What is depeg?

When an asset designed to track a fixed value, usually a dollar-pegged stablecoin, trades away from that value.

Depegs follow doubts about redemption, questions about reserves, or liquidity drying up outside banking hours. Some close within hours. Several algorithmic designs have collapsed to near zero and never recovered, so the range of outcomes is far wider than the word suggests.

The distinction that matters is between a liquidity depeg and a solvency depeg. In the first, the backing is intact and the market simply cannot absorb sellers at that moment. In the second, the backing is not there. They look identical on a price chart for the first few hours.

How it works

A peg holds through arbitrage, and arbitrage requires that redemption actually works. If a coin trades at 0.98 and holders can redeem it for a dollar from the issuer, buying at 0.98 and redeeming is profitable, and that buying pushes the price back up.

The peg breaks when that loop breaks. Redemption may be restricted to large verified counterparties, suspended, subject to a fee, or slow enough that the arbitrage carries overnight risk. Retail holders usually cannot redeem at all and are dependent on someone else's ability to.

Three failure patterns recur:

Illustrative patterns; a single event can begin as one and become another.

The reflexive designs are the dangerous ones. Where a stablecoin's backing depends on the price of an associated token, a fall in that token weakens the backing, which weakens confidence, which pushes the token lower. That loop has run to zero more than once.

Depegs above a dollar happen too, usually when redemption is easy but minting is restricted, and they are far less damaging.

Example

Illustrative. A fiat-backed stablecoin trades at 0.94 on a Saturday after news about one of its banking partners. Institutional redemption at a dollar is open but settles on the next banking day, so an arbitrageur buying at 0.94 carries two days of risk that the news gets worse. That risk premium is the 6 cent gap. If the banking exposure turns out to be small, redemption clears and the price returns to a dollar by midweek. If the reserves genuinely are impaired, the same chart continues downward, and nothing in the first two days distinguishes the cases.

Why it matters when you buy

Stablecoins are the settlement layer for most crypto trading, so if you hold one between trades you are holding a credit exposure to its issuer, not cash. Backing model and redemption terms are what determine how a stress event resolves. Stablecoins explained compares the models, and the coin pages cover individual issuers.

Related terms

stablecoin — the category; peg — the value being tracked; fiat backed stablecoin — reserves held off chain; crypto backed stablecoin — reserves held on chain; algorithmic stablecoin — the design with the worst failure record.

Questions

Do depegs always recover?

No. Fiat-backed coins with intact reserves have recovered from short depegs, and several algorithmic designs have gone to near zero permanently. The backing model is the best available guide to which case you are in.

Can I redeem directly with the issuer?

Usually not as an individual. Most issuers redeem only for verified institutional counterparties above a minimum size, so retail holders depend on those parties keeping the arbitrage loop working.

Does a depeg affect my trades?

Yes, if you price everything in that stablecoin. A pair quoted against a coin trading at 0.96 is showing you a price 4 percent away from dollars, which is easy to miss when the ticker still says a dollar sign.