A depeg happens when a crypto asset designed to track a reference price stops closely matching that target. In practice, the term most commonly refers to stablecoins that aim to hold a fixed value, often 1 unit of fiat currency like the US dollar, but begin trading above or below it.
How a depeg happens
Stablecoin pegs rely on a combination of reserves, market incentives, and liquidity. A fiat-backed stablecoin typically holds cash and short-term instruments and depends on confidence that tokens can be redeemed for the underlying collateral. If redemption pathways become constrained, reserves are questioned, or trading liquidity thins on major venues, the market price can slip below the peg. Conversely, heavy demand and limited supply on exchanges can push a stablecoin above its target.
Crypto-collateralized and algorithmic designs have additional failure modes. Crypto-backed stablecoins can depeg during sharp collateral drawdowns, especially if liquidations lag or markets become congested. Algorithmic stablecoins rely on mint and burn mechanics and arbitrage to keep the price anchored; when confidence breaks or incentives stop working, the feedback loop can accelerate deviations instead of correcting them.
Examples and real-world impact
Depegs are often seen during stress events, such as rapid sell-offs, exchange outages, or doubts about an issuer’s reserves. Even small deviations can disrupt traders using stablecoins as a cash substitute for settlements, payroll, remittances, or as collateral in lending protocols.