“Stablecoin” is a promise, not a fact. Twice in recent history that promise broke in public — once it healed within days, once it destroyed tens of billions of dollars. The two events look identical on a price chart (a line falls below $1) but had opposite mechanics underneath. Understanding the difference is the most useful mental model a stablecoin user can have. Basics first: how different pegs work.
Case 1: USDC and the SVB weekend (March 2023)
On Friday, March 10, 2023, Silicon Valley Bank failed. Circle disclosed that $3.3 billion of USDC’s reserves were sitting in it. Markets did the math instantly: roughly 8% of backing was now entangled in a bank resolution. USDC fell as low as ~$0.87 on some exchanges over the weekend.
Then the mechanism that keeps fiat-backed stablecoins alive kicked in:
- The price discount was only about uncertainty over reserves, not about the redemption contract. If reserves were made whole, 1 USDC would still redeem for $1 with Circle.
- On Monday, US regulators announced depositors would be made whole. The uncertainty evaporated, USDC re-pegged within days, and Circle moved reserves toward cash at larger banks and the BlackRock-managed reserve fund.
Lesson: a fiat-backed depeg is a bank-run-style confidence event. Its severity maps to the size of the reserve question, and it heals when the question is answered. The arbitrage loop — buy discounted coins, redeem for $1 at the issuer — is the gravity that pulls the price back, for those who can access redemption.
Case 2: UST and the death spiral (May 2022)
TerraUSD (UST) held no meaningful dollar reserves. Its peg was an algorithm: 1 UST could always be minted or redeemed against $1 of LUNA, Terra’s volatile governance token. Faith in that loop was the collateral.
When large UST redemptions hit in May 2022, the loop inverted: redemptions minted new LUNA, LUNA’s price fell under the selling, each fallen dollar of LUNA backed less UST, confidence cracked further, more redemptions came. The “death spiral” took UST from $1 to cents in days and LUNA to effectively zero — around $40 billion gone. There were no reserves to answer questions; the design itself was the question, and the answer was no.
Lesson: an algorithmic depeg isn’t a confidence wobble, it’s a structural failure. There is no arbitrage gravity when the thing you’d redeem into is itself collapsing.
Reading a depeg in real time
Next time a stablecoin trades below $1, these are the questions that matter:
- What’s the backing model? Fiat reserves (run risk, heals) vs crypto collateral (liquidation risk) vs algorithmic/synthetic (structural risk). USDe’s delta-neutral design, for example, fails differently from all three — see the mechanism notes in Stablecoins 101.
- Is there a specific reserve event? News of frozen funds, a bank failure, or an attestor walking away drives fiat-backed wobbles. No news + a slow bleed usually means liquidity, not insolvency.
- Is redemption working? If the issuer is honoring $1 redemptions, the discount is an arbitrage opportunity for institutions and typically self-corrects. If redemptions are halted, the discount is information.
- How deep is the discount? Sub-1% moves happen regularly in stress; our converter’s depeg watch flags anything beyond that threshold live.
What this means for how you hold
- Keep operational balances in fully-reserved, transparently-attested coins; treat higher-yield designs as the risk assets they are.
- Card balances and remittance floats should be sized to survive a bad week, because a depeg + an issuer freeze window is exactly when you can’t move money.
- “Past depegs always recovered” is true only for the surviving designs. UST holders learned that the hard way; don’t confuse the survivors’ record with a law of nature.
For the spending side of stablecoins — what happens after you hold them — the U-card guide picks up from here.