De-pegging Events & Systemic Risk
A de-peg is a market-price deviation. Its causes, possible recovery paths and consequences depend on the instrument, issuer, reserves, redemption route and market conditions.
By Anton Titov, Founder · Plexo Institute
A de peg is not one failure mode. Distinguish the instrument, issuer, reserve structure, redemption path and the position exposed to the market move.
A de-peg is a price deviation, not a diagnosis. Identify the instrument, reserve and redemption route before inferring a cause or response.
Reading Guide
Four moves that turn de-peg events from undifferentiated panic into a calibrated risk category.
For an issuer-backed stablecoin, secondary-market prices can be influenced by the ability and willingness of eligible participants to mint or redeem under issuer terms. That mechanism also depends on access, fees, timing, bank and blockchain operations, market liquidity and legal constraints.
A deviation can reflect information about reserves, operational access, redemption eligibility, market liquidity, an algorithmic mechanism or a combination of these. The event must be investigated rather than assigned a recovery outcome by label alone.
UST used an algorithmic relationship with LUNA rather than a conventional issuer reserve pool. When the relationship lost credibility, selling pressure, liquidity conditions and LUNA issuance interacted in a damaging feedback loop.
This is useful evidence about that mechanism. It does not prove that another stablecoin is safe, nor does it establish that every reserve-backed stablecoin has the same failure path. Reserve quality, legal claim, custody, redemption eligibility and market structure require separate evidence for each instrument.
In March 2023, Circle disclosed $3.3B of USDC reserves at Silicon Valley Bank. USDC’s market price deviated over the weekend. On 12 March, the Treasury, Federal Reserve and FDIC said SVB depositors would have access to all of their money on Monday; Circle said the affected reserve deposit would be available when US banks opened.
The episode shows that a market-price deviation can impose real mark-to-market, liquidity and liquidation consequences even when an issuer states that a token remains redeemable. It also shows why the location and availability of reserves matter. It does not justify a universal forecast about the speed or outcome of future events.
Reserve and custody evidence: inspect the current composition, legal segregation, concentration and practical access to assets. These details can matter, but they do not by themselves determine a market-price outcome.
Redemption route: identify who may redeem, under what terms, fees, hours and operational dependencies. A stated redemption right and a usable redemption route are related but different facts.
Market and position conditions: assess venue liquidity, collateral calls, oracle rules and each holder’s ability to act. A market maker’s participation cannot be presumed from a historical example or a firm name.
Information and communication: record what is disclosed, when, and against which current documents. BIS research finds that transparency can raise or lower run risk depending on beliefs about reserve quality and conversion costs.
These are investigation questions, not four levers that guarantee recovery. Some sit with the issuer, while others depend on law, banks, venues, counterparties and market conditions.
What a De-Peg Actually Is
A secondary-market price deviation with specific mechanics, not a single generic failure mode.
A stablecoin de-pegs when its secondary-market price diverges from its reference value. The significance of a deviation depends on the holder’s exposure, liquidity needs, collateral arrangements, venues, terms and internal risk limits; there is no universal percentage threshold.
Below $1 Is Only The Alarm
Two checks separate a weekend scare from a broken stablecoin.
Price alarm
Below $1 says stress. It does not name the failure.
Diagnosis gate
If yes, price has a route back.
If no, the anchor is gone.
Severity ladder
- both yesRecoverable scare
Price can rebuild.
- cash waitsLiquidity de-peg
USDC/SVB-style stress.
- anchor goneStructural collapse
UST/LUNA-style risk.
For an issuer-backed token, an eligible participant may buy on the market and redeem with the issuer when the issuer’s terms make that viable; in the other direction, it may mint and sell. This can support price alignment.
The mechanism is conditional on eligibility, fees, timing, banking availability, blockchain operations, market liquidity and confidence in the issuer’s performance. A deviation may occur when any of these conditions changes.
UST 2022: Algorithmic Collapse
A historical algorithmic failure with a mechanism that must not be casually transferred to other designs.
The Terra/UST collapse in May 2022 was a major historical digital-asset event. Its scale and exact price path depend on the asset and time window measured; this explainer focuses on the mechanism rather than a headline loss number.
UST, TerraUSD, was an algorithmic stablecoin: it was not backed 1:1 by reserves. Instead, its peg was maintained by an arbitrage relationship with LUNA, the Terra blockchain native token. Burning 1 UST minted $1 worth of LUNA; burning $1 worth of LUNA minted 1 UST.
