Depeg

A depeg is when a stablecoin's market price moves significantly away from its target value, such as a dollar-pegged token trading at 0.95 or 1.05 instead of 1.00. Small deviations of a fraction of a cent are normal and are quickly closed by arbitrage; a true depeg is a larger, sustained gap that signals stress in the mechanism or in confidence.

Depegs can be temporary or terminal. A concrete example of a temporary one: in March 2023, USDC fell to roughly 88 cents after its issuer disclosed that part of its reserves were held at the failing Silicon Valley Bank; once US authorities guaranteed the bank's deposits, USDC returned to a dollar within days. By contrast, TerraUSD's 2022 depeg was terminal — the algorithmic mechanism behind it collapsed and the token never recovered.

What matters during a depeg is the cause: a market panic against solid reserves tends to mean-revert, while a genuine shortfall in backing or a broken mechanism does not. A common misconception is that a stablecoin trading below peg is automatically a buying opportunity; if the backing is actually impaired, the discounted price can be the honest one. Depegs also ripple outward, because stablecoins serve as collateral and trading pairs across DeFi, so a large depeg can trigger liquidations elsewhere.