Stablecoin depeg explained: why a $1 coin can trade below $1

A stablecoin is supposed to be worth one dollar, yet over one weekend in March 2023, one of the largest was trading at around 87 cents. It’s a useful reminder that the price on a screen and the value a coin is designed to hold aren’t the same thing.

That gap between the target and the market price is called a depeg. Here’s what it means, the two ways a peg can slip, how different designs fail in different ways, and which facts are worth checking when a stablecoin trades below $1.

What a depeg is: market price versus redemption value

A stablecoin’s peg is a target, usually one US dollar. A depeg happens when its market price moves away from that target, and it can happen in either direction. The market price is what buyers and sellers agree on, on exchanges and other platforms. The redemption value is what the issuer has promised to pay, typically $1 per token, but only to those who can redeem directly with it.

The Federal Reserve points out that these are separate processes: redeeming with the issuer is one thing, and selling on a market is another. A depeg shows up in the second. S&P Global’s study of five large dollar stablecoins found that dips below $1 appeared to be more frequent and to last longer than rises above it.

Two ways the peg slips for reserve-backed coins

Federal Reserve researchers describe peg instability for reserve-backed stablecoins as coming in two forms. The first is redemption risk. If holders lose confidence in the soundness of a stablecoin’s backing, a run can follow, with holders rushing to redeem and reserves being sold off to meet the demand. The second is a price dislocation in the secondary market, where demand shocks can push the price away from the peg until the issuer adjusts the supply.

Normally, arbitrage keeps the price close to $1. If the market price falls below the redemption value, someone who can redeem with the issuer has an incentive to buy cheaply and redeem, which pushes the price back up. That mechanism breaks down when the market loses faith in the peg or redemption is blocked. And the same research shows that in sharp crypto sell-offs, dollar stablecoins have sometimes traded above $1 for a time, because investors rush into them.

How the three designs fail differently

Fiat-backed stablecoins fail where their reserves and redemption channels are weak: a drop in the value of the reserve assets, a lack of trust in the custodian, or a redemption route that stops working. Crypto-collateralized stablecoins are backed by other crypto-assets, usually over-collateralized, so a sharp fall in the collateral’s price can threaten the peg. The Federal Reserve notes that these coins can therefore face more frequent and pronounced runs.

Algorithmic stablecoins hold few or no reserves and rely on smart contracts to adjust supply. The Federal Reserve says these mechanisms work only if enough participants believe the price will return to the peg, and that if belief fails, a self-reinforcing run can follow. Its glossary calls the resulting spiral, in which both the stablecoin and its companion token fall together, a “death spiral.”

Two cases: USDC in March 2023 and TerraUSD in May 2022

In March 2023, three US banks failed over one weekend. According to S&P Global, USDC fell about 13% below $1, with a low near $0.87, after its issuer confirmed that $3.3 billion of cash reserves were held at Silicon Valley Bank, and it also relied partly on two other failing banks to operate redemptions. DAI followed, because USDC made up over half of its collateral at the time. Both recovered after US authorities confirmed support for the banks’ creditors. Tether, which had no exposure to the bank, rose slightly above $1 as holders rotated out of the affected coins.

TerraUSD, an algorithmic stablecoin, collapsed in May 2022. The Federal Reserve notes that its collapse reverberated across the digital asset ecosystem, and S&P describes it as one of the sudden collapses seen in algorithmic designs. The two cases show how differently the same word, depeg, can play out: USDC’s reserves existed but were temporarily out of reach, while TerraUSD’s design itself gave way.

What you can check when a stablecoin trades below $1

When a stablecoin trades below $1, there are facts worth looking up. Has the issuer made a public statement? When was the latest reserve report, and what do the reserves consist of? Has redemption been paused or delayed? Is the discount showing on one platform or across several? And which network and version of the token do you hold, since bridged versions can behave differently from native ones?

S&P Global notes that transparency about the stabilization mechanism and redemption routes influences market prices. These are things to look up, not signals about what the price will do next.

WEEX Reminder: check the facts, not just the price

WEEX reminds users that a price below $1 on one platform doesn’t, by itself, show what is behind it. Check the issuer’s own statements and latest reserve report, confirm which network and contract address you’re dealing with, and be wary of anyone offering to “recover” or “swap” a depegged coin who asks for a seed phrase or private key. Nothing here is financial advice.

Conclusion

A depeg is the market price of a stablecoin drifting away from its target, and it can come from redemption problems, from price dislocations in the market, or from a design that gives way. USDC’s 2023 episode and TerraUSD’s 2022 collapse show how different the causes and outcomes can be. Knowing which mechanism a stablecoin relies on explains most of what to look for.

FAQ

1. What is a stablecoin depeg?
A depeg is when a stablecoin’s market price moves away from its target, usually $1. It can happen below or above the target.

2. Why can a stablecoin trade below $1 even if it is fully backed?
Because the market price and the redemption value are separate. In March 2023, USDC’s reserves existed, but part of them was held at a failing bank and redemption channels were disrupted, so the market price fell until support for the banks’ creditors was confirmed.

3. Can a stablecoin trade above $1?
Yes. The Federal Reserve found that dollar stablecoins have sometimes traded above $1 during sharp crypto sell-offs, when investors rush into them, until the issuer adjusts the supply.

4. Is a fall in a stablecoin’s total supply the same as a depeg?
No. A depeg is a move in the traded price. A fall in supply means tokens have been redeemed and taken out of circulation, which is a separate event.

5. Does a depeg always mean a stablecoin has collapsed?
No. USDC recovered within days, while TerraUSD collapsed. The outcome depends on the mechanism and on whether reserves and redemption hold up.