When UST traded below 1.00, arbitrageurs were supposed to buy UST cheap, burn it, mint LUNA, and sell. This mechanism worked when LUNA had reliable market value.
Public analyses describe a sequence in which large sales affected liquidity, UST deviated from its reference, redemptions minted LUNA, the increased LUNA supply weakened the stabilising mechanism, and market confidence fell further.
The important lesson is feedback: when the mechanism supporting a reference value depends on another volatile asset, stress can damage the mechanism itself. Precise causal attribution for every market participant and every subsequent insolvency is outside the scope of this explainer.
UST’s mechanism differs from an issuer-backed token that has disclosed reserve assets and contractual redemption terms. That difference is material to analysis.
It does not eliminate risk for an issuer-backed token: reserve access, legal claims, custody, redemption operations, market liquidity and issuer governance can still cause losses or price deviations. Risk policy should distinguish mechanisms without treating any class as automatically safe.
USDC 2023: Reserve-Location Risk
A historical case where reserve location, bank access and public information affected market confidence.
In March 2023, Circle reported that $3.3B of USDC reserves were held at Silicon Valley Bank. The episode is a useful case study in reserve location and stress access.
10 March 2023: SVB entered FDIC receivership.
Circle disclosed the $3.3B reserve exposure.
USDC’s secondary-market price moved below its reference over the weekend.
12 March: the Treasury, Federal Reserve and FDIC said that depositors would have access to all of their money on Monday.
Circle said the affected reserve deposit would be available when US banks opened.
The sequence is a reminder to separate issuer representations, public policy actions, redemption access and secondary-market prices. A holder’s outcome can also depend on whether it had leverage, collateral triggers, venue access or a need to sell during the event.
UST’s algorithmic mechanism and the USDC/SVB episode involved different disclosed facts and dependencies. The USDC episode involved cash held at a failed bank and a subsequent public policy intervention; UST involved a distinct algorithmic mechanism.
The comparison should not be reduced to a binary solvency label. In both cases, a risk officer needs current evidence about the asset, legal claim, reserve access, redemption route, market conditions and exposure structure.
A reserve-backed token can still experience operational or confidence stress. Whether and how it recovers is an event-specific question.
Structural vs Liquidity De-Pegs
A working taxonomy can organise investigation, but events often have multiple drivers and no category predicts recovery.
The taxonomy is an investigation aid. It can help a risk team ask what changed and which evidence is missing; it does not determine whether to hold, sell, redeem or liquidate a position.
| Type | Cause | Recovery profile | Examples |
|---|---|---|---|
Structural / mechanism | A mechanism’s collateral, conversion or incentive structure is impaired | Event-specific; assess the mechanism and remaining claims | Algorithmic designs such as UST |
Access / liquidity | Reserve access, banking, redemption or market liquidity is disrupted | Event-specific; assess the route, terms and current access | USDC/SVB as a historical case |
Information / confidence | New or disputed information changes market beliefs or willingness to trade | Event-specific; check the underlying evidence and liquidity | Can overlap with any other category |
Issuer or operational | Legal, technical, governance or key-management event affects the issuer or route | Event-specific; assess applicable terms, controls and remedies | Can overlap with any other category |
The category tells a team where to investigate: mechanism and claims; reserve access and redemption terms; information quality and market liquidity; or issuer governance and legal remedies.
It does not prescribe a trade. Decisions about holding, selling, redeeming or liquidating need the institution’s mandate, legal rights, liquidity needs, collateral triggers and current market evidence.
A policy that assumes all de-pegs have the same cause or outcome misses these distinctions.
Four Determinants of De-Peg Severity
Four areas to investigate during a deviation; none alone predicts the outcome.
Reserve access, redemption operations, market liquidity and issuer communications can affect how an event develops. Their significance and controllability vary by instrument and incident.
Reserve composition, legal segregation, custodian concentration and access terms can affect confidence and redemption capacity. The USDC/SVB episode illustrates why the location of cash is relevant alongside the asset label.
No single disclosure permits a general forecast of market-price behaviour. Inspect the current issuer report and the route’s legal and operational dependencies.
A redemption route may depend on eligibility, bank hours, banking partners, token transfer operations, compliance checks and fiat crediting. Circle announced additional automated minting and redemption arrangements after the SVB event.
A risk review should determine which conditions are contractually available to the relevant holder and what happens if a step is unavailable.
Secondary-market liquidity and the willingness of eligible participants to use issuer mint and redemption processes can affect a deviation. These conditions can change rapidly by venue, size, asset and time.
