What Is a Depeg?
A depeg is a pegged asset trading away from the value it promises: a stablecoin at 97 cents, an LST below its underlying, a wrapped token gapping under the original. The peg is a mechanism plus confidence; a depeg is one of them failing, and knowing which one is everything.
How It Actually Works
- Wobbles: redemption arbitrage normally holds pegs tight: below a dollar, buy and redeem for a dollar; above, mint and sell. When redemption stays credible, dips get bought fast. USDC's fall to 88 cents in March 2023, when a reserve bank failed, reversed within days once backing clarified: a confidence wobble on solvent plumbing.
- Death spirals: when the mechanism itself is reflexive, the depeg feeds itself. TerraUSD in 2022 minted its sister token to absorb selling, hyperinflating it, evaporating $40 billion in weeks. No credible redemption floor existed; the design was the failure.
- The diagnostic question during any depeg: does a solvent redemption path exist, and is it functioning? Discount plus working redemption equals arbitrage opportunity for professionals; discount plus broken redemption equals everyone learning what backed the promise.
Risks and Common Mistakes
- Panic-selling a wobble at the bottom, crystallizing a loss that redemption would have repaired. Also its mirror: diamond-handing a death spiral because "it always came back."
- Yield-chasing into fragile pegs: the extra points on exotic stables and wraps price exactly this event, per the who-pays rule.
- Concentration: keeping all dry powder in one stable. Two regulated issuers is cheap diversification against a tail you cannot time.
When It Matters
Choosing which pegged assets to hold and how much, and behaving usefully during the hour a peg wobbles. The stablecoin regulatory floor that reduces (not removes) this risk is in my securities guide.
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