, and the like as reserves in proportion to the amount of coins issued. USDT (Tether) and USDC are representative. It's the most common, but the key question is whether the reserves are truly sufficient and where they are held.
Second, crypto-collateralized. It pledges another coin as collateral, but since coin values swing, it pledges more than needed (over-collateralization).
Third, algorithmic. It tries to maintain the peg with a program and arbitrage incentives alone, without physical collateral. The theory sounds plausible, but there is a representative case where it collapsed in practice.
The nightmare of depeg: the Terra/UST collapse (2022)
'Depeg' means a stablecoin failing to hold its target value (1 dollar) and drifting away from it. An event that showed its destructive power is the May 2022 collapse of TerraUSD (UST).
UST was an algorithmic type that maintained its peg through exchange with its sister coin 'LUNA,' without collateral. It was once the No. 3 stablecoin by market cap, and LUNA had a market cap exceeding $40 billion.
But in early May 2022, when large-scale withdrawals began, the peg wobbled. Within a few days, UST collapsed from 1 dollar to $0.60, then $0.30, plunging more than 95%, and as LUNA was issued without limit to prop it up, LUNA's value converged to essentially 0. Tens of billions of dollars (on the order of about $40 billion) of value evaporated in an instant.
The scale of the evaporation varies by compilation basis (UST + LUNA about $40 billion–$45 billion; including the market ripple effects, more). The key point is the fact that 'an algorithmic peg can completely collapse.'
Collateralized types aren't safe either: the USDC case (2023)
You might think, 'Then isn't a coin backed by real dollars safe?' But collateralized types aren't 100% safe either.
In March 2023, the U.S. Silicon Valley Bank (SVB) went bankrupt. And Circle, which issues USDC, happened to have about $3.3 billion of its reserves deposited at this very bank. When this became known, USDC's peg temporarily broke and it fell to $0.88.
Fortunately, as U.S. authorities announced full protection of SVB deposits and Circle confirmed its funds were safe, USDC recovered to 1 dollar in about three days. It wasn't a complete collapse, but it left the lesson that 'even a collateralized type can shake along if the bank holding its reserves shakes.'
A stablecoin is not a bank deposit and is not covered by depositor protection. The '1-dollar guarantee' rests on the issuer's promise and reserves; it is not guaranteed by the state.
Preguntas frecuentes
Q. Since a stablecoin is 'always 1 dollar,' is there no risk of loss?
No. 'It targets 1 dollar' and 'it is always 1 dollar' are different. The algorithmic UST completely collapsed to nearly 0, and even the collateralized USDC temporarily fell to $0.88 due to bank risk. Stablecoins have no depositor protection either, so losses can occur depending on the issuer, the reserves, and market conditions.
Q. So which stablecoin is the safest?
It's hard to declare a specific coin 'safe.' Generally, one whose reserves are transparently disclosed and whose physical collateral is sufficient is rated as having less risk than an algorithmic type, but as the USDC case shows, even a collateralized type shakes along if the place holding its reserves shakes. No stablecoin can be called risk-free.
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