Do not assume that named market makers, historic liquidity or a large market capitalisation will be available during a future stress event.
Timely issuer disclosure can give counterparties more evidence to assess an event. It does not ensure that the market will accept the evidence or that a route will remain available.
BIS research finds that the effect of transparency on run risk depends on beliefs about reserve quality and conversion costs; transparency is not a one-directional stabiliser.
What This Means for Risk Officer Policy
Three practical recommendations follow from the de-peg taxonomy.
The taxonomy is useful if it improves preparation. A risk policy can record permitted instruments, issuer and custodian concentration, redemption eligibility, liquidity assumptions, escalation paths and collateral or liquidation consequences.
Policy can distinguish algorithmic designs from issuer-backed designs because their disclosed mechanisms and claims differ. The appropriate restriction, limit or approval route depends on the institution’s mandate, law, counterparty terms and risk appetite.
Issuer concentration is one relevant exposure, but diversification can also introduce new legal, operational, liquidity and compliance dependencies. A policy should assess concentration together with the eligibility and terms of each permitted instrument, rather than prescribe a particular pair of issuers.
Reserve disclosures and assurance reports are inputs to diligence, alongside legal claims, custodian access, redemption terms and liquidity. Any position limit should follow the institution’s documented methodology and current evidence, not a generic disclosure ranking.
Related reading: Stablecoin Reserves.
Counter-Arguments & Limitations
Where this analysis can be challenged, and the counter-counter.
The argument: De-peg events can have structural, liquidity, information and operational components at once. A category can be clearer in retrospect than in real time.
Counter-counter: That is why the taxonomy is a checklist, not a forecast model. It prompts a team to gather current evidence about the mechanism, reserve disclosure, legal claim, redemption route, liquidity and issuer communication.
A team should record uncertainty and update its assessment as facts arrive. It should not infer a dominant cause or recovery path simply because an event resembles a historical case.
The argument: A market-price deviation can trigger losses for holders who must sell, face collateral calls, rely on an oracle or cannot use the issuer’s redemption process. An eventual issuer statement or later market recovery does not reverse every position-level loss.
Counter-counter: This is correct. Instrument-level facts, issuer representations and position-level outcomes are separate questions. Circle stated that USDC remained redeemable 1:1 and that the SVB reserve deposit would be available when banks opened; affected holders still faced venue, oracle and liquidity conditions during the weekend.
The policy lesson is to model stablecoin price deviations and operational access in position sizing, collateral and liquidity controls. No historical category can prove that holding, selling or redeeming is rational for every holder.
About This Explainer
Scope, disclosure, and method.
Published by Plexo Institute. Data vintage: 2018-2026.
Disclosure: This explainer is a research framework, not a certification of any instrument, issuer, reserve or live risk policy. It does not provide investment, trading, legal, regulatory or risk-management advice. A reader should use current primary documents and its own controls before relying on a route or position.
The taxonomy draws on issuer disclosures, the 2023 Federal Reserve/Treasury/FDIC statement, public analysis of Terra/UST, and BIS work on stablecoin-run dynamics. It distinguishes documented events from Plexo’s analytical categories. Historical cases are used to formulate diligence questions, not to predict a future price path. This piece is analytical and does not constitute investment or risk advice.
Continue Reading
Reserve mechanics - Stablecoin Reserves
The flywheel that de-pegs amplify - Stablecoin Liquidity Flywheel
Custody concentration as de-peg trigger - Wallet Custody Models
References
Circle, $3.3 Billion of USDC Reserve Risk Removed, Dollar De-peg Closes (March 2023).
Chainalysis, The Trades That Triggered TerraUSD's Collapse (2022).
BIS Working Paper, Public information and stablecoin runs (2024).
FSB, High-level Recommendations for Stablecoin Arrangements (2023).
IOSCO, Policy Recommendations for Crypto and Digital Asset Markets (2023).
Stanford Blockchain Lab, The Anatomy of UST (2022).
US Treasury, Federal Reserve, and FDIC, Joint Statement (March 12, 2023).
References
7 references- $3.3 Billion of USDC Reserve Risk Removed, Dollar De-peg Closes — Circle
- The Trades That Triggered TerraUSD's Collapse — Chainalysis
- Public information and stablecoin runs — BIS
- High-level Recommendations for Stablecoin Arrangements — Financial Stability Board
- Policy Recommendations for Crypto and Digital Asset Markets — IOSCO
- The Anatomy of UST — Stanford Blockchain Lab
- Joint Statement by Treasury, Federal Reserve, and FDIC — Federal Reserve