When a stablecoin loses its peg: what is depeg and why is it important

What happened in the market in 2023?

Remember March 2023 — many were panicking. Stablecoins BUSD and USDC, which seemed to be reliable dollar pegs, suddenly started trading below $1. The reason is simple: a wave of FUD and distrust caused traders to urgently sell off these assets. This was a classic case of depeg in action.

Understanding the term

Depeg is essentially the disconnection between a stablecoin and the asset it is pegged to. Take Tether (USDT) as an example. This token exists because people believe that for every USDT, there is a real dollar in the company’s accounts. The value $1 — it’s not just a number, it’s a promise. But if Tether Limited encounters (financial, legal, operational) problems, that promise may not be fulfilled. Then USDT will fall below a dollar — a depeg will occur, and the token will float freely without a peg.

Stories from the crypto world

The most dramatic example is UST from Terraform Labs in 2022. This algorithmic stablecoin completely broke down. Instead of $1 its price falling, it plummeted so much that the token was practically worthless. It wasn’t just a depeg, it was a total collapse.

The situation in 2023 showed that the depeg problem is also relevant for major players. BUSD and USDC confirmed: no stablecoin is immune from losing parity with the dollar. Throughout the year, capitalized stablecoins on the market repeatedly demonstrated instability in their peg to reserve assets.

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